On today’s Microsoft post-earnings conference call, a financial analyst with Evercore ISI had the opportunity to ask CEO Satya Nadella a simple question about the company’s mega-important cloud business.
“Do you feel better, I guess, where you are today versus your position a year ago?” he asked, in part. He was asking about the positioning of Microsoft’s all-important Azure cloud computing service, commonly seen as the second-place player to the leading Amazon Web Services.
This seemed to prick a nerve with Nadella, who launched into a lengthy response that essentially sought to portray the query as short-sighted.
“I completely understand all of you measure us by what we’ve done for you lately, and that’s a fine way and we’ll keep account of it, but that’s not how it works,” Nadella told the analyst.
Microsoft looks at “generational opportunities,” as in, once-in-a-generation market shifts, that are absolutely crucial to take advantage of, but that might take years to generate real revenue, Nadella explained.
The generational shift
Nadella prefaced that comment by noting that, rather than think about the short-term view of the product’s competitive stance today. Microsoft is really in markets like cloud computing for the long haul. If you focus too hard on the present, he says, you miss the chance to dominate whatever comes next.
“I don’t view it that narrowly, quarter to quarter or even year to year. And these are generational opportunities that’s at play when it comes to the intelligent cloud or what’s happening in augmented reality. Either one of those things, I think if we started viewing it quarter to quarter or year to year we’ll completely miss the trend,” said Nadella.
Augmented reality, the field of technology for digital imagery projected into the real world, is another big, long-term bet for Microsoft, that the company thinks could be bigger than the smartphone. And while Microsoft Azure is generating revenue today, Microsoft’s own HoloLens isn’t yet on the broader market, meaning it’ll be a while before it’s more than the tiniest blip on the balance sheet.
In general, Nadella says, Microsoft is investing in areas with “revenue that won’t show up for many years out. And it won’t be very transparent to you, and that’s how it is.”
The bottom line, says Microsoft CFO Amy Hood, is that even if it doesn’t seem obvious today, these big bets are going to pay off down the line, as the market slowly turns. Microsoft Azure revenue is growing fast, Nadella says, but it would never have happened if Microsoft hadn’t invested in its core technologies many years ago.
Added Hood: “The most important thing is that customer success is what will breed revenue for the next quarter, the next year. And especially in this market, a generational move here really means especially for many of the workloads being moved, these pay off every year for the next ten.”
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