"Management is doing things right; leadership is doing the right things." - Peter Drucker
The company has decided to promote from within and will name Satya Nadella as its new CEO sometime next week according to several sources. Mr. Nadella is currently the company's server/cloud product chief. His division accounted for ~65% of the company's profit in its last quarter.
I believe this is a solid pick as do investors, it seems, as the stock rose when word leaked out Friday despite the sell-off in the overall market. The products within Mr. Nadella's portfolio are some of the fastest growth engines for the company.
It appears Mr. Ballmer will leave the company and the board shortly. His tenure will go down as a mixed one. Over the last decade, the company has ~tripled earnings and revenues and established a solid dividend payout, but the stock has gone nowhere under his leadership.
Microsoft missed the transition to mobile and the importance of social media but has built an impressive 'cloud' portfolio which hopefully Mr. Nadella can more effectively highlight to the investment community than his soon to be predecessor.
In defense of Mr. Ballmer he did become CEO towards the tail end of the internet boom where tech concerns were awarded sky-high valuations that few lived up to in subsequent years. To me, he is like a football coach that has overstayed his welcome. At some point the early successes are forgotten and the players start to tune out their leader's words. In other words, it was a good time to leave and I wish Mr. Ballmer much success in future endeavors.
Mr. Ballmer did leave his successor in a solid position. The company just reported one of its best quarters in years recently. Earnings came in at 78 cents a share, 10 cents a share above consensus. Revenues also came above expectations and showed an over 14% Y/Y rise.
Some critics have been dismissive of these revenue figures stating a good portion of the growth was driven by lower margin Xbox and Surface sales. However, the company posted 12% Y/Y gains in enterprise server software sales as well as Windows license revenue. The company also gained impressive market share with its server visualization offering against market leader VMware (NYSE:VMW).
Most importantly, its two 'cloud' products (Azure and Office 365) both saw revenue gains of over 100% Y/Y in the quarter. Office 365 added 1.5mm subscribers in the quarter and now has 3.5mm subscribers overall. In addition, both Azure and Office now have over $1B in annual sales and are showing exponential growth.
The new leader will have to make some critical decisions over the medium term such as whether to spin off its Xbox business, what to do with its money losing search offerings and to ensure a successful integration of its recent purchase of Nokia's (NYSE:NOK) handset business. Fortunately, Mr. Nadella has been in the front lines in establishing the company strongly in the cloud space as well as overseeing enterprise server software. These will be very important components to Microsoft's value and growth story in coming years.
Unlike Mr. Ballmer, he is also becoming leader when the stock is undervalued. The shares goes for 12.5x forward earnings, a 20% discount to this overall market multiple. This is despite revenue growth that should clock in at 6% to 8% in 2014, significantly above the consensus forecast of 4% sales growth for the S&P 500 overall.
Throw in the company's over $60B in net cash and marketable securities, AAA credit rating and a 3% dividend yield, and an investor can see a very positive value story on the existing Microsoft. Hopefully, Mr. Nadella can better articulate the company's growth story and draw analyst attention to its fast-growing cloud presence.
I am willing to give the new leader some room to do this as MSFT is already a compelling value play in an increasing volatile market. I added some shares Friday as I believe the company's next decade will be rewarded significantly better in the market than its last decade. BUY