Nadella: Enterprise cloud opportunity larger than any market Microsoft has been in

Operating income was down overall for Microsoft in the final quarter of 2015, but its cloud success holds promise

Microsoft's cloud business was a bright spot in its quarterly earnings report and CEO Satya Nadella positioned the segment as one that could dwarf any business the company has operated in historically. 

Satya Nadella

"The enterprise cloud opportunity is massive," Nadella said during a call to discuss the results with analysts. "It's larger than any market we've ever participated in."

Microsoft revenue was down in the quarter ending in December, compared to the previous year, but it beat expectations and the company's cloud businesses, which Microsoft has to rely on for future growth, performed well.

Here's why Nadella thinks the opportunity is so big. Microsoft is discovering that the cloud is allowing it to broaden the market it can address. For instance, Microsoft now supports Linux in Azure and Linux workloads make up 20 percent of the use of Azure. "This is an opportunity we didn't have previously," he said.

Similarly, with a service like its Enterprise Mobility solution, Microsoft also can address a bigger market. While the company has long had Active Directory and System Center to help IT admins manage devices and users, with the growth of mobile and SaaS, "EMS is bigger than anything we had in the client-server era," he said.

He argued that while Microsoft is "one of two leaders" in the cloud space, Microsoft has an advantage over its competitors because the company offers SaaS, PaaS, IaaS and hybrid cloud "at scale."

"We are growing in each of these areas," he said.

The company doesn't try to compete individually on each of those cloud segments. Instead, it wants to show customers how they can benefit by using all of those services based on a single backend architecture at Microsoft. For instance, Office 365 users who want to extend data from those apps into custom apps may choose Azure as a natural platform to build those apps, he said.

In terms of revenue, Microsoft's "Intelligent Cloud" group, which includes Azure as well as server products and consulting services, was the only group that that was up in the quarter. Azure revenue grew 140 percent compared to the same quarter in 2014, Microsoft said. Operating income for the Intelligent Cloud group was down compared to the same quarter the previous year, though.

In addition to cloud successes, Nadella shared some details of uptake of other Microsoft products. The company now has 200 million active devices running Windows 10, although only around 22 million of those are enterprise or education users. Still, Nadella said that 76 percent of Microsoft's enterprise customers are in active pilots of Windows 10.

He also spoke briefly about artificial intelligence, a topic with an uncertain future but that a number of big tech companies are focusing on. "At the heart of every business in the future will be systems of intelligence," Nadella said. Powerful AI systems will help people understand the past and predict the future, he said. "Cortana Analytics is the building block" for that, he said.

"Our goal is to make it possible for every company in every industry and country to take advantage of this new AI," he said.

Like other traditional enterprise vendors, Microsoft is navigating through a transition from earning most of its revenue from licensed software to bringing in cash from cloud services. Microsoft has done better than some of its competitors, by launching Azure early in the cloud market and aggressively developing Office 365 and other products with cloud back-ends.

Total operating income for the quarter was $6.0 billion on revenue of $23.8 billion. 

For more:
- check out the earnings press release 

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