This Jan. 21, 2015 photo shows Microsoft CEO Satya Nadella  speaking at an event demonstrating new features of its flagship operating system Windows at the company's headquarters in Redmond, Wash. Microsoft will report earnings Thursday April 23, 2015. (AP Photo/Elaine Thompson)

This Jan. 21, 2015 photo shows Microsoft CEO Satya Nadella speaking at an event demonstrating new features of its flagship operating system Windows at the company's headquarters in Redmond, Wash. Microsoft will report earnings Thursday April 23, ... 2015. (AP Photo/Elaine Thompson) (The Associated Press)

After a year's honeymoon, Microsoft boss Nadella faces pressure to show results

Technology Associated Press

Microsoft is changing its business. The question has been whether it's changing fast enough.

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The tech giant showed some progress Thursday, reporting better-than-expected quarterly earnings and more growth in its relatively new cloud computing segment. CEO Satya Nadella has been investing in new services and redesigning Microsoft's most popular programs for smartphones and other mobile gadgets.

But a continuing slump in the PC industry has caused Microsoft's stock to tumble in recent months, marking the end of a honeymoon period in which shares rose steadily after Nadella took the reins in February 2014. Microsoft's latest report shows another decline in profit and in revenue from the company's flagship Windows software for personal computers.

Wall Street analysts say 2015 is the year when Nadella needs to show his strategy is making a difference.

"He needs to not just talk the talk, but walk the walk," said FBR Capital Markets analyst Daniel Ives, who's been a fan of Nadella's moves to overhaul a company best known for its personal computer software.

Microsoft's financial results underscore the importance of those efforts. Revenue from cloud computing has grown rapidly, as more businesses are paying to use software housed in Microsoft's data centers. The Redmond, Washington-based company says it's on track to log more than $6 billion in cloud sales this year.

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But the numbers show Microsoft still relies heavily on selling traditional software, which contributed the largest part of its $21.73 billion in sales for the quarter. The company saw a 26 percent drop in Windows licensing revenue for consumer PCs and a 19 percent drop in licensing for business PCs. And many analysts believe that trend will continue.

Worldwide demand for PCs are expected to fall in 2015, for the fourth consecutive year, according to International Data Corp. Microsoft blamed weak demand, along with the effects of a strong dollar overseas, when it issued a forecast in January for lower revenue than analysts had expected. That sent Microsoft's stock tumbling more than 10 percent in one day.

After peaking at $50.05 last November, Microsoft Corp. shares have traded below $43 recently. The stock closed Thursday at $43.34 and rose more than 3 percent in late trading after the earnings report.

Microsoft is hoping for a boost later this year, when it releases a redesigned version of Windows with new features for PCs and mobile devices. And Nadella has taken other steps to get Microsoft's software into the hands of consumers who prefer smartphones and tablets.

That includes offering Windows at steep discounts for manufacturers to use in lower-priced tablets and laptops. This may hurt revenue near term, but Bernstein Research analyst Mark Moerdler says it should pay off eventually by getting more people to use Microsoft products like the Bing search engine and Office 365 programs for documents, spreadsheets and mail.

Similarly, Microsoft has released Office apps for Apple and Android smartphones, which are far more popular today than Windows-based phones. While the apps are free for consumers, Microsoft hopes to gain revenue by charging for extra services and versions for business users.

That revenue may come, said Forrester analyst Ted Schadler. But he cautioned, "this kind of structural transition takes a long time."