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Decent Q1 Report Card To Give Nadella More Time To Retool Microsoft

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Satya Nadella is an executive who likes to keep close to the script -- all the more reason why Microsoft ’s CEO will be thrilled to get a chance to reclaim the narrative when the company reports its first fiscal quarter on Thursday.

Analysts polled by Thomson Reuters expect a per-share profit of $0.49 cents-per-share, a 21 percent decline from a year ago. Microsoft's also expected to post $22.02 billion in revenue, up 19 percent.

Barring the unforeseen, that should be good enough to remain in Wall Street’s graces. With Microsoft’s stock trading near its 52-week high, Nadella faces none of the pressure which ultimately forced his predecessor Steve Ballmer to resign and pursue a new career as a sports mogul.

It also will give Nadella a way to talk about something other than current events. On Monday, we learned from a recent SEC filing that Microsoft awarded its boss $84.3 million in total compensation -- mostly in the form of stock grants -- during the company’s fiscal year which ended June 30. Before anyone flips out at the dollar amount, consider this: the going rate for high-profile CEOs in the tech business ain’t cheap. Longtime Microsoft rival Larry Ellison, for example, received $67.3 million in total compensation for what turned out to be his swan song as Oracle’s chief executive.

Unfortunately, the disclosure of Nadella's compensation package came as Microsoft continues to try and contain the PR backlash triggered by clumsy comments he made at a conference suggesting that females would receive more favorable karma by not asking for raises. (He’s been on a contrition tour ever since.)

There was nothing Nadella could do about that timing, but this much is clear: Since he became CEO in February, the company has started to move at a faster tempo and insiders say his arrival has helped raise morale in the rank-and-file.

“There’s definitely a new energy,” said a Microsoft executive who asked to remain unidentified.  “Call it a Satya hacker culture. There’s a more organic feel that things are happening -- and it now can happen from the bottom up. Windows is no longer perceived as the center of the world. And the new order  is to play well on iOS and Android platforms as well and that’s been liberating.”

During the final years of previous-CEO Steve Ballmer’s tenure, Wall Street cooled on the company as Microsoft seemed stuck while rivals such as Google and Apple profited handsomely in fast-growing markets like smartphones, social networking and search.  Since taking over, Nadella has offered a different vision, one in which Microsoft is no longer handcuffed to its Windows franchise and the company retools for a multi-platform future in which mobility and cloud computing define tech’s winners and losers.

This remains the proverbial work in progress but Microsoft can point to progress on some fronts.

Revenue from Microsoft's cloud business in the last fiscal year more than doubled to $2.8 billion from $1.3 billion the year earlier.  What’s more, the company now counts 80 percent of large corporate companies as customers for its cloud computing infrastructure -- and the momentum continues: On Monday, Microsoft said that more than 10,000 customers were signing up each week for its Azure cloud platform.

Another possible talking point:  US PC sales have increased for six consecutive quarters, according to market researcher Gartner. That’s a hopeful harbinger given that the US is the largest market for Windows and the region with the lowest piracy rate.

“Microsoft is moving to a mobile and cloud first strategy, away from the old PC and software licensing model,” according to Forrester analyst Frank Gillett. “So metrics such as Office 365 and Windows Azure revenue are the success metrics to watch, rather than PCs shipped - which is why Microsoft is not taking license revenue for smartphone and small tablets running Windows. To be where their customers are, Microsoft is no longer a Windows-first company, it is a customer-first organization - they have to be where the customer is, regardless of the operating system the customer is using.”

Also -- although there’s little chance Nadella will talk about this tomorrow -- the company’s expected to soon enter the wearable computing business. Forbes reported that an announcement of a smart watch may come as soon as next month. That would give Microsoft a months-long head start on Apple, whose own smart watch won’t reach the market until early 2015. It would also mark  Microsoft’s first new market under the Nadella regime.

But Nadella is still trying to figure out what to do to reinvigorate demand for Microsoft's Windows Phone operating system, which accounted for a paltry 2.5 percent of new smartphone shipments worldwide in the last quarter, according to market researcher IDC. By comparison Google’s Android had an 84.7 percent share in the quarter while Apple’s iOS accounted for 11.7 percent.

Meanwhile, the company has had to fend off reports that it is contemplating killing off its Surface tablet, which has picked up important customers such as BMW, Coca Cola, and Louis Vuitton. It's also the official tablet of the National Football League. Still, the Surface trails far behind Apple's iPad and nothing's going to change that in the near term.

For now, though, Nadella just needs more time to complete his transformation of Microsoft. At that point, we'll have a good idea whether he's really worth that $84 million pay day.

Here’s more on what to expect from the individual segments of Microsoft’s earnings report in this Forbes preview.