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Satya Nadella: Microsoft's Chief Believability Officer

A Lot For ValueAct To Like

Nadella made it a priority to speak about Microsoft's strategy to offer its newer SaaS and mobile software products on a subscription model. Traditionally, software bundles like Windows XP were sold on a license basis.

"[We] are well on our way to making that transition in terms of moving from pure licenses to long-term contracts and as well as subscription business model," Nadella said. He also indicated that monetization will be determined based on usage, with well-received service increases leading to subscription price increases.

That is exactly how hedge fund ValueAct Capital Management envisions Microsoft's earnings growth in coming years.

Must Read: Amazon Is Plunging: What Wall Street's Saying

When asked about Microsoft's turnaround strategy, ValueAct's Jeffrey Ubben told TheStreet it is similar to a revitalization orchestrated at Adobe (ADBE) under CEO Shantanu Narayen. Ubben said that like Adobe, Microsoft's in the direction of a SaaS model will eventually drive pricing power and rising profitability at the company.

ValueAct, which owns a stake in Microsoft, may have a very patient view of the company's turnaround. The fund first disclose a 5% stake in Adobe in 2011 and Ubben said ValueAct recently re-underwrote the investment given its belief that earnings growth at the company is just beginning.

Ubben, who spoke to TheStreet at the IMN Active-Passive Investor Conference on Tuesday, said Microsoft, having already launched Office 365 and Azure with a SaaS pricing model, is further along than Adobe was when the hedge fund first invested in a turnaround. He also pointed to Microsoft's recent introduction of Word, Excel and PowerPoint to iPad tablets as another positive recent development for the company.

In late 2013, Microsoft signed a cooperation agreement with ValueAct, letting ValueAct Capital President Mason Morfit meet with selected Microsoft directors and company management "to discuss a range of significant business issues." Morfit also joined the Microsoft board in Nov. 2013.

Earnings Results, Partial Guidance

Microsoft posted net income of $5.66 billion, or 68 cents a share, vs. $6.055 billion, or 72 cents a year earlier. Revenue was $20.403 billion versus $20.489 billion the prior year. Microsoft was expected to earn 63 cents a share on revenue of $20.4 billion, according to Bloomberg data.

CFO Amy Hood said Microsoft expects to report Devices and Consumer Licensing revenue of $4.1 billion to $4.3 billion; Devices and Consumer Hardware revenue of $1.3 billion to $1.5 billion; and Devices and Consumer Other revenue of $1.9 billion. Commercial revenues are expected to be at $13.1 billion to $13.3 billion, and within this, Commercial Other is forecast to be at $2.1 billion.

That guidance excluded any impact from the Nokia acquisition, which will be included in Microsoft's fourth-quarter earnings report. Hood confirmed Microsoft's previous operational expense guidance and said the company is expecting a higher tax rate for the fourth-quarter, reaching 18% to 20% for the full year.

-- Written by Antoine Gara, with Andrea Tse in New York.

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