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Microsoft CEO Satya Nadella speaking in Seattle earlier this year. (GeekWire File Photo)

Microsoft investors will gather Wednesday morning for a yearly tradition, the company’s annual shareholders meeting at Meydenbauer Center in Bellevue, Wash. It’s Satya Nadella’s first shareholders meeting since becoming CEO nine months ago, and it caps a year of massive change for the company.

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Microsoft shareholders will see a new regime on Wednesday, including Nadella, left, and John Thompson, center, who has replaced Bill Gates as chairman.  Former CEO Steve Ballmer, right, has left the board. (Microsoft File Photo)

If Nadella follows the tradition set by his predecessors, he will give a broad update on the company and do his best to persuade shareholders to buy into his vision. That vision, in his words, is to make Microsoft the “productivity and platform company for the mobile-first, cloud-first world.”

What the heck does that mean? Microsoft, which built its business by making the dominant operating system and productivity applications for PCs, is now betting on its ability to do the same for a new world in which computing extends far beyond our desktops — connected and powered by increasingly intelligent cloud services, driven by data, and working across many devices.

The key is that Nadella defines “productivity” broadly, to include technologies that improve not just efficiency at work but also quality of life.

MicrosoftBand_Phone_WeeklyStepsUI_RGBOne early example is Microsoft Band, released a little more than a month ago — a wearable fitness tracker that promises to eventually connect to users’ calendars, for example, to detect patterns in their day that might be affecting their health. It’s powered by a system called Microsoft Health, running on the company’s cloud platform across Windows, iOS and Android. This initial device has many issues, as we’ve documented, but the concept shows where the company is headed.

Microsoft is increasingly dabbling in hardware — making phones, game consoles, tablets in addition to the new wearable device. But it still makes the vast majority of its money licensing software and services like Windows, Office, Windows Server, and SQL Server (to name a few of the biggies) to businesses and consumers, increasingly on a subscription basis.

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Shareholders will see a new chairman at the meeting, John Thompson, and several new board members. (Bill Gates stepped down as chairman but remains on the board.)

So how is Microsoft doing under the new regime so far? Where should shareholders focus their attention? Here’s our report card.

Financial performance

Microsoft’s core money-making machine continues to chug along, like a reliable old car. Over the first three quarters of Nadella’s tenure, revenue is up 14 percent, to nearly $67 billion. Gross margin, a key measure of operating profitability, is up 3.8 percent, to $45.1 billion. Profits are up about 10 percent, to $16.2 billion.

Cash and short-term investments now total $89 billion, up from $80 billion a year ago. Shareholders will no doubt focus on this number during the meeting on Wednesday, asking about the possibility of increased dividends and share buybacks. Finance chief Amy Hood will no doubt point out the many billions Microsoft has already returned in this manner.

Despite this strength, big questions remain about how the company will fuel its next generation of growth, and what will happen to profits if more of its business shifts to hardware.

Grade: B

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Market value/share price

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MSFT over the past year. (NASDAQ chart)

Wall Street appears to be happy with Nadella’s overall approach, sending the company’s share price up 32 percent since he took over as CEO in early February. Two weeks ago, Microsoft overtook Exxon Mobil to reclaim its position as the world’s second-most valuable company, behind Apple.

One of the biggest differences is a change in mindset, with Nadella demonstrating an increased willingness to look beyond Windows to make Microsoft’s applications and services work across competing devices and platforms. Exhibit A: The decision to make the core Office apps available for free on iPad, after previously requiring a paid subscription for basic editing.

Those are among the changes that the market seems to be responding to. At the very least, it will be more difficult for Microsoft shareholders to complain about the share price at this week’s meeting.

Grade: A-

Tablets/smartphones

SurfacePro3Even with its focus on cross-platform applications, Microsoft’s ability to expand Windows from desktop and notebook computers into tablets and smartphones is a major litmus test for the company’s future. So far, it’s a slog for the company, with Windows Phone’s market share still solidly in the single digits, and iPad and Android dominating the worldwide tablet market.

Microsoft’s Surface Pro 3 tablet, one of Time’s 25 Best Inventions of the Year, has given the company a bit of a boost. Revenue for the Surface line overall was up 127 percent to about $908 million in the September quarter, thanks in large part to the Surface Pro 3. However, by comparison, Apple’s iPad line brought in about $5.5 billion in the same period.

The company has also struggled with basic brand recognition, with NFL commentators repeatedly referring to the Surface as an iPad-like device.

One big question is whether Microsoft can succeed long term by approaching tablets as an extension of traditional computers, exemplified by its focus on hybrid tablets that can double as notebooks. Apple and Samsung have been taking a different approach, playing to their own strengths by treating tablets as an extension of their mobile platforms, and so far that approach has been prevailing.

Overall, as Microsoft absorbs its $7 billion acquisition of Nokia’s devices and services business, it has a huge amount of ground to make up here.

Grade: D

Xbox

xboxone2121After a series of missteps last year with the Xbox One launch, Microsoft has been struggling to keep pace with Sony’s Playstation 4. However, the company has shown increased momentum in the initial days of this holiday season following its move to cut the price of the Xbox One to $329.

Microsoft was coming into this console generation from a position of strength. Meanwhile, competitors like Google and Amazon are making inroads with lightweight streaming devices, and the Xbox One has so far fallen short of the company’s vision for providing the dominant all-in-one entertainment platform for the living room.

Grade: C

Cloud/Developer

This isn’t as evident to the general public, but Microsoft’s Azure cloud computing platform represents one of the company’s biggest bets, aiming to create the operating system, essentially, for this new world of devices, applications and online services.

The company last month took a major risk in support of Azure with its decision to make .NET and Visual Studio work across platforms and devices — a pragmatic move designed to get more developers and applications using Azure, long term, even if they aren’t focusing exclusively on Windows.

Growth in Azure was one of the factors driving a 128 percent increase in Microsoft’s commercial cloud revenue in the September quarter.

Grade: B

Overall leadership

Nadella at work. (Microsoft File Photo)
Nadella at work. (Microsoft File Photo)

The past nine months haven’t been easy. Nadella has experienced his first public-relations disaster, the fallout from his widely publicized comments on women in technology. He has also made it through the largest layoffs in Microsoft’s history, wrapping them up ahead of schedule.

He has shown a willingness to make big moves, most notably the company’s $2.5 billion acquisition of Minecraft — a major deal that promises to help keep Microsoft relevant for a whole new generation.

Inside the company, Nadella is pushing employees to be more nimble, as evidenced by the decision to axe the annual employee meeting in favor of a two-day hackathon.

But so far these moves are largely symbolic. The big question, long term, is whether Nadella can get Microsoft to innovate in big ways — not just following others into new markets but coming up with truly original ideas that redefine and significantly improve how people and businesses use technology.

Nadella will have a chance to make his case to Microsoft shareholders on Wednesday, but it’s going to take more than nine months to accurately assess how he’s faring as a leader.

(Update: As part of my own effort to be nimble and responsive, I’m going to agree with Jefferson in the comments below and give an actual letter grade in this category, not just a TBD.)

Grade: B

Did I grade too easily? Too tough? What did I miss? Weigh in below, and check back with GeekWire on Wednesday morning for live coverage from Microsoft’s shareholder meeting.

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