Microsoft CEO Satya Nadella admits his company missed the rise of mobile phones, but insists it won't make the same mistake with augmented and virtual reality. Nadella did not say Microsoft has plans to exit the smartphone business, but admits its focus is on other areas.

"We clearly missed the mobile phone, there's no question," Nadella said during an opening dinner for The Wall Street Journal's WSJD Live conference on Monday night. Microsoft's slow reaction to devices like the original iPhone is blamed for its inability to compete today.

Microsoft still offers its own smartphones following its big acquisition of Nokia's hardware division in 2013, but they post little threat to Android and iOS devices. The latest figures from IDC show that Windows phones now account for just 0.4 percent of the market.

"Our goal now is to make sure we grow new categories," Nadella added, with augmented and virtual reality being two of its priorities. Nadella believes HoloLens could be the beginning of the "ultimate computer" based on mixed reality.

No plans to give up on phones

Microsoft has no plans to give up on smartphones just yet, however. "We have devices which are phones today but the place where we are focused on, given where the market is, is what is the unique thing that our phone can do," Nadella said.

"We have a phone that in fact can replace your PC, the same way we have a tablet that can replace your laptop. Those are the categories that we want to go create."

We'll find out more about Microsoft's other efforts on Wednesday during its big press event, which is expected to bring new Surface devices, updates on Windows 10, and more.