Q1 2021 Microsoft Corp Earnings Call
As Microsoft 365 follow platform and Azure to help providers like Cleveland Clinic, and St. Luke's Health network improve patient outcomes.
Now to lengthen among.
Amid a rapidly changing work environment Lincoln is where more than 722 million professionals go to connect with their communities learn new skills and find new opportunities. We saw record levels of engagement again this quarter, we launched our most significant redesign.
The streamlined search and messaging experience as well as new ways for connecting and sharing with stories more.
More professionals are turning to Lincoln learning to increase their knowledge capital watching more than a million hours of content each week more than double the amount a year ago.
Three people are hired every manager on Linkedin and new features make it easier for nearly 40 million job seekers to indicate they are looking for their next opportunity.
In marketing solutions Advertiser demand on linked in return to near pre corporate levels up 40% year over year as marketeers use our tools to connect with professionals ready to do business and organizations continue to tap into the combination of Lincoln sales navigator.
And dynamic 365 to ensure salespeople have the context, they need to sell remotely.
Now to Microsoft 365.
Pcs have become mission critical to sustain work learning in life at home and maintain business continuity in the enterprise in a remote everything world window.
Windows 10 monthly active devices are up double digits year over year across commercial consumer and education.
And we will have the largest lineup of surface and OEM devices ever this holiday season to support every person in work style.
Microsoft 365 is the comprehensive suite of productivity apps and experiences people use and rely on every day.
Teens now has more than 115 million daily active users. We are seeing increased usage intensity as people communicate collaborate in quarter contents across work life and learning.
All up Microsoft 365 users generated more than 30 billion collaboration minutes in a single day this quarter.
Teams is the only solution with meetings calls chat content collaboration as well as business process workflow in a secure integrated user experience and as companies move online. They also want one unified platform for meetings to form systems, which teams delivers.
The key to productivity is to move beyond transactional meetings and sustain the flow of work and maintain business process context, that's where Microsoft 365 and teams stand up you collaborate on our Powerpoint presentation before our meeting and share it with participants in share point, if you may.
The meeting you can access the recording by our stream and catch up we are persistent chat action items or can automatically be assigned in less with power platform and teams you can build custom productivity apps using less sets of data source and you can even connect dynamics 3652 teams. So that you can see customer information.
And take action.
It's clear that people will need more flexibility in when where and how they work we are adding re imagined work spaces in teams for every collaborator remote in person or on the go and we are accelerating our innovation for both first line as well as new.
Knowledge workers with over 100, new capabilities in the last six months, including breakout rooms meeting recap shift scheduling and large scale digital events up 20000 participants to help people transcend both time and distance.
Employee health and wellbeing is a top concern for every CEO, we are innovating with new experiences to help people prioritize well being in the flow of work new insights and teams provides personalized recommendation recommended actions, making it easier for employees to create.
Healthy work habits and for leaders to build high performing teams new word virtual commute gift structure to remote workday with scheduled cognitive breeders and together Mod is helping employees at companies like office depot reduce video fatigue.
More broadly we are accelerating our innovation across Microsoft 365.
New Microsoft stream is the video platform for the enterprise, making it easy to create share and discover video that work transcription and voice commands in word help people save time and share point syntax makes it easier to find and work with content across the enterprise.
We are seeing Microsoft 365 momentum in every industry in education, nearly 270000 institutions are using teams to power remote learning and improve learning outcomes, including University of Nottingham in the UK Morehouse College University of South, Florida, and some of the larger school districts in the United States.
It's like Miami Dade County, public schools in sports, the NBS and NFL or re imagining the game day experience for fans Pepsico will deploy Microsoft 365, and teams to its 270000 employees worldwide and Morgan Stanley Pricewaterhousecoopers and prevention financials.
All chose Microsoft through six five E. Five this quarter for differentiated security compliance voice and analytics.
Now to security.
We are the only company that offers end to end capabilities to protect and manage data devices identities and infrastructure holistically, enabling a cross platform and a multi cloud zero Trust architecture HR block for example used on tools to implement zero Trust funds.
Couples in just two weeks, enabling thousands of tax professionals to securely work from home.
In identity Azure AG has nearly 400 million monthly active users and we have seen usage of third party apps increased two x. since last year in security, New Microsoft defender simplified threat detection and response and now includes coverage for Android and iOS as well as multi.
Cloud and on premise protection for sequel workloads in device and data management, Microsoft endpoint manager monitors and organizations devices in a unified platform and new tools offer proactive remediation of issues before the disrupt end users and in compliance our new compliance manager.
Offers more than 150 out of the box assessments for regulations, such as GDP are.
Now to gaming.
Gaming is the most expansive category in entertainment industry three.
3 billion consumers look for to gaming for entertainment community, an achievement and our ambition is to empower each of them wherever they play.
Our X. box game past service has more than 15 million subscribers quality.
Differentiated Kwan content is the flywheel behind the services growth and the addition of EA play next month, along with our pending acquisition of Valemax media will add more of the world's most iconic franchises to more than 100 high quality games already available and material increases are a bit.
32 increased content.
We're also transforming how gains are distributed and plate and reaching new players on mobile and tablet by bringing cloud gaming to gain pass.
Finally, we are delighted by early reviews and excitement in the X. box series S and X box series X.
Which would be the most affordable in the most powerful console available.
In closing in a world of uncertainty and constraints every person in every organization needs more digital technology to recover and Reimagine what comes next.
This represents an unprecedented expansion of our addressable market in every layer of the tech stack. We are focused on innovating and differentiating to meet these needs and growing opportunity with that I'll hand over to Amy who will cover our financial results in detail and share our outlook and I look forward to rejoining for your questions.
Thank you Catherine and good afternoon, everyone. This quarter revenue was $37.2 billion up 12% year over year gross margin dollars increased 15% operating income increased 25% and earnings per share was $1.82, increasing 32% and 30 per.
In constant currency consistent execution by our sales teams and partners drove a strong start to the fiscal year and our commercial business customers accelerated digital transformation priorities and we again saw strong demand for our differentiated high value hybrid and cloud offerings.
Resulting in increased commitments to our platform and higher usage overall, our transactional light duty business remained a headwind, although the small and medium business customer segment improved slightly through the quarter and.
In our consumer business continued demand for Pcs and productivity tool benefited windows OEM non grow up its consumer and surface.
And improved advertising market benefited search and link them mm.
And we saw continued strong engagement across our gaming platform.
Moving to our overall results on a strong prior year comparable and relatively small exploration dates commercial bookings growth was ahead of expectations.
The 23% and 18% in constant currency driven by our core annuity sales motion and an increase in the number of large long term as the contracts as a result commercial remaining performance obligation increased 24%, 23% in constant currency to 100.
$7 billion with a roughly equivalent split between the revenue that we recognized within the next 12 months and beyond the next 12 months.
Commercial cloud revenue grew 31% to $15.2 billion and commercial cloud gross margin percentage expanded five points year over year to 71% driven by the change in accounting estimate for the useful life of server and network equipment assets starting on July earnings call. Excluding this impact.
Commercial cloud gross margin percentage was up slightly.
Right revenue mix shift to Azure and increased usage to support our customers remote work scenarios.
This quarter FX had no impact on revenue growth more favorable than anticipated due to the weaker us dollar and in line with expectation at that had no impact on cancer operating expense growth.
Company gross margin percentage was up two points year over year to 70% driven by the change in accounting estimate now earlier, excluding this impact company gross margin percentage was down slightly with increasing cloud revenue mix and continued investments such as trial offers and flexible financing options that delivered greater customer value in this challenging and by.
From an.
Operating expenses increased 3% lower than anticipated.
Even by greater than expected cobot related savings and investments that shifted to future quarters.
And operating margins expanded four points year over year to 43%, including roughly two points of favorable impact from the change in accounting estimate.
Now to our segment results right.
Revenue from productivity and business processes was $12.3 billion, increasing 11% ahead of expectations, primarily driven by Lincoln and office consumer on a strong prior year comparable office commercial revenue grew 9% with continued impact from the transactional weakness noted earlier, obviously 65.
Our commercial revenue grew 21% and 20% in constant currency driven by installed base expansion across all workloads and customer segments as well as higher ARPU.
Five revenue growth accelerated with strong value and our advance security compliance and voice component.
Paid officethree hundred 65 commercial seats increased 15% year over year with early momentum in free trial conversions.
And we saw continued growth in small and medium business and first line worker offerings with improvement through the quarter. So again at more moderated levels under 65 commercial now account for over 70% of our existing office commercial paid installed base.
Office consumer revenue grew 13% with better than expected sales of office 2019, and accelerating growth in Microsoft 365, subscriptions up 27% year over year to 45.3 million.
Yes revenue grew 19% and 18% in constant currency better than expected driven by dynamics were 65 revenue growth of 38% and 37% in constant currency growth.
Growth in the number of customers adopting multiple dynamics 365, workload accelerated reflecting the value of our modern solution with compelling climbs devalue linked.
Lincoln revenue increased 16% significantly ahead of expectations, primarily driven by a stronger advertising market that benefited our marketing solutions business.
Segment gross margin dollars increased 13% and 12% in constant currency and gross margin percentage increased one point year over year, including roughly two points of favorable impact from the change in accounting estimate partially offset by sales mix. The cloud operating expenses increased 4% in operating income increased 19% year over year.
Including six points to the change in accounting estimate next.
Next the intelligent cloud segment revenue was $13 billion, increasing 20% and 19% in constant currency slightly ahead of expectations on a significant base server products and cloud services revenue increased 22% and 21% constant currency.
AD revenue grew 48% and 47% in constant currency driven by consistent strong growth in our consumption based business.
This quarter, we saw better than expected growth in our per user enterprise mobility business as the installed base increased 27% to 152 million seats.
And our on premise a server business decreased 1% was impact from continued transactional weakness and a strong prior year comparable that benefited from the end of support for Windows server and sequel server 2008 inch.
Enterprise services revenue grew 6% and 5% in constant currency again, driven by Premier support services.
Segment gross margin dollars increased 26% and 25% in constant currency and gross margin percentage increased 3.0 per year with nearly four points of favorable impact from the change in accounting estimate.
Operating expenses increased 10% and operating income increased 39% and 38% in constant currency was roughly 13 points of favorable impact from the change in accounting estimate.
Now to more personal computing revenue was $11.8 billion increasing 6%.
Better than expected performance in Windows, OEM, non pro surface and search.
In Windows overall, OEM revenue declined 5% better than expected.
OEM non pro revenue grew 31% benefiting from demand for larger screens for productivity.
And OEM pro revenue declined 22% impacted by lower commercial demand across all customer segments and the prior year comparable that benefited from the end of support for Windows seven.
Inventory levels ended the quarter in the normal range.
Windows commercial products and cloud services revenue grew 13% and 12% in constant currency slightly below expectations as continued demand for Microsoft to 65, and our advanced security solutions was partially offset by a lower mix of multiyear agreements that carry higher in quarter revenue recognition.
As well as continued transactional weakness.
Surpassed revenue grew 37% and 36% in constant currency driven by year over year differences in product launch timing and channel purchasing as well as overall PC market demand surge.
Search revenue ex Tac declined, 10% and 11% in constant currency.
And in gaming revenue increased 22% and 21% in constant currency driven by continued strong engagement and monetization across the platform, though at a slightly lower rate than last quarter X box content and services revenue increased 30% with strong growth in third party transactions.
Game pass subscribers and first party titles.
Segment gross margin dollars increased 8% and gross margin increased one point year over year as improvements primarily within gaming and surface were mostly offset by a lower mix of windows revenue.
Operating expenses decreased 8% and operating income grew 18% year over year now.
Now back to total company results capital expenditures, including finance leases were $5.5 billion up 15% year over year to support growing customer usage and demand for our cloud services cash paid for PPD was $4.9 billion.
On a low prior year comparable that included tax payments related to the transfer of a tangible property cash flow from operations was $19.3 billion up 40% year over year in free cash flow was $14.4 billion up 38%.
Excluding the impact of the tax payments cash flow from operations grew 12% as healthy cloud billings and collections were partially offset by higher supplier payments related to the Xbox hardware inventory build.
Free cash flow grew 3%, reflecting a significant increase in cash payments for pp inning.
Other income and expense was $248 million higher than extent dissipate and driven by net gains on foreign currency, remeasurement and investments, including Mark to market gains on our equity portfolio.
Our effective tax rate was 14% with a greater than expected impact from equity vest in the quarter and finally, we returned $9.5 billion to shareholders through share repurchases and dividends an increase of 21% year over year now, let's move to our outlook.
In our commercial business, expanding addressable market differentiated value and consistent execution to drive another quarter of increased usage and growing commitment to our platform that drive commercial bookings. However, a declining export rebates will impact the growth.
As always large long term azure contracts are more unpredictable and their timing and increasing mix of these long term agreements trends more quarterly volatility in bookings and.
And those trends have improved and that growth will continue to be impacted by transactional weakness a strong prior year comparable that included the end to support for Windows, seven and Windows server 2008, as well as transactional strength in Japan across our office businesses will also impact growth rates in our consumer business, we expect some.
From continued consumer PC market growth.
Though at a more moderated growth rates than last quarter, given the traditionally high volume of TCV sold every QQ.
Commercial cloud gross margin percentage will increase approximately three points year over year again, driven by the change in accounting estimate noted earlier, excluding this impact continued improvement and as I asked them test gross margin will be offset by mix shift to azure and on a dollar basis, we expect capital expenditures to be roughly.
In line with last quarter to support growing usage and demand for our cloud services.
Now to FX based on current rates, we expect FX to increase total company revenue and operating expense growth by approximately one point and have no impact on Cogs growth within the segments FX should increase productivity and business processes and intelligent cloud revenue growth by approximately one point and have no impact.
Act on more personal computing revenue growth next segment guidance in productivity and business processes. We expect revenue between 12.75 and $13 billion in office commercial revenue growth will again be driven by office lease 65 with continued up sell opportunity kicking five however growth.
Will be impacted by the strong prior year comparable noted earlier as well as a decline of approximately 30% in our on premises business driven by continued transactional weakness and the ongoing customer shift to occupancy 65 in office consumer we expect revenue to grow in the mid single digits down sequentially as continued growth in Microsoft.
Pre 65 subscription revenue will be impacted by the strong year prior year comparable and the seasonality of the PC market noted earlier.
Enlink then we expect the improved advertising market and continued strong engagement on the platform to drive revenue growth similar to last quarter.
And in dynamics continued dynamics, we 65 momentum will drive revenue growth. So its slightly lower rate than last quarter in line with historic seasonality in that business.
For intelligent cloud, we expect revenue between 13.55 and $13.8 billion in Azure revenue growth will be driven by our consumption based business with continued strong growth on a significant base.
Our per user business, we expect growth rates to moderate further given the size of the enterprise mobility installed base and our on premises server business. We expect revenue to decline low single digits as demand for our hybrid and premium offerings will be offset by continued transactional weakness and the impact from the prior year comparable.
It earlier.
In enterprise services, we expect revenue to be up low single digits.
In more personal computing, we expect revenue between 13.2 and $13.6 billion.
In windows on the strong prior year comparable overall revenue should decline in the high single digit range in our OEM business, we expect another strong quarter and early on non crowd, but only a pro will again be impacted by the lower commercial demand and windows commercial products and cloud services services, we expect.
Hopefully annuity billings growth driven by the continued demand for our advanced security solutions, However growth will be materially impacted by a lower mix of multiyear agreements that carry higher in quarter revenue recognition, primarily due to the declining expiry base and a large deal in the prior year.
In surface revenue will be relatively unchanged impacted by the year over year timing differences of product lifecycle transitions noted earlier.
In search ex Tac, we expect revenue to decline in the mid to high single digit range and in gaming we expect revenue.
Growth in the high 20% range, we expect very strong demand following the launch of our next generation X. box series acts and asks console driving supply constrained hardware revenue growth of approximately 40%.
We also expect net negative gross margin impact from console sales this quarter as we invest against growing lifetime value of the platform X. box content and services revenues to grow in the low 20% range with strong engagement and continued momentum and gain pass subscribers. As a reminder, our outlook does not include.
Panamax, which we still expect to close in the second half of the fiscal year.
Now back to company guidance, we expect cost of $13.75 billion to $13.95 billion and operating expense of $11.4 billion to $11.5 billion and other income and expense interest income and expense should offset each other and finally, we expect our Q2.
Tax rate to be approximately 16%.
In closing I'd like to share a few thoughts as we look beyond the next quarter as.
As digital transformation accelerates and our sales teams and partners continue to execute well in serving customers are high value solutions should drive full year double digit revenue growth in our commercial segment, even in a challenging and competitive environment.
Given our significant ambition desire to enable our customers visions for their future and the opportunity that creates we will continue to invest in high growth markets and the strategic areas that will further enhance our position with that Mike Let's go to QNX.
Thanks, Amy we'll now move acuity of respect to others on the call request that participants. Please only ask one question operator can you. Please repeat your instructions.
Absolutely, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad, a confirmation trends indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your hands for pressing the star key.
Our first question comes from Keith Weiss with Morgan Stanley. Please proceed with your question.
Thanks, Phil and thank you for taking the question and very nice quarter.
Talk a little bit about intelligent cloud and the trends that you're seeing there were.
We're picking up on stuff like Rcs cluster is a really strong indications from CIO that they want to move more aggressively into the public cloud, we're seeing that and good results from Azure, how should we think about the on premise server and tools business on a going forward basis is this increased preference for public cloud going to more permanently impair server and cloud.
Im sorry server and tools growth in the on premise environment or is there a potential for that 50 coming back to the low to mid single digit growth that we've seen historically once we pass these tough comps.
Let me start and Keith Thanks for the question and maybe you can add to it a couple of things Keith one is the approach we will restate taken is that distributed computing will remain distributed so the cloud in the edge is what will be the distributor fabric for application.
So if you look at.
Where our growth is coming from for the all off number intelligent cloud is coming from the infrastructure. They add the flexibility that we have around hybrid deployment things like Azure Arco very differentiated same thing with data hardest one of the big feature innovations will even in the last quarter was the ability.
To deploy for example, azure data in any cloud, including the edge also that deployment drives application preference for our infrastructure. The SEC. The two other things that are happening is developers whether its lift shift modernize motion or just new applications because of what they're doing a good job or Azure Dev ops. So riyadh.
Coach using Azure services.
And with follow up platform dynamics are empty six five because a lot of these larger gaps that people build out about stitching together extensions of workflows of multiple sop. So we have all three of these trends leading to more intense usage of infrastructure data and the application past service.
And so thats, how we view it I don't sort of look at each quarter, what's happening on server plus cloud I look at the holistic deployment options that our customers need for their increasingly distributed applications and so thats sort of what I see in EMEA. If you want to address please go ahead Sir.
Maybe I can help a little bit and.
In General I think it's easier if you think about Azure plus the annuity business as being this durable hybrid.
Cloud value the stock is talking about.
And we continued to see very strong and consistent performance across those things in terms of renewal rates the strength of premium the strength of hybrid value prop and so on.
That aspect keep the cause of the reasons not to mention we don't see nearly as much change in that it's it's frankly why you see bookings numbers that are very good. It's why you see our PEO, but less than 12 months think about that as our core annuity motion versus longer than 12 months, which are the azure longer contract.
All having very healthy gross so that's what you're left with is a small component.
Of the business, which is that non annuity slash, what we call transactional business, which is one time purchases all recognized in the quarter and the cause of that it doesn't move around a lot more it and helped obviously when we had end of support we were transparent about that and then it hurts more both in this macro environment, but more.
So just because of some tough comparable and so while we will continue to have that through.
A few quarters, and we'll expect that to bounce around a bit because of the nature of a 100% in quarter recognition does fundamentals of bookings renewals premium and hybrid value as well as our consumption.
On the field far.
Far more consistent than not is how I would I would answer that.
Okay. That's super helpful. Thank you guys.
Thanks, Keith Operator, we'll take next question please.
Thank you. Our next question comes from Heather Bellini with Goldman Sachs. Please proceed with your question.
Great. Thank you so much for taking the question I had a question you just made some really strong robust growth comments on the topline is as you look out into the future, but you also invested rightly so your desire to invest for your customers.
The growth areas I think one of the questions people might be wondering is how do we think about how that might impact operating margin trajectory.
And should we interpret your comments that obviously growth remains really start strong and were investing for growth, but there is an eye on profitability as well like how would you like those comments interpret it a little bit more deeply thank you so much.
Thanks, Heather and if you take a step back the comments are really about the consistency and the opportunity in front of us and so in our commercial segments, where we're seeing.
Consistent annuity execution, we're seeing increasing usage were seeing good deployment and frankly the portfolio that suck you went through in his comments. If you go section by section it's talking about amazing.
T C O advantages.
With that portfolio offers even for our commercial customers, who are looking for ways to accelerate but control cost and so for us we see operating environment like that where you see the opportunity you feel good about your portfolio you can feel in we basically feel good about our complete sac.
At a high value, what we want to make sure we do and my comments were around us.
Our really about making it clear that we intend to continue to go after.
The opportunity, we see and so of course, we're always thoughtful.
About how.
We invest but in these areas, where we see such strong signal I do expect us to continue to focus and at the operating margins a real focus will also just be as we enter.
The second half of the year, it's obviously impacted by some of the hardware investments that we're making as well as the overall windows numbers. So.
That's the probably the best way to think about.
Thank you so much and.
And Heather.
Congratulations will Miss having you on the call after seven years.
[laughter]. Thank you so much bye.
Thanks, Kevin Operator, we'll move to next question. Please.
Our next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed with your question.
Thank you very much for taking the question and congratulations.
And then really nice clean quarter give.
Given the flare ups in Cove, it in certain geographies and continuing locked down do you think there is increasing pressure on overall spending does it impact SAS adoption going forward and and adding to that how do you see your supply chain for the cloud components are you going to be able to meet all the demands. Thanks.
So maybe I'll start and maybe you can add to it I mean overall, what we have lunch over whatever the last nine months or so.
Is.
The best way for any business to ensure both resilience.
As well as pivots in transform and re imagine how to work with some of the constraints is digital tax so.
Whether it's infrastructure, whether it's data on Hsas, it's in fact increased adoption rate and.
And that's where do you see like where you see it in power apps. For example in many cases, even the smallest of businesses need to be able to deploy solution quickly for some work flow that allows them say for example, do curbside pickup if you are a retailer in a small business.
But they were able to build out easily and deploy it. So that's what we are seeing which is increasing adoption and use.
And on the supply chain side.
We have worked through we did get when we have the initial rush we did have demand.
So just that needed us to sort of walk through on our supply chain, we feel very good right now on how the supply is working to support the demand.
Amy.
Nothing to add Sapia therapy.
Thank you very much appreciate threats.
Thanks, Mark operator, we'll take the next question please.
The next question comes from Phil Winslow with Wells Fargo. Please proceed with your question.
Hi, guys. Thanks for taking my question, you're asking another great quarter I just wanted to focus in on the office 365 commercial and Amy. Thank you for that update that you are now 70% penetrated and if I go back to the financial analyst briefing back in 2017 that was 50%. So I guess two questions. One is can you help us sort of unpack. It just blew stalled re's growth, obviously with those 2%.
These are the numbers you gave that's pretty healthy installed base growth and then as a follow up to that one of things. You mentioned two is obviously the continued migration. If you five sort of what inning are we in for the sort of the eathree. The five motion and how important is voice, which is one of things you mentioned that you find just to to two officers. These five going forward.
Oh Im sorry go ahead.
Let me break down your questions I want to make sure that the comment on 70% is really thought about it in the right way and it's 70% of the current installed base and so one of the key.
Components of that is we have as you said continued to see installed base growth and whether that's adding and first line worker at scenarios, whether it's increasing in small business and there are so many ways for us to continue.
To add tremendous value continued to grow the installed base, but we are please.
That we have and 70% on more modern experiences obviously of office 365 in terms of adding some productivity and being able.
As we continue to offer.
To your point some of this notion on each three and five.
To that question, there's absolutely room still on on both of those motions. We've got room to continue to have people move to Athree. We've got room to continue obviously, that's not just voice, although that is an important component.
The really exciting value any five is that it offers security value. It offers compliance value. It offers voice again.
Analytics value and so the reality is all of them are becoming more meaningful, especially in time to value and tcl.
One thing I'll say that I, sometimes think yes.
Yes, yes, when we talk about office 365 is what are the other key motions and Thats important around this group and business is the ability for us to continue to add on the Microsoft received 65 components, and whether that mats or windows security value and so on.
While we are excited about the installed base and the progress. It also creates a good opportunity for us to continue to move people to the Microsoft or 65, SKU and not just a threed the skews of office.
Great. Thank you very much appreciate it.
Thanks, Phil Operator, we'll take next question please.
Our next question comes from Karl Keirstead with GBM. Please proceed with your question.
Thank you Amy I wanted to ask you a question given the comment you made about bookings volatility I wanted to ask about some of the azure trends in particular that we can't see.
Such as the level of Azure migration activity that might still be in the planning phase.
Or if deals have been signed how you feel about the Asher backlog that will convert to revenue over the next year or so and whether some of the Azure go lives have been pushed by a quarter or two given the uncertain environment that kind of color Mike.
As a nice complement to the solid 47% reported as your number you gave thank you.
Go ahead David.
And Karl take a question, maybe let me break down some of the some of the components.
When you think about.
Azure and some of these longer term sort of deals I was discussing.
The longer term bigger deals when I talk about them being more volatile. It's just it's more that we done and really focus on the exact moment in time that they get done they tend to be partnerships that we're really working through they take longer for planning and so these types of course.
Ownerships, it's really about making sure we make them successful far more than which quarter and that they arrive in and so that does just result in a little bit more volatility in that in that bookings number now into her so I would separate that from the question you're asking was I think is great around how much of that.
Creates.
Funnel of opportunity for us in terms of converting those plans as well as maybe a hybrid benefits and that exists today in our good annuity performance on Prem So for us that is about investing in customer success and so for US. It's been one of the important investments we've made over the past.
A couple of years and why we continue to invest in everything from skilling at our customers up through training up through deployment and really make sure that each project is successful and has good value and so when you think about that and think about the newest on Prem business.
As well as these longer term azure contracts as being effectively a a book of business to continue to work and convert.
Into as you are talking about this consumption now within the quarter. The consumption. Obviously has other impacts most of it obviously is.
Its use and it's recognized in quarter, you'll see that number as you know jump around a little bit from quarter to quarter on some of that is the per user that we've talked about things like M&A can have a little bit more in quarter recognition and they can be impacted by an X X X freebase.
And so you'll see that number the aggregate CPI jump around a little bit more than just from consumption and you can have things like overages land on an annual basis as opposed.
Tim maybe a monthly basis and that can also make the number jump around a little bit so while the funnel and Dod conversion is absolutely. How we think about seeing strong bookings and a strong especially longer than 12 month ARPO ballots.
We certainly also sort of works at meticulously at the customer level to get projects to success.
Just one thing I would add is stream is earlier comment about our customer success motion when we look at the App portfolio.
For any customer we look to see first of all which apps do they want to just retire we chaps do they want to modernize and moved to the cloud our new cloud starts.
And then we use all of what is their own off stack to help them right. So it could be a power app that gets built which is more part of Microsoft office 365 of Microsoft 365 it.
It could be a SaaS application that is in dynamics module, that's better for them because that's a faster time to value.
And then and sometimes you build in Azure. So we look at it holistically across all of the Tech stack. Our says any one thing because that's what we think both differentiates Microsoft and create preference for Microsoft long done so thats, how we approach it.
Thank you Ben.
Thanks, Karl Operator, we'll take the next question please.
Our next question comes from Brent Thill with Jefferies. Please proceed with your question.
Good afternoon Satya good to see the teams number double on any use in a pretty short duration. Maybe if you can just walk us through your next chapter of the teams story and.
Where you see the biggest opportunity in.
What other.
Components, you're seeing attach to the teams rollout. Thank you.
Sure. Thank you so much of the question Keith is very exciting to us because.
Unlike anything else that we have done that and at the application layer it.
It's literally like a shell.
As a platform effect because it is meeting its chat its collaboration as well as business process applications integrate into teams so thats scaffolding richness.
Literally makes it a very robust platform AD. So we're seeing significant growth you saw what we talked about the usage growth, but we're also seeing significant growth of usage across all these modalities inside a team offer.
But the other aspect, which I referenced in my remarks is when you look at Microsoft 365, all of our teams is both string all off growth right because meetings are important but this transactional work happens before meetings during meetings and after meetings. So that is believed to have the work flow come.
Please be stitched together is where Microsoft 365 really stands out so that reinforcing effect Gulf teams by itself and then Microsoft 365 in conjunction with teams is where you will see a significant amount of usage growth more so than individual tools off the path Steven.
All right. So maybe it would be good. Thanks, Brent next question operator, we'll take the next question. Please.
Thank you. Our next question comes from Keith Bachman with BMO. Please proceed with your question.
Hi, Thank you very much Clifton Amy I wondered if you could speak to the growth of windows within MPC in particular as we move past the tough compares how would you characterize the growth potential windows and what would you envision are the key drivers and perhaps even the key risk associated with that.
With those comments on what you envision the durable growth is on windows. Thank you very much.
So maybe I can start Amy and then you can add to it if anything again, the last nine months or so have proven that when it comes to windows and Pcs I'll become mission critical because when it comes to remote learning remote work.
And any type of activity.
And productivity in particular depends on having Pcs.
Applications on Pcs. So we are doubling down on it that means the innovation in windows and that might Microsoft 365 is the best way to conceptualize.
How we even think about windows, because its one surface area where.
We want to deliver our best payloads for productivity communications collaboration business process, and we'll keep working even on the form function innovation as well. So even if you look at the holiday lineup of Svod devices, it's great to see that large screen small screens mobile.
Different different chip architectures that make it pretty attractive to our windows device with you will always have so thats. How we look at it is very important I think if anything even mobile only countries in mobile only scenarios are recognizing that they also can do with some help with additional screens and so thats something that we look forward.
Good.
And I do think one of the ways to think in particular about commercial demand for windows. Just at this point it well it can have intends to have around end of support Sun raised demand on the front then you have a year of tough comparable as we say.
Then it tends to generally stabilized.
And be quite consistent and I think as we've seen in the past nine months I think on the high end mission critical value of a PC in the commercial environment, whether you're doing that from a remote situation or inside the walls of an office.
I think we feel very good about the value that we're offering.
Thanks Keith.
Operator, we'll take the last question now please.
Thank you. Our final question comes from Brent Bracelin for Hyper Sandler. Please proceed with your question.
Thank you and I'll squeeze in two if I could I wanted to follow up on Azure. This is a segment has grown now to 17% of revenue I think thats up from 4% just three years ago.
You talked about the number of terabyte scale applications doubling in from a size standpoint, it looks like in my model Azures bigger than the Windows business for the first time ever My question really is around where we added the journey around Azure. How important is this that Microsoft model and ultimately how big could it be looking out over the next three to five.
Yes.
Let me start and maybe you can add to it.
The way I think about the.
Computing landscape going forward is if you sort of said.
At the highest levels today as a percentage of GDP tech spend is 5%.
We think it will double in the next 10 years and if anything this spend dynamic perhaps is accelerated that doubling.
And in that context, what's done large the most stuffs secular need it's the need for distributed cloud infrastructure.
It's both needed for modernizing existing IND applications, you have and so thats why by the way what 20% penetrated so there's more 80% that needs to move but more importantly, there's going to be new application starch, which meet infrastructure.
And so if you sort of add those up I think that we are still in early innings. They will be between quarters volatility all of the points that Amy made even earlier, but.
But we think distributed cloud infrastructure is the most important now but the way we have approached it is not just think of that led in isolation, but the data layer work, we do composers the AI layer composers and more importantly, our SAS applications with our business applications power platform, Microsoft 365, all reinforce.
Worse that same model deck stack.
So I would still say that our digitization in its with this new tech stack is in its very early infancy.
And Brian I think the last point.
You made it may be the most and most important is that when we think about and talk about expanding addressable markets or seeing more opportunity than we maybe even just a few quarters ago. It's at every layer when people say that they have constraints when you need a better.
Our time to value when you need to reinvent each in almost every business process.
In a fast and effective manner, having every layer of the sac enabled by the infer layer. The data later and the AI layer I do think it's frankly early inning, even in places where people think.
You know it seems to be near the end and so I think we feel a lot of optimism in that respect.
Cubicle the important milestone with Azure the large windows for the first time in just the last question from your earlier.
And I know what it would cost about this acceleration is good adoption about across consumer and enterprise, but it almost feels like the acceleration in reality is actually happening faster I'd be curious to hear kind of the plans for GBP three.
License and how is the plan to democratize that across the platform fixed.
Yeah, it's a great observation because there to sort of things that we are seeing is AI is actually being used by both professional developers people move on these large scale transformer models or to even do zero shot learning. It's always we are seeing significant increases vary in Cogs Cogs services usage across the board.
Which by the way it comes with the use of other compute services and data services in Azure, but the other interesting thing is what I would call. The domain experts, who are using power apps being able to tap into AI.
These cogs services to build these walk flow assisted with AI, and that's where a lot of productivity gains for a lot of businesses and business process workflows is happening so its exciting to see that as well as the eyes Thats increase corporate I mean every team session is full of AI because of the transcription services.
The speech recognition services and so on that it incorporates the same thing with dynamics as well.
Thanks, Brent and the rest of the Q and a portion in today's earnings call. Thank you for joining US today, we look forward to speaking with all of you soon.
Thank you. Thank you all thanks, so much.
Ladies and gentlemen. This concludes today's teleconference. We thank you for your participation and you may disconnect your lines at this time.
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