Q2 2021 Microsoft Corp Earnings Call
Yeah.
Greetings and welcome to the Microsoft fiscal year, 2021 second quarter earnings Conference call.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mike Spencer General manager Investor Relations. Thank you Sir you may begin.
Good afternoon, and thank you for joining us today on the call with me are starting to dose Chief Executive Officer, Amy Hood, Chief Financial Officer, Alice Charles Chief Accounting Officer, and Keith Dolliver Deputy General Counsel.
On the Microsoft Investor Relations website, you can find our earnings press release and financial summary, slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures.
Unless otherwise specified we will refer to non-GAAP metrics on the call the.
The non-GAAP financial measures provided should not be considered as a substitute for superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's second quarter performance. In addition to the impact these items and events have on the financial results.
All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted.
We will also provide growth rates in constant currency when available as a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations, where our growth rates are the same in constant currency, we will refer to growth rate on it.
We will post our prepared remarks to our website immediately following the call until the complete transcript is available today's call is being webcast live and recorded if you ask a question. It will be included on a lot of transmission in the transcript and in any future use of the recording.
You can replay the call and view the transcript on the Microsoft Investor Relations website.
During this call we will be making forward looking statements, which are predictions projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed on today's earnings press release and the comments made during this conference call and in the risk factors section of our form 10-K forms 10-Q and other reported.
Filings with the Securities and Exchange Commission, we do not undertake any duty to update any forward looking statements and with that I'll turn the call over to Satya.
Yeah.
Thank you Mike It was a record quarter driven by our commercial cloud, which is about $16 billion in revenue up 34% year over year.
What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry.
Digital capability is key to both resilience and growth.
No longer enough to just adopt technology businesses need to build their own technology to compete and grow.
Microsoft is powering this shift with the world's largest and most comprehensive cloud platform.
And now I'll briefly highlight how we are innovating across every layer of the modern tech stack starting with Azure.
We are building azure as the world's computer ought to support organizations growing cloud needs.
We are investing to bring on cloud services to more customers announcing seven new data center regions in Asia, Europe, and Latin America, and adding support for top secret classified workloads in the United States.
We've always led in hybrid computing and we're accelerating our innovation to meet customers, where they are azure stack HCI now broadly available helps businesses extend the power of the cloud to sovereign workloads more than 1000 customers now use azure arc to simplify hybrid management and drew.
On the Azure services across on premises multi cloud and at the edge and with Azure digital twins organizations like Bentley systems, Honeywell industries, and Johnson controls can bridge, the digital and physical worlds, creating simulations of factories cities to optimize their operations.
We are seeing momentum in every industry Deutsche Telekom to rely on azure to modernize its it infrastructure drew a partnership with broad Institute of M D and Harvard as well as barely a cloud will be used to help more researchers analyzed biomedical data cruise and GM chose azure as.
Debt preferred cloud as they work to make autonomous driving mainstream.
And just last Friday, we announced an expansion of our partnership with S&P to accelerate the adoption of FCB workloads on Azure in the past six months, we've seen tier one ERP migrations from companies such as Bayer.
Carhart coats and Pepsico.
To Azure.
At the data layer on Azure is the only cloud with limitless data and analytics capabilities that enable organizations to build the predictive analytical path required to digitally transform.
Azure synapse brings together big data data warehousing and data integration all into one powerful solution.
Leading companies like Fedex grab in PNG are using synapse to generate immediate insights from massive amounts of structured and unstructured data and we are seeing strong overall growth in our analytics business as companies accelerate their data initiatives to build competitive advantage day.
Data governance is top of mind for every business leader and we'll grow into an important category on its own as critical as any AI. Our analytics category. Today, we are investing to participate in this growth new azure above you.
<unk> provides.
<unk> end to end view of an organization's data estate across on premise multi cloud and SaaS apps that previously was impossible.
In AI.
We offer the most comprehensive.
Our portfolio of tools frameworks and infrastructure, enabling businesses to build mission critical solutions that comprehend speech understand natural language make predictions provide insights and support decision making on.
Our Azure health Bot for example is being used by organizations like CDC drew marrow Blue Cross in Walgreens to build virtual health care assistance used by more than 80 million people worldwide at a time when expanding access to health care information is more critical than ever.
Now the developers developers have been critical to business continuity over the last year, and we are helping them collaborate and scale their impact to drive organizational outcomes from Github to visual studio. We have the most widely used and loved to change to help developers rapidly go from idea to code and code too.
Cloud users get hop is becoming key to building digital capability and every company across every industry to date Github is used by more than $56 million developers as well as 3 million organizations from bonds feed and flat drew marsh and Mckellen Oracle and Volvo cars.
Now the power platform.
We're empowering domain experts, enabling anyone in any organization to build applications automate processes create virtual agents and analyze data.
Power platform is the clear leader in low code No code development with more than 11 million monthly active users up 95% year over year.
Businesses like Nestle Humana chose followed by this quarter to help employees use data to make smarter decisions and public sector. The city of Kobe in Japan is relying on power virtual agents and power automate to keep citizens informed building intelligent bots drawn so frequently asked questions as well as automated workflows.
Drew routing inquiries.
Vaccine distribution, perhaps best exemplifies the critical need for digital capability across the globe and our vaccine registration and administration solution Bill.
Sales on power platform enables governments to manage the end to end process from screening and scheduling to administration and follow ups in Australia on the government of Victoria is relying on our tools to help deliver doses drew more than 6 million residents and yet in the United States, Minnesota, Nebraska, Oklahoma are using our cash.
<unk> abilities are return to workplace solution and bond platform is also helping organizations keep workers safe and healthy when they go back to the office and we're adding new capabilities to ensure people have verifiable secure access to their vaccination records now.
Now the dynamics 365, we are taking shares companies in every industry turn to new business applications to grow customer expectations are changing faster than ever before requiring near real time visibility into trends behavior and needs our customer data platform customer insights leads its category and has helped.
Customers unify over 2 billion customer profiles, providing a single view of interactions across marketing sales and E commerce to deliver more personalized experiences.
More companies are turning to a mixed reality solutions to help frontline employees connected.
Even when apart L'oreal for example is using dynamics 365 remote assist in whole loans due to help technicians repower equipment at factories when they cannot travel.
In retail our applications.
We're front and center at <unk> earlier, this month dynamics 365, Commerce now support both BTC and <unk> E commerce, enabling retailers like Columbia sportswear after ship inventory from stores and offer contactless payment options.
<unk> IQ continue to scale continues to scale rapidly with retailers like Dick's sporting goods and home depot and Kroger using the platform to power their digital vendor marketing programs.
On the on new Microsoft Cloud for retail is bringing together our platform and tools across the shopper journey accelerating time to value. It builds on the success of the Microsoft Cloud for health care, which is being used by organizations, including Providence to empower clinician to better serve patients.
Now to Linkedin, we once again saw record levels of engagement across the platform of Linkedin, nearly 740 million members use the network to connect learn and find new opportunities.
<unk> increased 30% conversations were up 48% and hours spent on Linkedin learning, we're up two <unk> compared to a year ago.
Linkedin advertising business had a record quarter accounting for more than a third of Lincoln's total revenue linked in's marketing solutions was up over 50% as advertisers increasingly turn to the platform as the trusted weighted reach professionals ready to do business.
Finally, we continue to benefit from the secular shift to remote selling businesses are using the combination of Linkedin sales navigator and dynamics 365 to ensure salespeople have the context, they need to sell remotely while new tools helped sales organizations use linked and data to identify on size opportunities.
Now to Microsoft 365, the pandemic has proven the PC central role in keeping people connected productive and secure all we added more new devices running windows 10, this quarter than ever before at CES, Our partners showcased new Pcs design for the new ways, we work non in play.
And on Pluto on security processor built by AMD, Intel and Qualcomm will bring chip to cloud security.
Flexible work is here to stay to empower the digital workforce organizations will need to <unk> on organizing layout for all the ways people work learn and collaborate that's what Microsoft 365 and teams uniquely provide.
Teams is the only solution with meetings calls chat content collaboration with office and business process workflows in a secure integrated user experience. We're seeing large deployments of 117 organizations have more than 100000 users of teams and over 2700 organizations have.
Over 10000 and teams has nearly 60 million daily active users on mobile alone.
<unk> enables people to collaborate both synchronously, Andy Synchronously retained business context and stay in the flow of work driving increased usage across office 365 and power platform.
Off platform monthly average usage on teams is growing forex year over year and with Microsoft data worse any one now can create and deploy custom solutions with power apps and intelligent bots that followed virtual agents directly in teams.
Teams is rapidly becoming the de facto unified communications platform of choice for every organization New features like voice enabled channels create a part more powerful and streamline calling experience and noise suppression on live captions with speaker attribution make meetings more accessible at Accenture alone audio.
Conferencing on teams has increased to over 1 billion minutes a month as 85000 employees use teams to make external calls and this quarter lumen, formerly Centurylink rollout teams, calling globally to 42000 employees in just four weeks.
<unk> has shown the importance of empowering the 2 billion frontline workers around the world with the right technology.
390000 associates at home depot will use Microsoft 365, including Yammer to foster connection and engagement across the organization and more than 500000 employees in the U S Department of Veterans Affairs, including health care workers use teams to collaborate.
In education more than 200 million students and educators worldwide rely on Microsoft education products for remote learning.
And leading customers in every industry, including Amgen AT&T, Daimler GSK and Ikea are increasingly turning to our premium offerings for advanced security compliance voice and analytics capabilities.
Microsoft 365 E. <unk> revenue has grown triple digits for the past four quarters.
Now the security.
The recent solar winds attack on a Stark reminder of how critical security is to our customers.
We are focused on ensuring organizations deploy and maintain a zero trust architecture.
Our end to end security capabilities inclusive of identity security compliance and management across all clouds and all client platforms have been key as we help customers strengthen their security posture and mitigate impact.
Beyond our products, our operational security posture and threat intelligence, which analyzes eight trillion signals each day help customers defend themselves.
Over the past 12 months, our security business revenue has surpassed $10 billion up more than 40%.
This milestone is a testament to the deep trust organizations placed in us.
And we will continue to invest in new capabilities across all our products and services to protect our customers.
We see strong momentum and usage of our products in identity Azure <unk> has more than 425 million monthly active users in security Microsoft defender block nearly 6 billion threats last year alone in management, we saw triple digit growth in the number of devices managed by Microsoft in June in <unk>.
Compliance, we've seen 90% increase in our customer base year over year.
Now on to gaming.
We surpassed $5 billion in revenue for the first time in this quarter as we expand our opportunity to reach towards 3 billion gamers wherever they play the launch of Xbox series X series S.
What's the most successful in our history with the most devices ever sold in the launch month.
Game developers are benefiting too as they turn to us to reach more players and scale their games using the power of Oclock, we exceeded $2 billion in revenue from third party titles this quarter for the first time.
We're gaining console share of gamers recognize the value of our broader ecosystem.
<unk> has more than 100 million monthly active users while game pass now has 18 million subscribers and we are transforming how games are distributed played and viewed bringing cloud gaming and game pass to iOS devices and Windows Pcs over the next few months.
We are pleased with the overall growth in our consumer subscriptions with game pass in more than 47 million, Microsoft 365, personal and family subscribers we have.
A large and growing consumer subscription business and we see significant opportunity in both of these segments as they move to services and on demand models.
In closing I'm energized by our increasing momentum in the expanding opportunity fueled by the structural change brought about by the rapid adoption of digital technology.
We're investing to meet these needs in the coming decade, and I'm optimistic about what's ahead with that I'll hand, it over to Amy who will cover our financial results in detail on chat our outlook and I look forward to rejoining you after for questions.
Thank you Satya and good afternoon, everyone.
This quarter revenue was $43 $1 billion up 17% and 15% in constant currency.
<unk> per share was $2 and three increasing 34% and 31% in constant currency across our business results exceeded expectations, driven by strong execution and improving trends across industries customer segments and geographical market Brazil.
Resulting in double digit top and bottom line growth and on.
Our commercial business customers prioritize their digital transformation, which drove healthy demand for our hybrid and cloud offerings with material growth in the number of $10 million, plus Azure and Microsoft 365 contract.
We saw stronger Azure consumption.
Well as higher usage of teams power platform, and our advanced security and compliance offerings.
Within our small and medium business customer segment transactional licensing trends continued to show some improvement.
In our consumer business, the overall PC market was stronger than expected.
Fitting our windows OEM office consumer and surface businesses.
Advertising market continued to show improvement benefiting our search and Linkedin businesses.
And in gaming, we saw record engagement and monetization across our platform as well as console demand significantly exceeded supply following the Xbox series X and S launches.
Moving to our overall results.
Even with the declining exploration base and a strong prior year comparable commercial bookings increased 19% on 11% in constant currency strong execution across our core annuity sales motion, including the Azure and Microsoft 365 momentum net earlier drove the better than expected.
Net result.
Commercial remaining performance obligation increased 24% to 22% in constant currency to $112 billion with a roughly equivalent split between the revenue that will be recognized within and the portion beyond the next 12 months.
And our annuity mix increased four points year over year to 93%.
Commercial cloud revenue was $16 $7 billion as growth accelerated to 34% and 32% in constant currency commercial cloud gross margin percentage expanded four points year over year to 71% driven by the change in accounting estimate pretty useful life of server and networking equipment assets.
Excluding this impact commercial cloud gross margin percentage was up slightly.
As a reminder, revenue mix shift to Azure increased customer usage of our productivity and collaboration solutions and continued strategic investments to support customer success and the deployment of our solutions will continue to impact gross margin.
The weaker U S. Dollar FX increased revenue by approximately two point about a point more favorable than anticipated FX had no impact on Cogs gross and increased operating expense growth by approximately one point.
In line with expectations.
Gross margin dollars increased 18% on 16% in constant currency gross margin percentage was 67% up slightly.
Likely year over year with roughly two points of favorable impact from the change in accounting estimate earlier.
Adding this impact company gross margin percentage was down driven by the sales mix shift to cloud and gaming.
Operating expense increased 3% and 2% in constant currency lower than anticipated driven by greater than expected COVID-19 related savings reductions on retail store expenses and investments that shifted to future quarters.
Overall company headcount grew more than 10% year over year with our focused investment in key areas such as customer success on engineering and sales.
Operating income increased 29% and 26% in constant currency and operating margin expanded four points year over year to 42%, including roughly two points of favorable impact from the change in accounting estimate and nearly one point of favorable impact from Covid related savings.
Now to our segment results.
Revenue from productivity and business processes was $13 $4 billion, increasing 13% on 11% in constant currency ahead of expectations, primarily driven by office commercial and link them.
On a strong prior year comparable and included roughly three points of benefit primarily from transactional strength in Japan office commercial revenue grew 11% on 9% in constant currency office 365, commercial revenue grew 21% and 20% in constant currency results were driven by installed base expansion.
Across all workloads and customer segments as well as higher RTL.
The strong demand for Microsoft 365, net earlier, particularly for our security compliance and voice components drove E. Five revenue growth acceleration again this quarter.
Paid off a 365 commercial seats increased 15% year over year with strong conversion of our free trial offerings.
Also saw seat growth improvement in our small and medium business and first line worker offerings.
Office consumer revenue grew 7% and 6% in constant currency on a strong comparable that included roughly seven points of benefit from transactional strength on Japan, Microsoft 365, consumer subscriptions grew to $47 5 million up 28% year over year.
Dynamics revenue grew 21% and 18% on constant currency driven by dynamics 365 revenue growth of 39% on 37% in constant currency.
The number of customers adopting multiple dynamics 365 workloads accelerated again this quarter.
Linkedin revenue increased 23% and 22% in constant currency significantly ahead of expectations gross in our marketing solutions business accelerated to 53% benefiting from the stronger advertising market noted earlier.
Segment gross margin dollars increased 13% on 11% in constant currency and gross margin percentage was relatively unchanged year over year, it's roughly two points of favorable impact from the change in accounting estimate operating expense increased 4% and 3% in constant currency and operating income increased 19% and 17%.
On a constant currency, including five points due to the change in accounting estimate net.
Next the intelligent cloud segment.
Revenue was $14 $6 billion ahead of expectations, increasing 23% and 22% in constant currency server products and cloud services revenue increased 26% and 24% in constant currency.
Azure revenue grew 50% and 48% in constant currency driven by strong growth in our consumption based business that benefited from improvement across industries and customer segments noted earlier our per user results were also better than expected driven by accelerated growth in our enterprise mobility and security install.
Dave up 29% to over 163 million seats.
And on a strong prior year comparable that included roughly four points of benefit from the end of support for Windows server 2008, our on premises server business increased 4% and 3% in constant currency with strong annuity performance driven by continued demand for our hybrid and premium offerings.
Enterprise services revenue grew 5% and 4% in constant currency again, driven by Premier support services.
Gross margin dollars increased 29% to 27% on price.
In constant currency and gross margin percentage increased three points year over year with roughly three points of favorable impact from the change in accounting estimate operating expense increased 12% and 11% on constant currency and operating income grew 43% on 41% in constant currency with roughly 10 points favorable.
Impact from the change in accounting estimate.
Now to more personal computing.
Revenue was $15 $1 billion, increasing 14% and 13% in constant currency and better than expected performance across all businesses and.
In Windows.
The stronger PC market resulted in overall OEM revenue growth of 1%.
Spite a strong prior year comparable in OEM pro from the end of support for Windows seven.
M. Non pro revenue grew 24% on OEM pro revenue declined 9% inventory levels ended the corner in the normal range.
Windows commercial products and cloud services revenue grew 10% on 8% in constant currency driven by continued demand for Microsoft 365, and our advanced security solutions.
In surface revenue grew 3% and 1% in constant currency search revenue ex Tac increased 2% and 1% in constant currency benefiting from the improved advertising market you noted earlier and.
And in gaming revenue increased 51% and 50% on constant currency Xbox hardware revenue grew 86% driven by the new console launch as well as the benefit from lower price promotions on our prior generation consoles, Xbox content and services revenue grew 40% on 38% in cash.
Constant currency with strong gross and third party transactions game pass subscribers and first party titles.
Segment gross margin dollars increased 11% and 9% in constant currency and gross margin percentage decreased two points year over year, driven by sales mix shift to gaming operating expense decreased 10% and operating income grew 25% on 22% in constant currency.
Now back to total company results.
Capital expenditures, including finance leases were $5 $4 billion up 20% year over year to support growing global demand and customer usage of our cloud services cash paid for PP&E was $4 $2 billion.
Cash flow from operations was $12 $5 billion and increased 17% year over year, a strong cloud billings and collections were partially offset by payments related to attacks on a settlement free cash flow was $8 $3 billion up 17%.
The impact of these tax payments cash flow from operations and free cash flow grew 33% and 41% respectively.
Other income and expense was $440 million higher than anticipated, primarily driven by net gains on investments, including mark to market gains on our equity portfolio as well as net gains on foreign currency Remeasurement.
Our effective tax rate was approximately 16% inline with expectations.
And finally, we returned $10 billion to shareholders through share repurchases and dividends, an increase of 18% year over year.
Now, let's move to our outlook.
My commentary for both the next corner and any remarks for the full year does not include any impact from the Zenimax acquisition, which we still expect to close by the end of the fiscal year and on.
Our commercial business.
Consistent execution focus on customer success, and a compelling solution portfolio in high growth markets should drive another strong quarter.
In our consumer business, we expect to see healthy demand for Pcs and productivity tools continue bill.
Growth rates will again be impacted by the end of support for Windows seven last year.
In gaming, we expect continued strong engagement on the Xbox platform and significant demand for the Xbox series X and S that will still be constrained by supply.
And our search and Linkedin businesses should benefit from the improving advertising market and.
Commercial bookings, we have a growing Q3 ex free base and a low prior year comparable so strong execution across our core annuity sales motions and increased commitment to our cloud platform should drive healthy growth.
As a reminder, an increasing mix of large long term azure contracts, which are more unpredictable and their timing can drive quarterly volatility hit on the growth rates.
Cloud gross margin percentage to increase by approximately three points year over year again, driven by the change in accounting estimate excluding this impact continued improvement in Azure Ias and Paas gross margin will be offset by revenue mix shift to Azure and continued investments to support our customer success.
We expect a sequential increase on a dollar basis to our capital expenditures as we continue to invest to meet growing global demand for our cloud services.
Now to FX.
Just on current rates, we expect FX to increase total company revenue Cogs and operating expense growth by approximately two points within the segment FX increased productivity and business processes revenue growth by approximately three points in intelligent cloud and more personal computing revenue growth by approximately.
Two points.
Now to segment guidance in <unk>.
Productivity and business processes, we expect revenue between $13 three five and $13 $6 billion in office commercial revenue growth will again be driven by office 365 with continued upsell opportunity to EFI and our on premise business, though we anticipate continued improvement in transactional purchase.
The trends, we expect revenue to decline in the mid to high teens range consistent with the ongoing customer shift to the cloud.
And all of us consumer on a strong prior year comparable revenue growth should be similar to last quarter with continued growth in Microsoft 365 subscription revenue.
On Linkedin, we expect continued strong engagement on the platform to drive revenue growth in the low 20% range and then dynamics continued momentum will drive revenue growth similar to last quarter.
For intelligent cloud, we expect revenue between $14, seven and $14 $95 billion.
And Azure revenue will again.
It can be driven by strong growth in our consumption based on that and then our per user business. We expect continued benefit from Microsoft 365 suite momentum and our on premise server business, we expect revenue growth to be on the low to mid single digits driven by continued demand for hybrid and premium annuity offering on a strong prior year comparable.
And that included the benefit from the end of support for Windows Server 2008, and enterprise services revenue growth should be roughly in line with last quarter.
And more personal computing, we expect revenue between $12, three and $12 $7 billion.
In Windows.
Overall OEM revenue growth should be in the low single digits on a strong comparable mentioned earlier windows commercial products and cloud services gross should be on the low to mid teens driven by continued demand for Microsoft 365, and our advanced security solutions and a surface good demand against a low prior year comparable should drive.
Gross in the mid to high teens range.
In search ex Tac gross should be driven by improvements in the advertising market and in gaming, we expect revenue growth of approximately 40% driven by next generation console sales as well as Xbox content and services revenue in the mid 20% range.
Now back to the company guidance.
The Cogs of 13, one to $13 $3 billion and operating expense of 11, 9% to $12 billion and other income and expense interest income and expense should offset each other.
Expect our Q3 tax rate to be approximately 15% slightly lower than our full year rate of approximately 16%.
And finally.
For FY 'twenty, one with our strong performance in the first half of the fiscal year and our outlook for Q3, we expect to deliver another full year of double digit revenue and operating income growth as well as healthy operating margin expansion, even after excluding the impact of the change in accounting estimate and Covid related savings.
In closing.
We have executed well in the first half of our fiscal year in a challenging and changing environment.
Investments made over quarters, and often years, coupled with focused execution by our teams are the drivers behind a compelling portfolio that is delivering value today for our customers and creating optimism and our roadmap for tomorrow.
Got you discussed our unique comprehensive and integrated set of products earlier on the call products and services that span large gross market.
And we will continue to invest broadly.
And boldly against the significant opportunities ahead of us with that Mike Let's go to Q&A.
Thanks Amy.
Well now move over to Q&A with respect to others on the call request. The participants. Please only ask one question operator could you. Please repeat your instructions.
Thank you well now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if you'd like to have your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment, please pull for questions.
Our first question comes from the line of Mark <unk> with Bernstein Research. Please proceed with your question.
Thank you for taking my questions and Satya and Amy and the whole team congratulations on a great quarter. It seems like almost every part of the business.
Did not seem to be any meaningful impact from COVID-19 are tougher comps two parts to the question. One should we feel that the COVID-19 impact is basically behind you and two is the tougher comps where are we now seeing the demand as such that allows you to build on those larger numbers. Thanks.
Thanks, Marc maybe I'll start and Amy you can add to it I think.
One of the things that we are seeing is the COVID-19 impact has put a lot of constraints on all of our customers, but the one structural change is the digital technology is becoming critical even for core resilience and business continuity and to deal with what is going to be a structurally changed customer behavior.
Avi on expectations, So as a tech company with that comprehensive differentiated portfolio all the way from business applications industry solutions to infrastructure.
I think we benefit from that and that's what you saw this quarter, but more importantly for me Mark when I look at the next 10 years of compute and digital technology will do across industries. That's the opportunity that we're obviously staying very very focused on and investing in.
And Mark maybe to the second half of your question.
On being passed on tougher Comparables I no I don't.
I think we are in it's why I've mentioned, a couple of them, most particularly I think the OEM number with the pro end of support in Q3, and we did have another strong and the support for the server on Prem number and so those are the two for Q3 in particular that would make sure to call out.
Thank you very much and congratulations again and stay safe.
Thanks, Mark operator, we'll take the next question please.
Thank you. Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
Thank you Azure, putting up a great accelerating quarter could you just talk to what youre seeing in terms of the breadth and maybe the size of the transactions.
Do you think it is important to highlight why why you're seeing this reacceleration in the business. Thank you.
Thanks, Brett.
Maybe I'll again, I'll start and Amy you can add.
I would say again with Azure some of the core differentiation, we have relative but it comes through our hybrid leadership some of the new data products that are highly differentiated and competitive in the marketplace.
As well as the integration with every other layer of our stack, whether it's the devil there with power platform or get a hub or with teams after power apps to Azure DB.
The industry solutions, we now have in health care and retail.
Are all leading to that time to value the price differentiation and cost advantage to customers and most importantly agility in that.
The ability to build their own digital capability. So that's what you see in the acceleration around azure, but when we think about Microsoft cloud, we think about all the parks coming together to deliver value and differentiation to our customers.
And maybe just to add a couple of thoughts on the shape, Brent and to make sure that we're clear on some of the important drivers there really the azure consumption comments or not about size of transactions right being signed and you. Obviously saw we had a good quarter in bookings, which is far more reflective of future.
Commitment.
What we saw is really fundamental consumption growth.
And some reacceleration of growth curves, particularly in maybe industries that had been more hard.
Hard hit in Q4, and Q1, and so I would describe it a little bit that way and including frankly, even some mid market and some segment base recovery on that front. So you know as I look forward obviously.
It's about what Satya talked about which is you theres differentiation. Their usage. There is looking forward to making sure that we continue to have great bookings numbers, but in the quarter itself. It was usage growth not the contracting.
That made a difference.
Thank you.
Thanks Brent.
We will take next question. Please. Thank you. Your next question comes from the line of Karl Keirstead with UBS. Please proceed with your question.
Thank you Amy I wanted to ask you about the Pvp guide for your third quarter or the March quarter. It was comfortably above.
Where everybody I think is modeling and in particular I wanted to ask you about office 365.
Of all the business as the larger ones and Microsoft.
Most of the upside in this recent quarter, except perhaps for office 365, where despite the migration to <unk> five and despite the free to paid seat conversion, we really didn't see an acceleration on office 365, I'm wondering if you could perhaps unpack that and describe why in part to the question is your guy.
For that segment is so good in the March quarter that one would infer that the office 365 growth is likely to accelerate in March I'm wondering if you could confirm whether that's a reasonable assumption. Thanks so much.
There's a couple of things Karl and <unk>.
Pvp Guide and let me break them down a little debt as you heard actually almost all the components in Q3 and half sort of.
Consistent to slightly better execution right. So theres upside that we saw on like then there's upside and office commercial there's upside that's reflected in the stronger subscriptions number we saw in consumer and there's good execution dynamics. So for me, it's a bit more and then we'll come back and talk about.
<unk>, Microsoft 365, all up in a second each of those pieces.
It was really consistent performance.
On into Q3, which is good.
And so when you think about office 365 interestingly.
What we're seeing is a lot of the things we have seen before.
But remember we had a pretty tough comp.
A year ago, our in office commercial and so for me I look and say gosh, Yeah. We did great execution, we saw some improving trends in seat growth and the frontline improving trends in SMB that won't yet be a reflected of course in revenue being good trial conversion.
On which again speaks to forward revenue more than in quarter revenue given that all subscription and we saw so you see Battersea gross good conversion and good E. Five selling so I actually feel pretty good, leaving Q2 and entering Q3 in terms of Val.
Are you that customers are getting out of the subscriptions that they've got and the conversions that we're seeing in market.
Yeah, I would just one quick thing I would add is when you look at Microsoft 365, I think one of the things that one of the best things I've seen recently is on our customer talked about all the things that they're using.
Pat drew even just last year or two now that is new value from office 365, and the usage depth and increase on.
That's I think really the real power of that franchise going forward and so I I hope.
As shareholders look at what's the depth and breadth of the offering and the usage and the usage depth by account, which I think is what at least we are reinvesting in tracking closely that's helpful. Thank you both and congrats on the numbers.
Thanks, Charles Operator, we'll take the next question please.
Yes.
Thank you. Our next question comes from the line of Keith Weiss with Morgan Stanley. Please proceed with your question.
Excellent. Thank you for taking the question guys and very nice quarter Scott.
I wanted to dig into.
One of the topics that you mentioned in your introduction and Thats kind of teams working as a framework across all of your solutions and sort of debt.
Connecting more and more people enter into the Microsoft framework.
I was doing some calls this quarter and asking about a competitor's acquisition of teams competitor and a lot of people on the channel talk to me about how teams who is pulling through dynamic CRM right and they they understood that the acquisition is as a defense against that and I was surprised to hear that that there would be a linkage between the two.
Could you help us one kind of understand the how teams pulls in additional products behind at number one and number two.
On the connection between kind of teams and how they get a broader base of frontline workers into the story from Microsoft because I think most people think about Microsoft as like an information worker story for frontline workers on another huge kind of area for you guys to go after.
No. Thanks much for the question that is absolutely right and I think I've commented on this earlier as well in our calls which would be bill teams as essentially this tool that brings together multiple.
Capabilities. It brings together chat it brings together our meetings.
Collaboration that is office collaboration as well as business process workflow all into one scaffolding.
That's the biggest breakthrough of teams in the past, obviously, we had suites of tools.
But this is the first product more so than outlook was even in terms of being able to integrate communications collaboration and business process and that's what you see when.
When we talked about it in my comments, that's why one of the things I stressed was what was happening with just line of business applications before.
Any SaaS application hours on others.
The reality is the most usage in Indiana price is line of business applications that were built custom by that enterprise on their IP organizations for all of the departments, whether it's HR or finance or operations that is really one of the bigger drivers of teams usage as a platform capability right.
So you can see you brought up first line Theres some shift scheduling application some inventory counting application that the frontline person is using automobil formed with teams, but the inventory management Apple. It's just a power app built using power apps. So that is what you are seeing and then of course, the integrations into dynamics integrations.
Into all SaaS applications, whether it's work day or whether it's S b or whether it is.
Service now.
And even sales force all of these applications are getting integrated into teams very rapidly and so that's the power of teams as a platform capability.
We are seeing and you're absolutely right that this is no longer about just knowledge workers collaborating in fact, if anything it's about knowledge workers collaborating and enabling frontline workers with more of these look to participate with digital tools in the workflow versus being disconnected.
Excellent that's a fascinating expansion on the story thanks for digging in on on it with us.
Thanks, Keith Operator, we'll take next question please.
Our next question comes from the line of Mark Murphy with J P. Morgan. Please proceed with your question.
Yes. Thank you very much on I'll add my congrats as well.
Amy do you see a sustainably different post COVID-19 expense profile for Microsoft as it relates to real estate footprint and T&D levels.
And maybe Scott you could perhaps comment on this as well are you expecting a fuller return to the office and so fuller resumption of business travel over time such that that.
That expense profile wouldn't looks very different.
Yeah.
Well, maybe I'll just talk about broadly how I think both at Microsoft as well as what we are seeing.
This return to work I think the key thing.
Mark Regis.
Think about is there will be more flexibility.
Terms of time, where they work even the sites people book, because I think the expectations have changed we obviously, you're not going to have the same constraints going forward. So I'm not at all assuming that we just remain as is all of the top all the way going forward, but at the same time. There is no return to January of 2020.
So therefore, what I think is key for us is to really maintain flexibility.
And that's why even going back to the conversation around teams, it's not like the walk on the happens in online meetings right what happens before meetings during meetings after meetings and especially in hybrid work.
Need debt sophisticated set of tools that really track work flow irrespective of who is we're on and.
And so that's what we're focused on and you in our own policies, we have laid out on policies, which give them more flexibility and it would be different by function different by geography different in time. So that's how we expect essentially worked to evolve I don't know Amy if you want to add a little more on the expense side.
Yeah, I think what I would add is maybe to take a step back from the narrow nets in some ways of the question Mark and expand it to say the overall expense logic that we have going forward and in many ways. It's why I talked about.
We've seen head count growth of over 10% in the past year as we invest in the significant opportunities we see in having customers be successful and that's at a time when frankly, we're coming upon the anniversary across many parts of the world of where we've been working remotely for close to a year and so it's.
About continuing to invest in those places are looking and learning about the types of flexibility that we're able to provide our own employees what travel patterns need to look like and of course, we will do what it takes to deliver success the customer and what should be the driving force behind how we invest in that segment.
And finally, as though Theres, obviously lots of opportunity for us to continue to be flexible on how we work, specifically, which is which is where satya talked about but this is a pretty broad conversation and in many ways I think talks to a broader rethink of of what productivity means across every industry and every role, which I, which I actually think is a very exciting.
Time, both for Microsoft 365, and lots of the tools we're developing.
Thank you.
Thanks, Mark operator, we'll take the next question. Please thank.
Thank you. Our next question comes from the line of Walter Pritchard with Citibank. Please proceed with your question.
Hi, Thank you I'm pushing for for Satya, and how Youre thinking about the $200 billion enterprise applications market.
Market share on that areas is fairly low in aggregate you've got dynamics, that's that's performing really well on and it sounds like is accelerating just wondering how youre looking at that market more broadly as an opportunity for the company.
Yeah.
Yes very.
Very focused on what we think is modern business process applications Walter the way I look at it as a complete rethink on even if you take the previous conversation around a.
One of the workflows that need to get integrated into our communications tools such that there is.
Bill.
Theres real continuity between frontline to knowledge worker to business process.
That opens up even a ton of opportunity I mean, it takes something like even digital twins and the level of automation that one can bring even into manufacturing.
So the combination of on Azure past service choose SaaS capabilities in dynamics 365.
It can be very transformative to digital manufacturing, which is probably going to be one of the bigger trends going forward same thing in supply chain. So it's a pretty important area for us business process in business applications participation. If you will will be both on the Azure side on the data side of the AI side and the Biz apps.
As well as power App. So it's not one narrow category because I think most people the way you measure business applications in the categories of business applications is pretty narrow.
But business process is much broader than that and so that's I think at least what we are building towards.
And maybe Chris Thank you for that.
To that Scott.
Talk to you just I think for US one of the exciting part about dynamics and for shareholders is the expansiveness of that redefinition by industry and even the terms and categorization to day to define biz apps I think we'll see are quite large and will be addressed not just with our dynamic.
Its product portfolio.
Partially with Arlington portfolio with our power platform portfolio with Microsoft 365, as well as Azure and I think that and thinking about it holistically is why it's so important for us and why we keep coming back to the commercial cloud as our frame I tell customers see the solution. It's how we sell it as health solutions are actually implement.
For business process change.
Great. Thanks, a lot operating.
Operator, we'll take next question please.
Thank you. Our next question comes from the line of Raimo lunch out with Barclays. Please proceed with your question Steve.
And congrats from me as well.
I wanted to talk a little bit about gaming.
You had a very strong quarter, but we also saw a few months ago launched Xbox game pass ultimate So on T X told US we knew it.
Can you talk a little bit about some of the early experiences there and the importance that you see emerging for that thank you.
Yeah, maybe I'll start.
Add to this on on X club.
It's very early days, but we are very excited about fundamentally the expansion opportunity provides.
So all of the service today really allows us to take on catalog and not be limited to any of the traditional endpoints.
Particular, the console on the PC and expand beyond that and so as you can imagine.
That I think from a reach perspective is very exciting to us and the fact that we now have a technology solution to do so we are in the very early innings of it while at the same time, ensuring that we are doing a fantastic job for all of our console gamers and PC gamers is going to be how we will approach the value of our subscription.
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Thank you.
Thanks drew operator, we'll take the last question. Please.
Thank you. Our final question comes from the line of Brad Reback with Stifel. Please proceed with your question.
Great. Thanks, very much Amy the cash flow in the quarter X. The audit settlement was far far ahead of everyone's expectations and I know you talked about Charles billings.
Billings in the quarter, but as we look forward are there any puts and takes that we should be aware of or should we just focus on cash flow growing pretty much in line with net income. Thanks.
Yeah in general Brad It's a very good question because the things you tend to watch them that can move it quarter to quarter are things like he mentioned, whether it's the settlement this quarter, whether it's for free cash flow the timing of cash capital expenditure.
Vs.
On an accrual basis, but over all.
It really shouldn't move in line with operating income generally and really reflect the fundamentals of our business execution.
It's been something we've focused on and I do feel like a strong sales improving margins are particularly on the cloud have all benefited us on those lines.
Great. Thanks very much.
Thanks, Brad that wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with all of you very soon.
Thank you all and stay safe. Thank you very much.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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