Q3 2021 Microsoft Corp Earnings Call
Greetings and welcome to the Microsoft fiscal year 2021 third quarter earnings Conference call at this time all parts of.
The parents are in a listen only mode. The question and answer session will follow the formal presentation.
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A reminder of this conference is being recorded it is now my pleasure to introduce your host Brian Iverson General manager of Investor Relations. Thank you you may begin.
Good afternoon, and thank you for joining us today.
On the call with me are Sochi, and the dollar Chief Executive Officer, Amy Hood, Chief Financial Officer.
All of US Chawla, Chief Accounting Officer, and Keith Dolliver, Deputy General Counsel on.
And the Microsoft the Investor Relations website, you can find our earnings press release, and the financial summary slide deck.
Which is intended to supplement our prepared remarks during today's call and provides the reconciliation of differences between GAAP and non-GAAP financial measures.
Unless otherwise specified we will refer to non-GAAP metrics on the call.
The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP.
They are included as additional clarifying items to aid investors and further understanding of the company's third quarter performance and addition to the impact these items and events have on the financial results.
All growth comparisons we make of the call today relate to the corresponding period of last year unless otherwise noted.
We will also provide growth rates and constant currency when available as a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations.
For our growth rates are the same and constant currency, we will refer to the growth rate only.
We will post our prepared remarks for our website immediately following the call until the complete transcript is available.
Today's call is being webcast live and recorded if you ask the question. It will be included in a lot of transmission and the transcript and and any future use of the recording.
You can replay the call and view of the transcripts and 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 the factors discussed in today's earnings press release.
And the comments made during this conference call and and the risk factors section of our form 10-K forms 10-Q, and other reports and 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.
Thank you Brett.
It was a record quarter of powered by a continued strength of our commercial cloud.
What are you all into the pandemic did still adoption curves aren't slowing dock and factor accelerating and it is just the beginning.
Digital technology will be the foundation for resilience and growth over the next decade.
We are innovating and building the cloud stack to accelerate the digital capability of every organization on the planet.
Now I'll highlight all of growing opportunity and momentum starting with Azure.
As the world Cogs become more digital computing will become more ubiquitous and decentralized we are building azure to address organizations needs and a multi cloud multi edge world. We have more data center regions than any other provider, including new regions and China, Indonesia.
The laser as well as United States.
<unk> has always been hybrid by design and we are accelerating our innovation to meet customers, where they are azure arc extends the azure control plane across on premise multi cloud and the edge and we're going farther with Oregon, the arc enabled and machine learning and Ark enabled kubernetes.
Companies like Fujitsu and KPMG are using Oct to simplify hybrid management and drawn Azure data services anywhere.
Our differentiation across the cloud and the edge is driving deeper and more strategic partnerships with leading companies in every industry from total and Repsol and energy to Kaiser Permanente, and health care and Amadeus and travel.
Now to data and analytics.
Core to the competitiveness of every company going forward will be there the ability to done data and to predictive and analytical path.
The next generation analytics service Azure synapse accelerates time to insight by bringing together data integration and enterprise data warehousing and big data analytics into one unified service no. Other provider offers the limitless scale price performance and deep integrations of snap.
And with spark integration for example of organizations can handle large scale data processing workloads with Azure machine learning. They can build advanced AI models with probably I 81, and the organization can access the insights we are seeing adoption from thousands of customers, including a b and bad Dentsu and Swiss re.
Credit is performed using synapse, a increase of 105% over the last quarter alone we.
We are leading in the Hyperscale sequel, and non sequel databases to support the increasing volume variety and velocity of data customers continue to choose Azure for the relational database workloads with sequel suffered on Azure B and use up 129% year over year and Cosmos DB is the database of choice for.
Our cloud native App development at any scale transaction volume increased 170% year over year.
Now on to developers and every organization looks to build its own digital capability, they will need to modernize existing apps bill new apps and have a standard way of doing book, but also the most popular tools to help developers rapidly go from idea to code and code the clock visual studio.
And I have more than 25 million monthly active users and Github is home to nearly 65 million developers over the past 12 months. The number of monthly active organizations using Github increased 70% in fact, some of the most groundbreaking technological achievements of the past the hour, including critical COVID-19 Vac.
Z and trials as well as the first powered flight on Maus were only possible because of the contributions of the open source communities on Github.
At the pathway of we're innovating to help developers infuse AI into the solutions. They built large scale AI models are becoming platforms and we've seen dramatic advances and research and development by open AI, whose models of trained and hosted exclusively on Azure GPT threes generate.
And for 5 billion words per day on average with hundreds of apps and production of across a range of industries with Azure cognitive services organizations can build applications that see here speak search understand and accelerate decision, making new capabilities enable developers to add Samantha.
Such their apps and help companies like AT&T duolingo, and progressive build custom neural voices for the products and we're doing going further with Azure up.
Precept, a complete platform from silicon to service, which simplifies the process of developing training and deploying AI at the edge.
As the virtual and physical was converge the matter worse comprised of digital twins simulated environments and mixed reality is emerging as a first class platform.
We are leading and seeing traction across public and private sector.
Bentley systems is building a digital twin of the city of Dublin to re imagine urban planning use of Azure digital twins as well as Azure Iot Pepsico is stimulating its manufacturing processes to improve product consistency using out of autonomous systems platform and from Airbus and Toyota to L'oreal and and.
Intel customers in every industry of transcending space and addressing complex challenges using mixed reality. The U S. Army for example will use hollow lens based headset augmented with our cloud services.
The new Microsoft mesh builds on this momentum, allowing for holographic interactions with true presence in the natural way on any device bill already seen early adoption by Accenture, which is using mesh to build immersive virtual office experiences.
Power platform is becoming the next generation business process automation and productivity suite for domain experts in all functions.
And we've taken a unique approach to what is and expansive and high grow the Tam, bringing together the robotic process automation low code no code tools virtual agents and business intelligence using power platform and domain.
Ex any domain experts can automate a workflow create and app builder virtual agent or analyzed data rapidly driving productivity gains across the organization through smart automation and just like office revolutionized productivity gains for knowledge workers power platform and we'll do the same for domain expert.
It's all up power platform is being used by nearly 16 million monthly active users up 97% year over year.
Revenue increased 84% year over year, Telstra T Mobile tour and automatic and Unilever have all been at the centers of excellence for power platform. The thousands of workers, who are using the low code no code tools to build apps and workflows for everything from COVID-19 screening to product quality control and robotics.
Losses automation Coca Cola saved months of development time by integrating power automate with legacy systems to automate shipment verification payroll processing and much more.
And and analytics Daimler chose policy I, just surface insights across the organization, while maintaining the highest levels of security.
And I want to business applications.
Dynamics 365 had a breakthrough quarter as company's ton to intelligent business applications to adapt and grow revenue increased 45% as we continue to take share from competition.
We are adding capabilities of cross dynamics 365 to address the organization's most pressing challenges.
New integrations with teams make it simple to meet chat call and collaborate directly with the and dynamics 365, and new dynamics for the six five intelligent order management helped the company's support Omnichannel fulfillment. We are seeing increased adoption of dynamics of 365 of across every industry from ABN Amro and financials.
Services to BMW and automotive and.
More broadly across the Microsoft cloud, we are leading with industry and cross industry solutions and expanding our investments to help organizations use our complete deck stack along with industry specific customization to improve time to value increase agility and lower costs. This quarter, we introduced new.
New industry clouds for financial services manufacturing and nonprofits and building on the momentum of existing clouds for health care and retail and our pending acquisition of nuance will bring our solutions directly into the physician patient group, which is central to health care delivery.
And I want to Linkedin.
The answer on Sky and saw record engagement as linked and 756 million members use the network to connect learn and create content and find jobs conversations increased 43% content share was up 29% and the hours on Linkedin increased by 80% were held.
And creators use linked in to expand the economic opportunity thousands of expert instructors of monetizing the content on Linkedin learning freelancers can now attract clients with dedicated pages and with the create a more members can build of following and engaged communities and a world facing of growing skills gap, we have helped.
The employers create feedback loops between skills learning credentials and jobs, 60% of the fortune 500 use Linkedin learning to scale and Upskill their employees nationwide insurance for example of using Linkedin learning to provide personalized curriculum to 26000 associates and new tools bring together of course.
With the skills assessments, helping companies like Blackrock, GAAP and task rabbit sourced job candidates based on proven proficiencies busy.
Businesses continue to turn to Linkedin as the trusted way to reach professionals ready to do business linked and marketing solutions revenue was up more than 60% year over year over the past 12 months revenue has surpassed 3 billion and is growing nearly three times faster than the b to B digital advertiser.
And the market.
And I want to Microsoft 365 and teams.
The bid work will require a new operating model that's why rebuild teams as the organizing left for all the ways people work learn and collaborate teams now has over 145 million daily active users almost doubled the number a year ago.
In markets, where employees of return to the workplace, including Australia, China, and New Zealand, and South Korea, and Taiwan, we have seen usage continue to grow and the number of organizations with more than thousand users integrating the third body and line of business applications with teams has increased nearly three ex year over year.
We're accelerating our innovation and adding more than 300 features over the past year, including more than 100, and new capabilities, so far in 2020 one.
New inclusive meeting experience for hybrid work, including custom gallery views enable Amy one to be seen heard and participate whether they are at home and a meeting room and of at an office or on a factory floor and customers like GM and Sanofi are using teams for unified communications, including for voice.
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Teams is extending beyond communications, creating an entirely new category of modern collaborative applications as organizations use power platform to build cost of mapped box and workflows within teams American.
American Airlines for example highlighted in their earnings call of the cost savings, it's driving by using of power app within teams to help their frontline workers manage critical gate operations.
Teams is transforming not only internal collaboration but companies how they do business. We added support for shared Workspaces with people outside the organization and we are seeing teams used for everything from virtual retail showrooms and personal shopping to interactive webinars.
We introduced Microsoft Veeva, this quarter, and creating a new market category for employee experience Veeva brings together, our knowledge learning communication and insights and an integrated experience directly with the teams and Microsoft 365 companies like Coca Cola and Unilever will use veeva.
To help their employees thrive and the new era of hybrid work all of Microsoft 306, five users generated more than 38 billion collaboration minutes and a single day. This quarter off of 365 now has nearly 300 million paid seats and organizations across the private and public sector like the city of Helsinki.
The Bosch health striker are increasingly choosing our premium offerings for advanced security compliance voice and analytics.
People are turning to windows Pcs more than ever to stay connected productive and secure windows 10, and now has more than 1.3 billion monthly active devices and Microsoft 365, consumer surpassed 50 million subscribers for the first time.
And I wanted to security.
And the threat landscape has never been more complex and challenging and security has never been more critical to our customers. This.
This is driving increased demand for our N two and capabilities across identity security compliance and management backed by cloud scale, AI and human expertise encompassing all clouds and all platforms.
What differentiates us and drives customer value is the interconnection between identity and point apps cloud data and infrastructure across our cloud native ex D. R and Sim all informed by our operational security posture, which analyzes more than eight trillion signals each day.
Our approach enables organizations to adopt the zero Trust architecture, while also reducing the complexity cost and risk created by stitching together point solutions and that's why more than 400000 customers use our offerings, including many of the world's most established firms like Boston consulting group HCA healthcare lows.
And UBS.
And signal is using azure confidential computing to protect the data and use for its millions of customers.
Going further to help protect organizations, we are delivering on our ambition to eliminate pass words, introducing Pos with led sign into Azure, a D or Azure 80 paid customer base has more than doubled year over year to over 300000, new capabilities and Microsoft 365 defend the help organizations better.
And prevent and mitigate active threats defender is blocked 30 billion threats on the email and nearly 7 billion non endpoints over the past 12 months alone and our compliance manager now offers more than 300 and out of the box assessments for regulations, such as GDP or.
Now onto the gaming, we're expanding our opportunity as we help both gamers and creators play connect and build across the communities on any device.
Turning to Xbox more than ever to play and chat with friends and we saw record engagement. This quarter led by the strength on and off console with game pass. We're redefining how games are distributed played and viewed just last week, we added cloud gaming why of the browser expanding our reach across the PC and mobile.
Content and is the flywheel behind the services growth and upon the closing of our acquisition of Zenimax media. This quarter. We made 20 of the worlds most iconic and beloved games accessible via of game pass with more to come.
As games evolve into matter, whereas the economies. We are building new tools to help anyone sell creations on our platform mine Kraft and nearly 140 million monthly active users up 30% year over year, making it one of the leading platforms in the creator economy.
And so have generated over $350 million from more than 1 billion downloads of mods add ons and other experiences and mine cross this is not counting and including activity outside of our marketplace.
We're also seeing a vibrant marketplace emerge and flight simulator with partners now able to sell content directly within the game.
In closing, we're innovating across the entire of tech stack as we differentiate and lead and areas that will be critical to the success of every customer going forward I'm optimistic about our opportunity of had without I'll hand, it over to Amy who will cover our financial results and detailed and share our outlook and I look forward the rejoining you for questions.
Thank you Scott and good afternoon, everyone. My comments today reflect the impact of the kind of ex acquisition for approximately three weeks this quarter and went live and our outlook. There was no impact from the nuance acquisition and is expected to close by the end of the calendar year, our third quarter revenue was $41 7 billion.
Up, 19% and 16% and constant currency and earnings per share was $1 95, and increased 39% and 34 per cent and constant currency when adjusted for the tax benefit related to the recent India Supreme Court decision of withholding taxes.
Many trends across industries, and customer segments, and geographical markets continued to improve which coupled with strong execution by our sales and partner teams drove another quarter of double digit top and bottom line growth and.
Our commercial business accelerating digital transformation enabled by our unique Microsoft cloud value drove healthy demand for our hybrid and cloud offerings strong accurate consumption increased platform commitment and higher usage of teams power platform and our security offerings, where key beneficiaries.
Within our small and medium business customer segment continued improvement and cloud purchasing trends more than offset transactional licensing weakness and and linked and talent solutions business annual contracts and job postings improved with the job market.
And our consumer business when does the OEM and Microsoft 365, consumer subscriptions benefited from a much stronger than expected PC market. Despite significant ongoing constraints and the supply chain improvement and the advertising market again benefited our search and Linkedin businesses and and gaming we continue to see record engagement and strong.
Monetization across our platform as well as demand that significantly exceeded supply for Xbox series X and S consoles.
Moving to our overall results.
<unk> bookings growth was ahead of expectations, increasing 39 per cent and 38 per cent and constant currency on a growing exploration base and low prior year comparable growth was driven by consistent execution across our core annuity sales motion and an increase and number of larger long term azure contracts.
As a result commercial remaining performance obligation increased 31 per cent and 32 per cent and constant currency to of $117 billion with of roughly equivalent split between the revenue that will be recognized within and the portion beyond the next 12 months and.
And our annuity mix increased two points year over year to 94%.
Commercial cloud revenue also better than expected grew 33% and 29% and constant currency to $17 $7 billion commercial cloud gross margin percentage expanded three points year over year to 70% driven by the change the accounting estimate for the useful life of server and network equipment assets and <unk>.
The thing packed commercial cloud gross margin percentage was up slightly with improvement in Azure gross margin, mostly offset by sales mix shift the actor.
With the weaker U S. Dollar FX increased revenue growth by approximately three points of about a point more favorable than anticipated FX increased cogs and the operating expense growth by approximately two points both in line with expectations.
The gross margin dollars increased 19% and 16% and constant currency gross margin percentage was 69% relatively unchanged year over year with roughly one point of favorable impact from the change in accounting estimate noted earlier.
This impact company gross margin percentage was down driven by strong revenue growth and cloud and gaming that resulted in sales mix shift.
Operating expense increased 5% and 3% and constant currency lower than anticipated, primarily driven by investments that shifted to future quarters. Overall company head count grew again this quarter of 12% year over year, reflecting our focused investments across key areas like cloud engineering sales and customer deployment.
Year over year growth and operating expense includes roughly two points of impact from continued COVID-19 related savings.
Operating income increased 31% and 27% and constant currency and operating margins expanded four points year over year to 41%, including nearly two points of favorable impact from the change in accounting estimate and roughly one point of favorable impact from COVID-19 related savings now to our segment results.
Revenue from productivity and business processes was $13 $6 billion and grew 15% and 12% and constant currency, primarily driven by office 365 and linked and.
Office commercial revenue grew 14% and 10 per cent and constant currency of the 365 commercial revenue grew 22 per cent and 19% and constant currency again, driven by installed base expansion across all workloads and the customer segments as well as higher <unk>.
Demand for our high value of security compliance and voice offerings drove strong momentum and <unk> again this quarter.
Paid office 365 commercial seats grew 15% year over year to nearly 300 million with acceleration to the cloud and our small and medium business segment, and a recovery and growth and our first line worker offerings. The <unk>.
Celebrated cloud adoption and negatively impacted office commercial licensing, which declined 25 per cent and 27 per cent and constant currency a bit below the expectation.
And the office consumer revenue grew 5% and 2% and constant currency slightly below expectations, primarily due to transactional weakness and Japan, Microsoft for 65, consumer subscriptions grew to $50 2 million up 27% year over year dying.
Dynamics revenue grew 26% and 22 per cent and constant currency better than expected driven by dynamics 365 revenue growth accelerating to 45 per cent and 40 per cent and constant currency with particular strength and power apps, and our finance and operations offering.
Linkedin revenue increased 25 per cent and 23 per cent and constant currency ahead of expectations and our marketing solutions business accelerated again this quarter to 64% revenue growth.
Segment gross margin dollars increased 15% and 12% and constant currency and gross margin percentage was relatively unchanged year over year with nearly two points of favorable impact from the change in accounting estimate operating expense increased 4% and two per cent and constant currency and operating income increased 26% and 20% of.
Constant currency, including four points due to the change in accounting estimate.
Next the intelligent cloud segment revenue was $15 $1 billion ahead of expectations, increasing 23 per cent and 20 per cent and constant currency server products and cloud services revenue increased 26 per cent and 23 per cent and constant currency ahead of expectations Azure revenue grew 50%.
And 46% and constant currency better than anticipated driven by continued strength and our consumption based business and and our per user business growth and our enterprise mobility and security installed base accelerated again this quarter up 30% over 174 million seats.
And on a strong prior year comparable that benefited from the end of support for Windows Server 2008 are unprecedented server business increased 3% and was relatively unchanged in constant currency with strong annuity performance driven by continued customer preference for our hybrid and premium offerings.
Enterprise services revenue grew 10% and 8% and constant currency with better than expected performance and Microsoft consulting services.
Segment gross margin dollars increased 27% of 24 per cent and constant currency gross margin percentage increased two points year over year with roughly two points of favorable impact from the change in accounting estimate operating expense increased 12% and 10 per cent and constant currency operating income grew 41% and 36.
For scent and constant currency with roughly seven points of favorable impact from the change in accounting estimate.
Now to more personal computing.
Revenue was $13 billion, increasing 19% and 16% and constant currency with better than expected performance and gaming windows OEM and search and.
And windows the straw.
Longer PC market resulted in overall OEM revenue growth of 10% driven by continued customer demand.
M. Non pro revenue grew 44 per cent and OEM pro revenue declined 2% on a prior year comparable that included the end of support for Windows seven and.
Windows commercial products and cloud services grew 10% and seven per cent and constant currency with the lower than expected mix of in quarter recognition from multiyear agreements.
And surface revenue grew 12% and 7% and constant currency lower than expected, primarily due to execution challenges and the commercial segment search revenue ex Tac increased 17% and 14 per cent and constant currency benefiting from the improved advertising market noted earlier.
And and gaming revenue increased 50% and 48 per cent and constant currency Xbox hardware revenue grew 232% and 223% and constant currency driven by our new console and.
Stock content and services revenue, which now include the Panamax grew 34% and 32 per cent and constant currency with better than expected performance of first party titles, particularly minecraft.
Segment gross margin dollars increased 14% and 11% and constant currency gross margin percentage decreased two points year over year, driven by sales mix shifts the gaming operating expense decreased 3% and 4% and constant currency and operating income grew 27 per cent and 22% in constant currency.
Now back to total company results.
Capital expenditures, including finance leases were $6 billion in line with expectations driven by ongoing investment to support growing global demand for them and increased customer usage of our cloud services cash paid for P. P and he was $5 $1 billion cash flow from operations was $22 2 billion.
And increased 27 per cent year over year, driven by strong count billing and collections and free cash flow was $17 $1 billion up 24 per cent.
Other income and expense was $188 million higher than anticipated, primarily driven by net gains on investments as a reminder, the required to recognize mark to market gains or losses on our equity portfolio.
Our non-GAAP effective tax rate was approximately 14% and finally, we returned $10 billion to shareholders through share repurchases and dividends.
Now, let's move to the outlook as a reminder, and Q4, we begin to see growth rates that reflect the first full quarter impact of COVID-19, a year ago, both across revenue and operating expenses.
Last year across Windows, OEM gaming and surface, we saw searches and purchasing and the usage that will negatively impact Q4 growth rate and our search and linked and businesses Q4 growth rates will be positively impacted given the advertising and job markets of a year ago and their and our transactional business, the slowdown and purchasing and office and <unk>.
Over the last year will benefit Q4 growth rates, particularly in our small and medium business segment net.
Next and our largest quarter of the year, we expect the accelerating trends soccer discussed our differentiated market position and continued solid execution to result, and another strong quarter growth and commercial bookings should again be healthy, but impacted by of declining ex freebase as always.
And increasing mix of larger long term azure contracts, which are more unpredictable and their timing can drive quarterly volatility and bookings commercial.
Commercial cloud gross margin percentage should increase roughly four points year over year with less and two points from the change in accounting estimate and.
As a reminder, the favorable impact continues to lessen over time.
Excluding the accounting change Q4 gross margin percentage will also benefit of debt from investments, we made a year ago to support increased usage needs and remote work scenarios.
Longer term commercial cloud gross margin percentage will continue to be impacted by revenue mix shift of Azure increase the usage of our productivity and collab solutions and ongoing strategic investments to support our customer success.
And capital expenditures, we expect the sequential increase on a dollar basis as we continue to invest to meet growing global demand for our cloud services now.
Now the FX based on current rates, we expect FX to increase total company productivity and business processes and intelligent cloud revenue growth by approximately three points more personal computing revenue and total operating expense growth by approximately two points and Cogs growth by approximately one point next to the segment guidance.
And productivity and business processes, we expect revenue between 13.8 and $14.05 billion and office commercial revenue growth will again be driven by office 365, with healthy healthy seat growth and upsell opportunity to <unk> five and our on premises business, we expect revenue to decline.
And in the high teens consistent with the ongoing customer shift to the cloud and all.
All of US consumer we expect mid to high teens revenue growth driven by continued momentum and Microsoft 365, consumer subscriptions against the low prior year comparable impacted by the transactional purchasing weakness noted earlier.
And link and we expect revenue growth and the mid 30% range driven by continued strong engagement on the platform and improvements and the advertising and job markets and and dynamics continued momentum and dynamics 365 will drive revenue growth similar to last quarter for intelligent cloud we expect.
Revenue between $16, two and 16 point for $5 billion and Azure revenue will again be driven by strong growth and our consumption based business and our per user business should continue to benefit from Microsoft for 65 of sleep momentum, though we expect some moderation and growth rates given the size of the installed.
Dave.
And of our on premise of server business, we expect revenue growth and the mid single digits driven by continued demand for our hybrid and premium of annuity offerings against the low prior year comparable and the transactional purchasing noted earlier and the enterprise services revenue growth should be roughly in line with last quarter.
And more personal computing, we expect revenue between $13, six and $14 billion and Windows overall revenue should grow mid single digits, driven by Windows commercial products and cloud services growth and continued demand for P. CS partially offset the ongoing supply chain impacts and the comparable noted earlier.
And surface on the strong prior year comparable and we expect revenue to decline and the mid teens as we worked through the supply chain and execute and challenges noted earlier and search ex Tac, we expect revenue growth and the mid forty's driven by improvements and the advertising market and gaming, we expect revenue growth and the mid to high single digits.
Significant demand for the Xbox series X and S will continued to be constrained by supply and on the strong prior year comparable we expect Xbox content and services revenue to decline and the mid to high single digits.
Now back to the company guidance, we expect Cogs of $13 seven to $13 $9 billion and operating expense of $13 $1 billion to $13.2 billion. As a reminder, and operating expense in Q4, we will benefit from continued COVID-19 related savings as well as the prior year comparable which.
Included roughly four points of impact from of $415 million charge related to the realignment of our retail store strategy.
And other income and expense interest income and expense should offset each other and finally, we expect our Q4 effective tax rate to be approximately 16%.
Now I'd like to share some closing thoughts as we look to next fiscal year.
Overall, we have performed well for three quarters of our fiscal year and a challenging environment and we fully expect a strong Q4 to lay the foundation for FY 'twenty two.
We will of course continue to focus on delivering strong revenue growth and the short term, but even more importantly, this year has reinforced the critical importance of investing boldly to capture the significant list of opportunities ahead of us.
Excellent and daily execution, coupled with a thoughtful vision for the future that creates value as well as opportunity for our customers globally.
Lead to long term revenue and profit growth with that Brett let's go to Q&A.
Thanks, Amy and I'll move to Q&A.
Out of respect for others on the call we request the participants. Please only ask one question operator can you please repeat the instructions.
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Our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed with your question.
And so and thank you guys for taking the question and and great quarter.
I guess this is the question both for Satya and Amy we're seeing just really great commercial bookings our results come through third and 9% growth and the current quarter and Scott you've been talking to US a lot of about is more strategic deals and the the acceleration of the digital transformation can you give us a little bit of color of what comes in these more strategic deals how does.
The change the dynamics of what types of solutions people are using for Microsoft the scope of sort of how deeply you are getting into these customers and the sort of how most of the I T, but youre getting and then maybe talk to us a little bit about the timeframe for.
And for which this comes into revenue what should our expectation and B. When you get one of these big strategic deals and how long does it take the really ramp up of this customer onto the broader Microsoft platform.
Thank you Keith for.
And so the question.
I think we feel very good both I would say of consumption and usage today as well as as you mentioned the bookings are because both of those at any given point and time is what we look at the.
The overall approach to the Microsoft Cloud if you look at the breadth of what any customer maybe doing with us they may be doing hybrid cloud infrastructure with us they may be for the first time doing tier one workloads on the cloud with us right, whether it's and core financials or and retail or and health care.
And at all so they could be deploying the centers of excellence around power platform and.
And power platform sits at the intersection of pretty much dynamics Azure and teams for example.
And the and of course, we're seeing the growth of teams and teams as I've always maintained is not just about one thing it's not about just meetings or it's not about just chat, but most importantly, it's the platform that drives and fact line of business and business application termination of inside of our collaboration work flow and so that's what we see.
And then the other thing I would say that we're now seeing is also the industry level of differentiation of the all of Microsoft cloud, So whether it's in retail, whether it's and health care or and financial services are we feel that we now can bring the power of the entire cloud together and a much more strategic way.
And maybe just to build on what thought he was saying Keith.
You think about bookings for the remaining performance obligation and what I tend to think of is when you hear those words I think often we pivot toward these azure contracts, we talk a lot about because they create some volatility but really the foundation for these long term strategic contracts is the Microsoft cloud Holistically.
So what you'll see is not just office 365, but the suite of Microsoft 365, you'll see higher level of additions of security or compliance workloads, you'll see dynamics 365 as of pillar with power platform, because they're spanning end to end industry solutions to combine it back to what Scott you're saying so you see.
And add a good bookings number which is fundamentally about you know do you renew what's up for renewal do you add workloads. The AD users and do you and does it have a component.
All of the and Azure commitment.
All of those things together for what creates the change and it would be look at remaining performance obligation you seem to have a good bit of it and that's gonna be recognized and the next 12 months and another equally balanced portion of beyond that so it's not all long term. This transition happens quickly usage build that book per user.
It's also per workload and it's consumptive based so it's really and more holistic view that I would have people take as opposed to thinking about and Azure contract is long dated.
Okay. Thank you guys Steve.
Operator next question please.
Thank you and the next question is from the line of frontal with Jefferies. Please proceed with your question.
Thanks Satya.
On health care. If you can just frame your aspirations of the long term of where you'd like to be in this industry and if you could just comment on you know where you still think the law and low low hanging fruit as it relates to the opportunity said specifically bill.
And on the the nuance of acquisition.
Sure Ben.
Thanks for the question.
And I look at the industry cloud opportunities, we think of health care is a very critical opportunity for us and a huge and expansive.
Addressable market. If you think about as the percentage of GDP L. B C health care is significant and fundamentally when I think about the provider market and particular digital attack is going to play a huge role for every provider to do the things that they care. The most about which is improve the patient outcomes and read.
<unk> costs and reduce the burden on the physician, so that's where the nuance acquisition as of.
Great fit for US we've been partnered with them and it also enhances our platform approach for and what re of always done has gone into and industry.
And with the platform and an ecosystem approach of for example, with nuance and they've done a fantastic job of taking what is perhaps the most defining technology of our times, which is AI and applying it to health care, which is the most important application space and Oh and they've done that again by really partnering partnering deeply with the EMR systems and the.
Rest of the health care ecosystem ultimately to benefit the providers and so we're really looking forward to that acquisition closing and you're already.
Partnered with them and our cloud, but this allows us to take that and integrate more deeply with what we're doing with teams and some of our AI capabilities, even more deeply and we think we can out of a significant amount of value both through our partners and the health care ecosystem as well as most importantly to the providers.
Thank you.
Thanks, Brent Operator next question please.
Thank you. Our next question is from Mark more Adler with Bernstein Research. Please proceed with your question.
Thank you very much and again, congratulations on the quarter and how well the company is executing I'd like to change gear, a little bit and and drilling and the bid on the dynamics 365 business frankly with this part of any other company or even a standalone business. It would be such as the center of enthusiasm by investors given how fast it's growing.
Such of when you sit dynamics 365 is taking share from competitors or are you talking about the ERP or CRM or is it whereas the bolt or is there something different and what are the key drivers of that strength and growth and how sustainable do you believe that is thank you.
Thanks, So much of for the question Mark and it's first of all of Weird very very excited about what's happening again with dynamics 365.
And when you asked where is the share coming and whereas the growth coming it's coming from all of those categories, but.
But the most of the interesting thing is and.
And somebody say once you deploy even and omni channel solution for example, in the World, where what's the physical and what is digital need to come together. Unlike anything before because of the pandemic is bringing about such structural change you need boat that Federated inventory management distributor inventory.
The management system I referenced in my remarks, and you need the customer insights product that is probably one of the fastest growing modules, which is that 360 degree view on customers and customer engagement.
And then including the supply chain. So bottom line of is that cost base of every customer is looking to digitize and.
And bring together the data silos in fact silos of CRM and ERP systems, and that's probably one of the most interesting things that we've observed is it's not about replacing even and existing ERP or an existing CRM, it's about buying dynamics and helping them grow.
Rajeev and some of the disparate and CRM and ERP systems. They may have so we do see this as the huge opportunity out of the world Modernizes and puts and a complete next generation more proactive versus reactive business systems and that's what dynamics has been architected for it so I feel like coming out of the.
Pandemic and the architecture and all of the hard work. The team has done over the multiple years now positions us very well.
Thank you and much appreciate it.
Thanks, Mark Operator next question please.
Thank you. The next question is from Karl Keirstead with UBS. Please proceed with your question.
A question for Amy on the Opex and Amy the Opex growth has been extraordinarily low the last several quarters of the growth rate looks like its going to inch up a little bit and the June quarter, but you mentioned the the investments are shifting to future quarters, you probably don't want to give too much on fiscal 'twenty, two but I'm just wondering whether.
We should extrapolate that into thinking that opex growth in fiscal 'twenty, two should get back to the pre COVID-19 levels of plus 10% and if you don't want to be that specific maybe you could just help us outline some of the variables. We should keep in mind as we model that line item post COVID-19 recovery and in fiscal 'twenty.
Two thank you.
Thanks, Carl and I do think and in Q4, and it's why I, specifically called out of the four points of impact from a year ago, because it does start to get to a more normalized rate and Q4, and I say that because our head count growth, which I noted earlier has been 12%.
And so overall you would expect opex growth to at least merrier of head count growth over any period of time and we've certainly benefited through the year from COVID-19 related savings will continue to have that in Q4 and as we get to 'twenty two I would.
Back to see a little less of that as people get back to the workplace at some level and resume some other normal levels of activity and so I do think you're you're heading and the right direction on that and and listen I think that type of growth with the type of opportunity. We're seeing the number of Tam expansive opportunities really of Sofia one.
Through and his comments, where we feel like we've got a unique position and opportunity to take share I feel pretty confident and being able to to certainly land that opex growth number.
Got it thank you Amy.
Thanks, Scott I mean, I think just to add to it Amy I think I hope you and all of your models you have new rose at least when we think about it for from even just last year to this year.
In many more new categories and in those categories with significant differentiation. So when we think about opex is not about adding opex to the stuff that we had in the past. It's the there's leverage there in fact, it's opex going into new tabs.
Yeah.
Operator next question please.
Absolutely. Our next question comes from the line of Kirk <unk> with Evercore ISI. Please proceed with your question.
Hi, yes, thanks, very much and and congrats on the quarter. So just wondering if you could just talk a little bit more about the the I realize it's early days on that but just the kind of feedback you're getting on that product and and how do you see that sort of fitting of the seem to be some nice adjacencies with dynamics with office 365. So it's just kind of curious if you could give us a little bit of a hit.
And on on how it's going and sort of your excitement level of about over the next quarter next couple of years. Thanks.
No. Thank you so much for the question and it's a lot. It's very much a great example of what I was saying in terms of creating a new category right and when I look back multiple years now we started talking about power platform and as I said, even in my script today.
We now have a full suite of tools that essentially created this next generation business process automation and productivity suite and power platform, that's at scale and growing at scale. Similarly, we think of the experience cloud as a distinct cloud opportunity for us it brings together or even two.
Day would've been disparate tools, whether it's the knowledge mining and management systems, and and enterprise connecting it to learning systems.
And and ultimately the employee experience and communication system. So we obviously the very has massive adjacencies to what we're doing with Microsoft 365, and office three six spot in particular of teams, but it also to your point our connects up with line of business systems saw each RM systems and all of the all of the things, we do and <unk>.
Dynamics as well as other third party SaaS application. So it's very early days and so we'll take the same approach we've taken whether it's and security whether it's in power platform, whether it's and dynamics.
And many other places where you've seen us grow substantial new businesses essentially as part of Microsoft cloud, but we are very excited about what this opportunity represents.
Thank you.
Thanks, Curt Operator next question please.
Absolutely. Our next question comes from the line of cash Rondon with Goldman Sachs. Please proceed with your question.
Hi, Thank you very much congratulations on the quarter Scott There I know you said that you expect tech is true.
As a percentage of GDP and talking about 5% of roughly double over the next 10 years and so how should we think about Microsoft of share and in.
And that context is it going to be steady or do you see that expanding and if it is going to expand one of them.
The key products and markets that will drive your relative share of growth as you as your upper for Tech and asked to take over from CDP. Thank you so much.
The cash for the question I think that first of all of US We're big believers and two things one is we need to be competitive and each layer and then the coming together of each led and do a cohesive coherent the architecture of the full stack of the Microsoft cloud creates that differentiation and that will define what we think is going to be increased.
The share for us as a tech itself as opposed to digital GDP doubles. So if you look at it when it's whether it's on the hybrid it infrastructure of the multi cloud multi edge world, which I believe is going to be the world 10 years from now we are very well positioned b of leather and it we currently live in it and we plan.
And to continue that when it comes to data and I look at even what we have been able to do with synapse, even and the just last year and what that can do both of the cloud into the edge when it comes through AI and what we're doing with the open AI and our cognitive services of what we're doing with power platform develop of SaaS and one of the most exciting things again.
And that I believe is the next 10 years is going to be about developers and the digital capability and every enterprise and we are the leaders there and think about V. S code as well as get up and then of course all of the things that we're doing with Microsoft 365, and dynamics and the industries that so ultimately we don't think any anything for granted but that said.
We are well positioned.
And for what is expansive Tam.
And with the competitive differentiation both in the individual layers of the stack as well as the cohesiveness of the stack itself.
Got it. Thank you so much that's the debt so it sounded like of share gain story. Thank you. So much I appreciate it.
Thanks cash operator next question please.
Our next question comes from Gregg Moskowitz with Mizuho. Please proceed with your question.
Okay very much for taking the question South of you in your prepared remarks, you spoke about and increase in vertical and nation of Azure can we double click on that a bit more how much incremental opportunity do you see and industries like financials like manufacturing and are there other verticals that may make sense to more actively pursue overtime as well.
Thank you for the question and I really think that ultimately customers are looking to increase that time to value lower cost and improve agility, so being able to customize these workflows.
And to come up come up with industry schemas, because when you think about increased digitization and workflow automation and it does take the next level of scheme of <unk> of what is perhaps today and not digital insight and the industry and so therefore, what we do by stitching together coming together of even Microsoft 365.
And <unk> teams power platform with certain workflows with our data inside of Azure as well as dynamics that absolutely improves the ability for any customer and any one of these industries to improve the time to value. So yes. It is going to both help us with adoption rates increase.
And the speed with which it increases and it also differentiates us and will continue to look and one of the other things that we're doing this is not just one industry of the time. It's also the cross industry workflows and so we absolutely believe that at the micro that bill already talk about not just any individual part of a cloud we'd talk about only one thing it's called the Microsoft cloud and.
And now we're increasingly talking about Microsoft cloud by industry and cross industry.
Very helpful. Thank you.
Thanks, Greg and operator, we have time for one last question.
And our final question will come from the line of Raimo <unk> with Barclays. Please proceed with your question Bill.
Thanks for screening and thanks for squeezing me in and I wanted to do the asked about security and the and what.
What we see in terms of change of the industry and how Microsoft is kind of fit in there well, but he and the last quarter that was kind of a big topic can you talk a little bit about what you see in terms of customers. Realizing the the broadened the offering from Microsoft and how the cloud is playing a changing of all of them. Thank you.
No. Thank you for the question, obviously security is of Super important topic golf for every customer every board of every executive team and.
And the fundamental approach we have is how do we ensure that every customer has implemented a zero trust architecture, but that's the name of the game, which is how can Microsoft through our participation and the security industry accelerate.
Essentially the cyber defense of the entire.
The digital sector and beyond and so to me of what we have done is taken a pretty unique approach of bringing identity and point application infrastructure. All together with the ex D. R and Sim, which is cloud native and that's pretty unique because we really don't let the seams getting the weight.
And we make sure that any customer who is able to sort of deploy the systems together has.
Both the defense and depth, but also the aggregate data to be able to detect and respond to any intrusion, because that's sort of the key posture.
And then you couple that with our operational security posture, and you're processing, a truly and events and using that to continuously help our customers is increasing to your point the cloud adoption rate. So if you look at some of the challenges like the half NIM. The cloud was not impacted and and when we did sort of a lot of work to make sure that the patches or out even.
For our servers that were out of support for multiple years and so but at the same time any business that was had moved already to the cloud had none of those issues. So therefore, I think we are going to see increased cloud adoption and we're going to see increased usage of end to end of security suites like what we offer and.
Most importantly, great hygiene and great operational security posture, all the time with Zero Trust architecture.
Thank you.
Thanks, tremor 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 the soon.
Thank you all.
Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and you may disconnect your lines at this time.
Mhm.
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