Q4 2021 Microsoft Corp Earnings Call

Leading in a new layer of the infrastructure stack. The enterprise meta words, Amy Inbev is using our solutions, including Azure digital twins in Azure Iot to optimize operations from the Bally feel to the warehouse distribution.

Customers also continue.

We choose our infrastructure to run mission critical Sap's solutions thousands of enterprises have migrated their ERP workloads to azure, including Campbell's soup L'oreal Munda leaves International service now and even at SAP.

All of this innovation is driving larger and more strategic azure commitments.

<unk> from industry leaders, including mass and consumer goods Morgan family in financial services and any C&I team now.

Now on to data.

Data is the most strategic asset for every business. We are the only cloud provider that helps organizations bill sovereignty over their data by bringing together our hyper.

Hyperscale oil TP analytics and governance workloads.

Cosmos DB has become the go to database powering the world's most demanding mission critical workloads, new capabilities help organizations like Albertsons Asos, DHL La Liga Maersk Swiss re optimize costs.

And boost performance.

Walmart is using cosmos DB to handle billions of online requests daily and to ensure millions of customers receive the items they want when they need them Azure.

Azure synapse brings together our data integration big data and data warehouses into a single service.

From a b.

And Amro in finance and am resource, Bergen, and pharma to Walgreens and retail on WP being advertising organizations are using synapse to generate insights from massive amounts of structured and unstructured data queries performed using synapse increased 146% over.

The last quarter alone.

Now on to developers Github is used by 72% of the Fortune 50 to bill ship and maintain software.

Organizations like Ford NASA on Shopify, or using new project planning capabilities to help developers better manage projects directly.

Within their workflow and epic games, Motorola solutions, and Volkswagen Software group all chose Github advanced security this quarter to help secure debt code. We're also leading in enterprise AI on new Azure applied AI services help organizations like Dol Lufthansa and <unk>.

Samsung apply AI to common business scenarios and live captions intuitive spaces are being powered by our speech services.

Finally, we are bringing the power of our partnership with open AI to both professional developers and domain experts with Github copilot professional developers can.

But faster with less work and using the world's most powerful language model GPT 3 domain experts can build apps using natural language with power platform.

Our platform has become the leading business process automation and productivity suite for domain experts across all functions.

Power B is the.

Right Corinne business intelligence in the cloud organizations in every industry, including bear Cerner Rolls Royce on choosing the platform to foster a data driven culture none.

On the number of organizations using power apps is more than double year over year BSF chose power apps to give 122000 employees.

He has the capability to Bill low code no code apps and the Toyota fusion teams of pro developers and domain experts are using power apps on Azure past services to improve quality control.

All up power platform revenue increased 83% over the past year.

And now on to dine.

The lead at 365.

Every business function, including marketing sales customer support and supply chain will need to be re imagine for an AI first in collaboration first world and the silos between communications collaboration and business process have to be broken down with dynamics 360.

<unk>, we are building a new generation of business applications to help organizations adapt to this new reality, we continue to gain share dynamics 365 revenue accelerated for the third consecutive quarter up 49% year over year.

We're helping businesses to become digitally sovereign over their custom.

Customer interactions with our customer insights product with organizations like Columbia, sportswear, GNC and La Clippers, all choosing to unify customer profiles and deliver more personalized experiences.

Empowering employees for hybrid work by creating a new category of collaborative applications, bringing business processes.

Ex fought directly into the flow of work.

New integrations between dynamics 365, and teams enable anyone in an organization to seamlessly view and collaborate on customer records within teams without having to purchase multiple licenses customer.

Customers want this and no other window is doing this.

Processing.

And we are helping organizations re imagine their core business process with new apps built for an age of omni channel communications, but.

Dynamics 365 customer service organizations like Coca Cola, and all and Xiaomi have a single comprehensive solution to deliver consistent.

And personalized support across all channels.

Now on to industrial solutions over the past year, we have introduced industry clouds for financial services healthcare manufacturing nonprofits and retail and this quarter, we announced on new Microsoft cloud for sustainability, bringing together capabilities.

That's true across our stack to create an entirely new business process category to help every organization address this very urgent need now.

Now onto Linkedin link.

Linkedin revenue surpassed $10 billion for the first time this fiscal year up 27% a testament to how mission critical.

The platform has become to help people connect learn and grow and get hired over the course of their careers and.

In the past 5 years since our acquisition revenue has nearly tripled and growth has accelerated.

Linkedin has become a leader across multiple secular growth areas spanning b to b advertising prefer.

For hiring corporate learning and sales intelligence.

And from Linkedin profiles within office to Linkedin learning courses within Microsoft Viva and Linkedin sales navigator leads within Microsoft dynamics 365, we have brought together the power of Linkedin and Microsoft to transform how people learn sell.

<unk> connect.

<unk> has more than 774 million members, who are more engaged than ever sessions were up 30% this quarter compared to a year ago, and Linkedin advertising business surpassed $1 billion in revenue this quarter for the first time up 97% year over.

<unk> growing 3 times faster than the category.

Now to Microsoft 365 and teams.

Hybrid work represents the biggest change to the way we work in a generation and will require a new operating model spanning people places and processes.

We are the only cloud that supports everything.

We are organization needs to successfully make the shift Microsoft teams is the new front end, it's where people need chat call collaborate and automate business processes all within the flow of work.

Teams usage has never been higher we are nearly 250 million monthly active users.

And all people use teams each day to communicate collaborate and caught the content across work life and learning.

We are leading in the new and growing enterprise phone category, just like video meetings chat and business processes happened on teams calls happened in teams, creating a huge new opportunity.

Energy, we have nearly 80 million monthly active teams phones users with total called surpassing 1 billion in a single month this quarter and we're just getting started.

Teams is also at the center of orchestrating collaboration across the entire Satha stake from HR to marketing to finance.

Leading third party SaaS vendors, including Adobe Atlassian Salesforce Sap's service now and work day have now built apps the deeply integrate with teams, bringing every business process and function directly into the flow of work.

And we're bringing teams to consumers so people can connect and collaborate with family.

<unk> friends across desktop mobile and the web.

All of this innovation is driving growth 124 organizations now have more than 100000 users of teams and nearly 3000 have more than 10000 users.

More broadly across Microsoft 365, Youre seeing double digit year over.

We our seat growth in every segment from frontline in small business to enterprise.

Meaning companies like bare Siemens Vodafone all chose our premium EFI offerings for advanced security compliance voice and analytics.

Now on to employee experience cloud having.

Having a digital employee experience.

<unk> platform is critical for every organization with Microsoft Viva, we are creating an entirely new category, bringing together communications learning well being and knowledge directly into the flow of work new capability to empower leaders to bill human capital nurture wellbeing and focus on employee results we.

We are seeing.

Strong interest and early adoption in every industry from American Express and Barclays to AT&T and Mars.

Humana chose Veeva to help 26000 employees make the shift to hybrid work gaining insights on everything from collaboration trends drew manager effectiveness.

Now on to Windows Windows 11.

Is the biggest update to our operating system in a decade.

We are re imagining everything from the Windows platform to store to help people and organizations be more productive and secure and build a more open ecosystem for developers and creators. We are delighted by early feedback more people have downloaded.

Our early build than any other windows release or update in the history of our insider program.

And along with our OEM ecosystem, we're excited to bring Windows 11, 2 new Pcs beginning this holiday and with Windows 365, we are creating a new category the cloud PC John.

Like applications move to.

The cloud with SaaS, we are now, bringing the operating system to the cloud enabling organizations to stream the 4 windows experience to any employees personal or corporate device.

Bill onto security with the cyber security landscape more complex than ever it's never been clearer that every organization will need to deploy.

<unk> and maintain a zero trust security architecture.

This is driving accelerated demand for our integrated end to end solution spanning identity security compliance and device management across all clouds on all platforms, nor the window is recognized by analysts as the leader in.

In as many categories. This is reflected in our share gains with nearly 600000 organizations, including Fedex nationally NTT and Volkswagen using our security offerings across Azure and Microsoft 365.

We saw a 70% increase in the number of small and medium business.

Customers.

And it's reflected in our sales growth with annual revenue continuing to increase 40% year over year.

We are going further to protect organizations and our recent acquisitions of cloud Nox reform labs, and risk IQ bolster our security capabilities in key areas, including <unk>.

Identity management.

O T and threat intelligence.

Now onto gaming gaming is the largest category in the entertainment industry, and we're expanding our opportunity to reach the world 3 billion gamers wherever and whenever they play.

We're all in on games at E..3 last month we.

Well the biggest games lineup ever announcing 27, new titles, which will all be available to game pass subscribers game pass is growing rapidly and it's transforming how people discover connect and play games subscribers play approximately 40% more games and spend 50% more.

On web than non members, we continue to lead in the fast growing cloud gaming market with last month, just last month, we made Xbox cloud gaming available on Pcs as well as Apple phones and tablets via the browser in 22 countries with more to come.

Millions of already stream games to their desktops tab.

More on phones.

And the Xbox series S and X are our fastest selling console ever with more console sold life to date than any previous generation.

Finally, we continue to grow our opportunity and the creator economy, adding new ways for players to build and monetize that.

<unk> in many of our most popular games, including flight simulator and Minecraft creators on more than double what they did a year ago across our titles.

In closing going forward every person in every organization will require more digital technology to be more resilient and to transform.

We're innovating across the entire tech stack to ensure our customers succeed in this new era.

I'll hand, it over to Amy.

Thank you Satya and good afternoon, everyone on.

This quarter revenue was $46.2 billion up 21% and 17% in constant currency.

Earnings per share was $2.17, increasing 49% and 42 per cent and constant currency and our largest quarter of the year focused execution by our sales and partner teams along with broad based strength across geographical markets and customer segments drove another.

Another very strong quarter of top and bottom line growth.

In our commercial business healthy demand for our differentiated hybrid and cloud offerings as well as increased long term commitments to our platform drove significant growth in the number of $10 million plus Azure and Microsoft 365.

6.

Customer reliance on the Microsoft cloud drove sequential increases in usage across teams power platform and our advanced security and identity offerings, which are empowering organizations to shift to hybrid work and modernize business processes.

And in linked them.

Contract listens business and improving job market drove strength in annual contracts and job postings.

And our on premises business strong annuity performance across office server and Windows also benefited from a greater mix of contracts with higher in period revenue recognition under ASC 606.

Our.

Accounts from our business Windows OEM surface were impacted by the ongoing constraints on the supply chain search and Linkedin benefited from an improved advertising markets and in gaming. We again saw strong engagement across our platform while demand for Xbox series X and S consoles continued to exceed.

Seed supply.

As a reminder, Q4 was the first full quarter impacted by COVID-19, a year ago across revenue and operating expense.

This quarter.

Even with a declining exploration base commercial bookings grew 30% and 25% on constant currency.

She significantly ahead of expectations driven by strong execution across our core annuity sales motion and an increase in the number of larger long term azure contracts as a result commercial remaining performance obligation increased 32 per cent and 31 per cent in constant currency to 100.

The $41 billion.

Roughly 45 per cent will be recognized in revenue in the next 12 months up 25% year over year, the remaining portion which will be recognized beyond. The next 12 months increased 38 per cent year over year, highlighting the growing long term commitment from Microsoft.

And Scott.

And our annuity mix increased 1 point year over year to 95 per cent commercial.

Commercial cloud revenue also better than expected with $19.5 billion as growth accelerated to 36 per cent and 31% in constant currency commercial cloud gross margin percentage expanded 4.

Soft comps year over year to 70% with roughly 1 point from the change in accounting estimate for the useful life of server and network equipment assets. Excluding this impact commercial cloud gross margin percentage increased despite revenue mix shift to azure driven by improvement across all our cloud services on a prior year comparable.

Will impacted by strategic investments, we made to support significant customer engagement and usage and remote work scenarios, including free trials flexible financing options and capacity for cloud infrastructure usage.

With the weaker U S dollar FX increased growth by approximately 4 points about a point more favorable than anticipated.

Painting.

Than anticipated.

Effects increased cogs growth by approximately 1 point and operating expense growth by approximately 2 points. Both in line with expectations gross margin dollars increased 25 per cent and 20% in constant currency gross margin percentage was 70 per cent up 2 points year over year.

With roughly 1 point of favorable impact from the change in accounting estimate.

Excluding this impact company gross margin percentage increased despite sales mixed shift to the cloud driven by commercial cloud gross margin percentage improvement noted earlier.

Operating expense grew 6% and 4% on constant.

<unk> on sea inline with expectations on a prior year comparable that included roughly 4 points of impact from the realignment of our retail store strategy and 2 points of impact from an increase in bad debt expense overall company head count grew again this quarter up 12% year over year as we continued to invest across key.

Chris like cloud engineering sales and customer deployment operating income increased 42% on 35 per cent in constant currency and operating margins expanded 6 points year over year to 41%, including roughly 2 points of impact from the retail stores charge and increase in bad.

The air expense from the prior year and nearly 1 point of favorable impact from the change in accounting estimate now to our segment results.

Revenue from productivity and business processes was $14.7 billion and grew 25 per cent and 21% on constant currency with better than expected performance across.

Had debt businesses.

Office commercial revenue grew 20% and 15 per cent in constant currency office 365, commercial revenue grew 25% and 20% on constant currency again, driven by installed base expansion across all workloads and customer segments as well as higher RPC paid.

Office 365 commercial seats increased 17% year over year with continued recovery driving acceleration in our small and medium business and frontline worker offerings demand from Microsoft 365, particularly for security compliance and voice.

Pedro strong E..5 momentum again this quarter <unk> 5 now accounts for 8 per cent of our office 365 commercial installed base.

And on a low prior low prior year comparable impacted by a slowdown in transactional purchasing office commercial licensing was ahead of.

Expectations down 8% on 11% in constant currency also benefiting from higher in period revenue recognition noted earlier.

Office consumer revenue grew 18% and 15% on constant currency driven by continued momentum on Microsoft 365, subscriptions, which grew to 51 point.

$9 million up 22% year over year.

Dynamics revenue grew 33 per cent and 26% in constant currency better than expected dynamics 365 revenue growth was 49% and 42% on constant currency with strong momentum and power apps and power automate.

Reflecting growing demand for our modern solutions to build apps and automate workflows.

Dynamics 365, now accounts for over 70% of total dynamics revenue.

Linked in revenue increased 46 per cent and 42 per cent in constant currency ahead of expectations against the comparable.

And by the advertising in job markets of a year ago.

Gross margin dollars increased 33% from 27% in constant currency and gross margin percentage was up 5 points year over year, primarily driven by improvement in our cloud services against a low prior year comparable impacted mostly by increased usage.

The change in accounting estimate drove roughly 1 point of favorable impact operating expense increased 8% on 6% on constant currency and operating income increased 62 per cent and 53% in constant currency, including 4 points due to the change in accounting estimate.

Next the intelligent cloud.

Loud segment.

Revenue was $17.4 billion, increasing 30% and 26 per cent in constant currency, we exceeded expectations across our consumption and per user azure businesses as well as in our on premises server products business.

Overall server products and cloud services revenue.

New increased 34 per cent and 29 per cent in constant currency Azure revenue grew 51% on 45 per cent in constant currency driven by strong performance across our core and premium consumption based services.

In our per user business, the enterprise mobility and security installed base increased.

29% to over 190 million seats.

Our on premise server business increased 16% on 12% in constant currency driven by strong annuity performance and benefiting roughly 4 points from new higher in period revenue recognition noted earlier, particularly.

And some of our largest deals in the quarter.

Enterprise services revenue grew 12% and 9% on constant currency driven by growth in Premier support services and Microsoft consulting services.

Segment gross margin dollars increased 32% and 27% on constant currency gross margin percentage increased.

1 point year over year with roughly 1 point of favorable impact from the change in accounting estimate operating expense increased 14% and 12% on constant currency and operating income grew 46% on 39% in constant currency, including 3 points due to the change in accounting estimate.

Now to more personal computing.

Revenue was $14.1 billion, increasing 9% on 6 per cent in constant currency with better than expected performance on windows commercial gaming and search offsetting OEM and surface weakness from supply chain constraints OEM revenue declined 3%.

And surface declined 20% and 23 per cent to constant currency and both were impacted by the significant supply chain constraints started earlier and a good demand environment.

Windows commercial products and cloud services revenue grew 20% and 14% in constant currency driven by demand from Microsoft 300.

65, with some benefit from the higher in period revenue recognition noted earlier search revenue ex Tac increased 53 per cent and 49% in constant currency benefiting from the improved advertising market and in gaming revenue.

<unk> increased 11% and 7% in constant currency.

Xbox hardware revenue grew 172% on a 163 per cent in constant currency driven by demand for our new consoles.

Fox and content and services revenue declined 4% in 7 per cent in constant currency against a high prior year comparable.

Gross margin dollars increased.

<unk> 8 per cent and 4% on constant currency gross margin percentage decreased roughly 1 point year over year, driven by sales mix shift to gaming hardware operating expense decreased 6% on 7% on constant currency, including approximately 13 points of impact from the recent retail stores charge in the prior year.

And operating income grew 19% on 13% in constant currency now back to our total company results.

Capital expenditures, including finance leases were $7.3 billion in line with expectations driven by ongoing investment to support growing global demand and usage.

Our cloud services cash paid for PP&E was $6.5 billion cash flow from operations were $22.7 billion, increasing 22 per cent year over year, driven by strong cloud billings and collections free.

Free cash flow was $16.3 billion up 17%.

Reflecting higher capital expenditures in support of our growing cloud business.

For FY 'twenty, 1 we generated over $76 billion on operating cash flow of 26 per cent year over year and over $56 billion in free cash flow of 24 per cent year over year.

This quarter other income and expense was.

$310 million higher than anticipated, primarily driven by net gains on investments as a reminder, we are required to recognize mark to market gains or losses on our equity portfolio.

Our effective tax rate was approximately <unk> 15 per cent and finally, we returned $10.4 billion to shareholders.

Share repurchases and dividends, bringing our total cash returned to shareholders to over $39 billion for deferral full fiscal year.

Now before we turn to our outlook I'd like to provide a few reminders for next fiscal year revenue growth rates across all segments will reflect the impact from COVID-19, a year ago.

3.

The impacts to shift as we move through the year.

Also our FY 'twenty, 1 operating income and margin benefited from 2 factors that will be headwinds in FY 'twenty..2 first the change in accounting estimate for the useful life of server and network equipment resulted in $2.7 billion of depreciation.

<unk> expense shifting from FY 'twenty, 1 to future periods and second we save nearly $1.2 billion on operating expense from COVID-19 related restrictions, which will also moderate in FY 'twenty 2 as geographies reopen globally with those reminders in place, let's move to our next quarter outlook.

Accelerating digital transformation and consistent strong execution should drive another quarter of growing commitment to our Microsoft cloud.

And commercial bookings are core annuity sales motions should drive healthy growth on a growing ex freebase, even against a strong prior year comparable.

Always quarterly volatility in bookings can be driven by an increasing mix of larger long term azure contracts, which are more unpredictable and their timing commercial cloud gross margin percentage should decrease roughly 1 point year over year with roughly 4 points of negative impact from a change in accounting estimate previously discussed.

As all excluding the accounting change Q1 gross margin percentage will increase despite revenue mix shift to Azure driven by continued improvement across our cloud services on a prior year comparable impacted by the strategic investments we mentioned earlier.

Longer term, which excludes the impact of the accounting change commercial cloud.

Just percentage will continue to be impacted by the same 3 things, we often discuss revenue mix shift to azure increased usage of our cloud services and ongoing strategic investments to support our customer success and.

And capital expenditures, we expect us to sequential increase on a dollar basis as we continue to invest to meet global.

Gross margin for our cloud services.

Now to FX based on current rates, we expect FX to increase revenue growth at the total company and all individuals' segment levels by approximately 2 points and total operating expense and Cogs growth by approximately 1 point now to segment guidance and project.

Well John anybody on business processes, we expect revenue between 14.5 and $14.75 billion in office commercial revenue growth will again be driven by office 365 with healthy seat growth across segments and continued momentum on <unk> 5 and our on premises business Bill.

Net revenue.

Productivity decline approximately 20% consistent with the ongoing customer shift to the cloud and office consumer against a strong prior year comparable we expect high single digit revenue growth with continued momentum in Microsoft 365 consumer subscriptions.

For linked debt continued strong engagement on.

On the platform and improvements in the advertising of job markets should drive revenue growth in the high 30 per cent range and in dynamics. We expect continued strength in dynamics 365, which includes our significant momentum in power apps to drive revenue growth in the high Twenty's.

For intelligent cloud.

Revenue to expect revenue between $16, 4 and 16 $6.5 billion.

And Azure revenue will be driven by continued strong growth on our consumption based business and our per user business should continue to benefit from Microsoft 365 suite momentum. So we expect some moderation in growth rate.

Given the size of the installed base. Therefore in constant currency Azure revenue growth should remain relatively stable on a sequential basis.

And our on premises server business, we expect revenue growth in the high single digits, driven by continued demand for our hybrid and premium premium annuity offerings against the low.

Low prior year comparable.

And on Enterprise services, we expect revenue to be in the high single digits.

In more personal computing, we have estimated the Q1 impact of the required windows 11 revenue deferral that will shift to Q2 to be approximately $300 million.

Therefore, our segment revenue outlook is $12.4 billion to $12.8 billion, given the 10 point estimated negative impact from the deferral OEM revenue should decline mid to high single digits in Q1.

Surface on a strong prior year comparable.

We expect revenue to decline in the low teens as we continue to work through the supply chain challenges in windows commercial products and cloud services continued demand from Microsoft 365, 5 and our advanced security solutions should drive healthy double digit growth in.

In search ex Tac.

We expect revenue growth in the high Thirty's driven by improvements in the advertising market.

In gaming, we expect revenue growth in the low double digits console growth will again be constrained by supply and on a strong prior year comparable Xbox content and services revenue should grow low single.

Yes.

Now back to company guidance, we expect Cogs of $13.5 5 to $13.75 billion and operating expense of $11.6 to $11.7 billion in other income and expense interest income and expense should offset each other.

And finally.

The effect on Q1 tax rate to be approximately 16% lower than our expected full year rate given the volume of equity best in our first quarter.

Clothing.

We remain focused on driving revenue growth as we invest boldly against the strategic high growth opportunities ahead.

I think that will deliver significant value to our customers worldwide.

Our outlook for FY 'twenty to reflect this.

With healthy double digit revenue and operating income growth.

Together.

That results and expanded operating margins in FY 'twenty 2.

After excluding the headwinds from the useful life change noted earlier.

Together with our customers and partners, we look forward to FY 'twenty 2.

Now, let's go to Q&A.

Thanks, Amy we'll now move to Q&A on our respect for others on the call we request that participants.

It's the only ask 1 question operator can you please repeat your instructions.

Absolutely Tequila question. Please press star 1 on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star 2 if he would like to remove your question from the queue for participants using speaker equipment and maybe.

Please pick up your handset before pressing the star keys.

Our first question is coming from the line of Keith Weiss with Morgan Stanley. Please proceed with your question.

Excellent. Thank you for taking the question guys and congratulations on a great FY 'twenty, 1 and a great end to the fiscal year.

Last year at this time.

You made a comment that I think really defined the conversation in software over the past year. When you were talking about an acceleration in digital transformation you saw coming out of Covid and I think that's evident in the results that we see here with 25% growth in your commercial bookings growth. What do you want to ask you with the durability of that growth on a go on forward basis was that acceleration.

On pull forward of demand and at some point, we're going to have that hard comp where do you see durability. In this acceleration on a go forward basis is there a lot more to come and then Amy talked to you a similar kind of question, but more on sort of the margin side of the equation I think.

Your your entire tenure at Morgan Stanley.

At Microsoft has really been defined by a good operational controls and ability to grow.

Gross profit dollars well ahead of Opex is that durable longer term is there still enough sort of efficiency gains at Microsoft to be able to keep that up or over the medium term if you will.

Thanks, So much share keeps the question I mean, the way we see the results today reflect that but more importantly on a secular basis.

As I think about you know I always go back to that number which is 5% of GDP as tech spend it's projected to double I think on that.

Emotional doubling will happen in a more accelerated pace and we feel well positioned because of the innovation across the stack because if you think about it on.

What's going to happen is every business, whether you're on a retailer or manufacturer in the service sector public sector, all private sector on digital adoption is the way youre going.

Both resilient as well as transform the core business processes and the strength. We have is that the entirety of the Microsoft cloud stack right. So it's not just about infrastructure or any application. It's the entirety of what we do and so I think it is durable quarter to quarter, depending on what happened.

Going to be bring the pandemic depending on the segments that were impacted for example, the consumer segments that were impacted are coming back on.

And then they'll normalize rather than arcades, we do in fact, 1 of the things I love about sort of our exposure is both it's a worldwide exposure and it has got the right balance between the consumer segments.

And the enterprise business to business segment. So it's a very durable long term growth prospect on behalf tough competition, we need to keep innovating, which is what we'll stay focused on.

And maybe turning to your margin question and while I am obviously proud of the work we've done Keith that you referenced as a team are.

On margins and returns I would say in general our focus remains and has been for the duration of really Satya and Ive worked together along with the rest of the S. L. T on consistently moving our resources and talent to our highest growth and most differentiated.

It places when you do that.

Inexpensive total addressable markets and the way that I believe we're focused on as an organization you do see the type of operating leverage that you're referring to and margins and that along as you see them sort of mathematically with.

A shift in our revenue to higher overall gross margin segments, you do get the results. We've seen so I feel very good about the work we've done and as you heard I'm I'm quite optimistic about the opportunities we have to invest a leading into FY 'twenty 2 as well.

Excellent. Thank you so much guys.

Thanks Keith.

Operator next question please.

Thank you. Our next question comes from the line of Mark <unk> with Bernstein Research. Please proceed with your question. Thank.

Thank you very much for taking the question and again also congrats on the quarter and Amy Thanks for the details on color, especially on the guidance.

So I wanted to ask about us.

Seasonality in Azure traditionally we've seen seasonality in the Azure numbers in Q4, and obviously last year, we didn't see it because of Covid on but we also didn't see it this year or has something changed that has changed the seasonality of the business and does that continue going forward and then as a follow up question.

Keith asked about Opex efficiency overall, but I'd like to ask specifically on the cloud is there any reason that the cloud opex shouldn't continue to grow slower than revenue, obviously on an annual basis not a quarterly basis. Thank you.

I think mark for the question, let me cover your first.

Which is the seasonality and the Azure business in some ways Mark on some of that seasonality frankly was because azure has 2 fundamental components. It's got a consumption model as well as a per user model the per user model, which as you well know is far more aligned.

Line, who are sort of end of year and can be more aligned to our end of year rhythms.

It also can have more quarterly volatility in terms of accounting.

In terms of revenue recognition the same topic, we often talk about when it comes to Microsoft 365 in terms of more in quarter recognition.

On what you've seen is that did historically represent a larger component of Azure. So added volatility to Q4, as we've seen our consumption businesses grow and grow consistently.

And thus far becoming a larger percentage of Azure you do have more stability.

So you start seeing less of that volatility that we've historically seen from from Q3 to Q4, we still have some of it as we talked about but I think it's a interesting observation on and it's a very good question.

Terms of your comment on cloud revenue and Opex, Yes, I do believe that's true.

Mark I get a lot of focus will continue to invest there is lots of opportunity there, but the market certainly warrants it.

Except it makes sense and I appreciate all the detail. Thank you very much.

Yes.

Thanks, Mark Operator next question please.

Our next question is coming.

From the line of Brent Thill with Jefferies. Please proceed with your question.

Amy a lot of questions on margins I'm curious if you think there is a feeling in the near term on margins or do you feel that you've got an elevated flight level. If you will and we shouldn't have to be worrying about that that level.

Martin can you just give us any more color as it relates to how you're thinking about that thank you.

Well I think for FY 'twenty, 2 on operating margins, which is really where I focus on.

Most of my thoughts as I said I'm when you excuse me split the useful life change I feel very good about.

On a margin improvement in FY 'twenty, 2 but what sits behind that Keith is there I mean, sorry, Brent is this.

Focus on the first thing I said, which is with every operating expense dollar. We invest are we continuing to invest in the highest growth places if you continued.

About to invest in high growth places with differentiation that customers care about and you add value.

You continue to see improvements in this area you know from time to time I'm sure.

There will be quarters, where that isn't the case, if we have some mix shift in the hardware et cetera, but in general.

Can you draw on a longer period of time, you've seen us focus on this and so if you remove a little on the noise from some of the useful life changes and look back a few years.

I do think you'd see the biggest needle mover being where we invest the dollars as opposed to the overall amounts of them, which should grow based on the opportunity.

General Thank you.

Thanks, Brent Operator next question please.

Thank you. Our next question comes from the line of Karl Keirstead with UBS. Please proceed with your question. Thanks very much Amy Thank you for giving more formal azure guidance for the next quarter or that's very helpful. So if astra's going.

Stable on constant currency I guess at 45% and you had indicated that EMS growth should moderate effectively you're saying that the consumption piece of azure that might accelerate in the September quarter. So I'm wondering if you could unpack that a little bit is this as simple as prior period commitments ramping.

On to remain at accelerated pace I'd love to hear your thoughts. Thank you.

Thanks, Karl Yeah, No I think in general.

Your you've got the right trajectory.

And do you think it's a it's both things you've heard me say, it's both some of our core as well as premium Skus.

We've seen some nice execute.

<unk> and I think thought he had mentioned some of these differentiated places in the Azure stack, where I think we also can see some growth in data services is a very good point, where I feel like we've made a lot of progress and have a real differentiation and have seen some acceleration in the past couple of quarters.

Q share on it thank you.

Yeah.

Thanks, Karl Operator next question please.

Our next question is coming from Mark Murphy with J P. Morgan. Please proceed with your question.

Yes. Thank you very much Satya at the Ignite conference a few months ago, you commented that cloud architecture.

Have reached peak centralization I'm wondering what the developments are are you seeing that inform your viewpoint and Amy do you sense uplift in some of those intelligent edge our products Scott.

As azure stack or others.

Contributing to the improvement in AR.

From a product growth that we saw this quarter.

Yeah.

Thanks, So much for that question a couple of things that are happening 1 is that all off even what we consider a big cloud infrastructure is getting increasingly distributed if you think about the approach we took to on data center.

Sergio the fact that would be on more regions east to meet I would say book the real world needs are for the computing architecture side, but also the regulatory and data residency requirements. So we feel we picked the right approach and that's paying dividends today, just even in terms of our geographic.

It's average our coverage of all of the regulatory requirements and then the second piece of course is distributed computing will remain distributed and what we are seeing with edge.

Is going to be the case, where we will see more of both the old workloads with hybrid benefits and hybrid deployments as well.

Copper workloads right. So if you take the on a b Inbev digital twin meets Iot type of scenario, that's going to require a lot more compute close to their factories and so to me those new scenarios on 5 G. I mean think about what AT&T is planning to do which is a hybrid deployment.

As new in a completely new space, where there is going to be.

Compute that's located to be able to take core network traffic and used cloud economics.

So that's what we think golf going forward, which is really compute will remain distributed.

Both because of their needs across.

And from fees regulation, and the very nature of compute architecture.

Okay.

And to the question you asked on how to think about the edge and where do you see that in results.

Really it shows up.

This is 1 where I would focus on the overall server products.

John Services number, which I think mark was at the heart of your question.

Because through our purchasing vehicles, the most effective way to purchase for flexibility.

But with and across the edge and the cloud is sometimes somebody on Prem licensing with hybrid right. So you do see that book.

Income results, but also depending on how it is purchased and a server kpis.

Thank you very much.

Thanks, Mark Operator next question please.

Thank you. Our next question comes from Brent <unk> with Piper Sandler. Please proceed with your question.

Hi, good afternoon.

On our as incurred because of coal here a question for you really around $10 million plus contracts you called out momentum this quarter and last quarter. My question is around the drivers of these larger enterprise commitments is this driven by just a larger scope of deals or are you seeing kind of broader.

On an attach rate across the whole breadth of Microsoft cloud products. Thanks.

Thanks, Brent maybe Satya I'll take take this 1 first and if you want to add anything Brent Unfortunately, I'm going to answer it's everything and let me talk about why I say that.

When you see the size of the contracts increase it's.

Until the entire scope of what's offered under the Microsoft Cloud, we're seeing both really strong renewals of our core contracts really strong additions across dynamics power apps power automate and 365 premium Skus security compliance.

And that voice.

Of course increases are those commitment sizes.

And you're seeing the addition.

Of Azure commitments, which we often talk about as these multi year longer term contracts and so then you do of course see them just have longer duration are on especially.

In the case of Azure so in many ways. What we focus on are the components that make up the larger contracts is each component being additive to selling.

On the value that's present across all of our pieces of the Microsoft Cloud and I. This was a good execution.

Actually on the for US you see it in the bookings number even more.

When you have a declining expiry base and then bookings growth that Scott Hi.

You have to do all of those things well.

And that's I think really what's reflected ultimately in transactional meaning those larger.

$10 million plus contracts being done.

Thank you.

Thanks, Brent Operator next question please.

Thank you. Our next question comes from Alex Zukin with Wolfe Research. Please proceed with your question.

Hey, guys. Thanks for taking the question I guess my main.

Question, maybe for Scott you you've taken.

You've noted the future of work, having changed and you talked about the fusion of teams into both the application stack the operating system stack and really amongst the entire a Microsoft.

On the portfolio is that driving given the acceleration.

Covid dynamics can you talk to the fact is that driving.

Larger deals new bites at the Apple or how is that changing the landscape and how do you think about that versus what your competitors are doing.

Yes, that's a great question, thanks for that multiple things happening.

And both some.

Youre seeing on independent secular growth trends and they do reinforce each other on let's just take dynamics, it's probably 1 of the most exciting things. We are seeing is that all coming out of this.

On damage there is an absolute new chapter for a complete new suite all the way from whether it's soft sales to customer service.

Some of them on marketing to supply chain.

Digital manufacturing, that's all going to be re implemented so theres going to be a complete new cycle of business process automation that is going to be AI first and collaboration first and the second part is where that intersection between teams and business process are dynamic.

Dynamics comes through because you do not want to have a system of record for anything whether it is a customer on our apart.

On a forecast that you don't want to collaborate on that you don't want to communicate on and by the way the communications and the collaboration artifacts are part of the record.

Record.

And that's what I think that this new generation of software will enable and so you see it in 2 fronts..1 is teams has become a platform not just for dynamics even for sales force for SAP beef on Adobe for service now Theyre all building great integrations in key teams and will foster that and dynamics.

That makes itself of course will integrate deeply with teams and embed teams or Azure communication services. So when you think about our omni channel customer service module. It doesn't look like anything that from 2 years ago, It's a completely rebuilt omni channel customer service.

System, which has all the communication functionality built in so it's a pretty exciting space.

And it also speaks to a lot of the questions around whereas the margin how is it going to sort of evolve I think tracking what's happening with power platform dynamics and teams I think probably.

And it's interest.

This section to even some of our data layers.

In Azure is perhaps the best indication of some of our competitor differentiation at scale already.

Yeah.

Perfect. Thank you guys so much.

Thanks, Alex.

Later, we have time for 1 last question.

Thank you. Our final question comes from the line of Keith Bachman.

<unk> with bank of Montreal. Please proceed with your question.

Many thanks for taking the question Amy I wanted to direct this to you and go back to margins for a second is there any comments or color that you could provide I know you said you focus on the operating margin side, but on the trends that you anticipate this year and 'twenty 2 around gross margins.

With or without the depreciation schedules part D is on the last quarter call indicated that.

Operating expenses might grow kind of mid teens or low teens I should say in 'twenty..2 I was wondering if you would want to update the comments on how we should be thinking about.

Operating.

<unk> expense trends as we look at FY 'twenty 2 thank you.

Thanks, Keith when I think about.

Your operating expense comments no I don't have any update to that I think if you think about our head count growth at 12% plus 3.

For the year continuing to invest in some of the places where we saw.

Savings for the year on Covid I would expect that that is still a good placeholder for people as they work through the year I mean with the opportunity we see in the market I think it.

Supports that level and given our execution when we do invest which leads me to emerging.

I feel very good about about that at the gross margin level will continue to focus really on the same things we've always focused on which is continuing across our cloud services.

To see improving margins.

Continue to see a mix shift to azure given the.

Growth, we expect there and we'll continue to see in gross margin improvements across individual services that make up many of our components across the company. So in general I feel like the gross margin trends are quite healthy heading into 'twenty 2.

Okay, great. Thank you.

Thanks, Keith so 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 soon.

Thank you everyone.

Thank you.

Ladies and gentlemen. This concludes today's conference. We thank you for your participation and you may disconnect. Your lines at this time.