Q1 2022 Microsoft Corp Earnings Call
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<unk> costs were.
We are seeing strong customer adoption of our new industry cloud for health care, and our clients with financial services and manufacturing will become more broadly available next week.
Sustainability is an existential priority for our society and for every business today and when we think about our approach to sustainability, it's more than just the carbon footprint of our own data centers with our Microsoft cloud for sustainability, we are creating an entirely new business processed category to help organizations manav.
The carbon footprint across their operations, the world's largest baking company Grupo Bimbo for example, using our tools to report record and reduce emissions in every country, where it operates.
Now onto Linkedin.
We are experiencing a great reshuffle across the global labor market as people are rethinking not only where and how they work but why.
As more people change jobs than ever before we saw record engagement as they increasingly turn to linked into connect learn grow and get hired linked.
Linkedin now has nearly 800 million members confirmed hires on the platform increased more than 160% year over year in this quarter, we launched new ways to help job seekers discover roles that align with how they want to work in a rapidly evolving labor market companies are increasingly turning to Linkedin.
Turning to Upskill and Reskill their employees.
We now have over 15000 enterprise customers of Linkedin learning and we are expanding our opportunity and the creator economy, including offering new ways for Linkedin learning instructors to build their audiences and connect with learners live businesses.
Continue to choose Linkedin as the trusted way to reach professionals Linkedin advertising revenue was up 61% year over year.
Now onto Microsoft 365 and teams.
Flexibility and productivity are not mutually exclusive.
We are innovating to empower people to have impact from home in the office and anywhere in between.
Microsoft teams is the only solution that supports all the ways people work usage have never been higher 138 organizations now have more than 100000 users of teams and more than 3000 have more than 10000 users.
Updates to teens rooms, including new AI powered cameras and spatial audio ensure every meeting attendee is always a first class but disciplined.
The rise of hybrid work is transforming the enterprise phone market and we are taking share across PSTN and white.
Coals originating from teams chats increased 50% this quarter compared to a year ago operated connect enables organizations to bring their existing service directly into teams and leaders in every industry, including Schlumberger of Westpac CF group Arianna SCP chose teams phone this quarter.
To meet all their internal and external calling needs.
Moving forward organizations will need a digital fabric that spans organizational boundaries to address key challenges like customer service swarming and supply chain resilience with teams connect employees across multiple companies can chat and collaborate as one extended team without switching tenants.
In private preview, we have already seen strong interest in usage from companies like <unk> and W. P. P teams by itself has become our first cross platform for application development.
For example employees at Levi Strauss and NTT data are using service now applications right within teams to access critical info within the flow of work organizations are also using power platform to build their own rich collaborative apps within teams for everything from curbside pickup to care team coordination.
All up the number of organizations with more than 10000 users integrating their third party and line of business applications with teams increased 82% year over year.
We are creating a complete new category with Microsoft Veeva, which brings together communications knowledge learning resources and insights our acquisition of Allied I owe a leader in the fast growing objectives and key results category adds new tools to help employees drive outcomes not just output.
In hybrid work.
I have an odd old mutual Paypal and Toyota in North America, all chose Veeva to help strengthen connections between employees and their mission between employees and managers and drive individual empowerment.
Across Microsoft 365, we're seeing growth in all segments, including triple digit year over year usage growth of teams in frontline calls one of Australia's largest retailers chose teams to bring two way communications to more than 120000, frontline employees, and Chevron H and M lumen and St. Jude.
All turned to our premium Microsoft 3655 offerings for advanced security compliance whites and analytics.
Now onto Windows earlier.
Earlier this month, we launched windows, 11th the biggest update to our operating system in a decade.
When I step back and reflect on the future of how we work connect and play one thing is clear the PC will be more critical than ever.
There has been a structural shift in PC demand emerging from this pandemic and we are delighted with the early response to Windows 11, with every new generation of Windows. We also unlock the next generation of hardware innovation across our ecosystem and together with our OEM partners. We are excited to offer the widest.
Choice two windows 11 devices at every price point in every form factor this holiday.
We are providing people and organizations everywhere with the most differentiated devices for productivity learning in gaming and also have massive opportunity to create a new class of applications that take advantage of the edge and AI capabilities in windows, coupled with cloud.
And Windows 11 is also the most open platform its pioneering new store commerce models and policies with both Amazon and epic games are bringing their marketplaces to the Microsoft store.
Now on to security.
Cyber security is the number one threat facing businesses today. Our goal is to help every organization strengthen its defense through the zero Trust architecture built on end to end solutions that span all clouds and all platforms rehab.
We analyze over 24 trillion signals across email endpoint and identities each day and translate this intelligence into innovative.
But features to protect our customers.
We are prevented more than 70 billion attacks over the past year alone.
We now have nearly 650000 customers using our security solutions up 50% year over year.
In businesses like HCA healthcare, and Siemens switched to our security solutions to protect their endpoints.
In identity Azure active directory now has more than 500 million monthly active users and we have seen usage of third party apps increased one five X year over year.
And the future of security password less nearly 240 million users have adopted password list login to date and consumers can now completely remove phosphates from their personal Microsoft accounts.
And we're not stopping there over the next five years, we will invest $20 billion to advance our security solutions and protect customers now.
Now on to gaming.
Continued to attract new gamers and reclaim those we've gained over the past year and a half we saw record first quarter monetization and engagement. This holiday season will bring our biggest lineup of content and exclusive games ever with three new AAA titles, including Halo infinite available via game pass subscriptions.
Which continues to offer the best value in gaming, but also bringing X crowd gaming to the console for the first time, enabling Xbox users to discover the stream and stream more than 100 games with just a click.
Cloud gaming is now available in 26 countries, including as of this quarter in Australia, Brazil, Mexico and Japan.
We're expanding our opportunity with independent creators as well as top studios updates to Azure play fab make it easier for developers to integrate to create a marketplace in games, they built and leading publishers from bungie to craft and are all relying on our cloud to scale and operate.
Their games.
In closing we have the most diversified set of digital businesses and we're innovating to expand our opportunity across the entire portfolio to help our customers in this new era next week, we'll hold our flagship ignite conference, where we will share. The next chapter of Microsoft Cloud from the meta words July.
Scale AI from hybrid work to a hybrid infrastructure I couldnt be more optimistic about the opportunities ahead with that I'll hand, it over to Amy.
Thank you Satya and good afternoon, everyone.
Our first quarter revenue was $45 $3 billion up 22% and 20% in constant currency earnings per share was $2.47 and increased 25% and 23% in constant currency when adjusted for a net tax benefit of $3 3 million.
Salaries for the transfer of intangible property quarter, our sales teams and partners delivered a strong start to the fiscal year and our commercial business customers continue to choose the Microsoft cloud, we again saw healthy growth in our azure consumption based business and increased usage across products.
Such as teams and how our platform and start getting reflected in comments and.
And our on premises business annuity performance in office, a surfer benefited from a greater than expected mix of contracts with higher in Terry and revenue recognition and in linked in the talent solutions business continued to benefit from an improved job market and our consumer business Windows OEM performance was better than expected and a growing.
PC market despite ongoing supply chain constraints. We also saw positive demand signals. The windows 11 ahead of watch with nearly all devices built this quarter eligible for upgrade micra.
Microsoft 365, 6% growth drove office consumer result, advertising market growth drove another strong quarter and linked in as well as search advertising and in gaming, we were able to ship more Xbox series X and S console than expected even as demand continues to succeed.
God bless.
And as to our overall results against the strong prior year comparable commercial bookings grew 11% and 14% in constant currency driven by consistent execution across new add on and renewal sales motions.
<unk> growth was impacted by fewer large long term azure contracts, which are unpredictable and their timing as a result commercial remaining performance obligation increased 28% and 29% in constant currency to $137 billion with a roughly equivalent split between revenues that will be recognized with them.
And the portion beyond the next 12 months and our annuity mix increased two points year over year to 95%.
Microsoft Cloud revenue grew 36% and 34% in constant currency to $27 billion ahead of expectations, Microsoft cloud gross margin percentage decreased slightly year over year to 71%, excluding the impact from the change in accounting estimate pretty useful life server.
Network equipment assets, Microsoft Cloud gross margin percentage increased roughly four points driven by improvement in our cloud services, particularly in Azure and office 365, partially offset by sales mix shift to Azure.
With the weaker U S. Dollar FX increased total company productivity and business processes and intelligent cloud revenue growth by two points in line with expectations more personal computing revenue growth was increased by one point from FX less favorable than expected FX increased cogs by one point in line with expectation.
And had no impact to operating expense slightly more favorable than expected.
Gross margin dollars increased 21% and 19% constant currently gross margin percentage was 70% down slightly year over year, excluding the impact of the change in accounting estimate discussed earlier gross margin percentage increased roughly one point driven by improvements in cloud services had an earlier partially.
Set by sales mix shift to cloud.
Operating expense increased 11% lower than expected, primarily driven by investments that shifted just feature quarters.
At a total company level head count grew 14% year over year as we continue to invest in key areas, such as cloud engineering sales customer deployment and gaming.
Operating income increased 27% and 24% in constant currency and operating margin expanded two points year over year to 45%, excluding the impact of the team's accounting estimate operating margins expanded roughly four points year over year now to our segment results revenue.
From productivity and business processes was $15 billion and grew 22% and 20% in constant currency.
As expected performance commercial and lead Gen.
Office commercial revenue grew 18% and 16% in constant currency office 365, commercial revenue grew 23%, especially 1% in constant currency driven by installed base expansion across all workloads and all customer segments as well as higher Arco.
Demand for our advanced security compliance and voice offerings drove continued momentum in E. Five revenues. This quarter paid office 365 commercial seats increased 17% year over year, driven by another strong quarter of growth in our small and medium business and frontline worker offer.
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Office commercial licensing increased 13% and 14% in constant currency significantly ahead of expectations benefiting from the higher in period revenue recognition that earlier office consumer revenue grew 10% and 8% in constant currency on a strong prior year comparable with better than expected growth.
And Microsoft 365 subscriptions.
Over the past two years, our Microsoft 365 subscriber base has grown over 15%, reaching $54 1 million this quarter.
Dynamics revenue with 31% and 29% constant currency dynamics 365 revenue growth was 48% and 45% in constant currency with continued strong demand for power apps, which grew 202% and 197% in constant currency and in.
Linked in.
<unk> increased 42% at 39% at constant currency with continued strength in marketing solutions and better than expected performance enhance solutions from the improved job market earlier.
Segment gross margin dollars increased 22% at 20% in constant currency and gross margin percentage increased slightly excluding the impact of the change in accounting estimate gross margin percentage increased roughly two points driven by improvement across all cloud services operating expense increased 7% and operating income increased 33.
Percent and 29% in constant currency.
Next the intelligent cloud segment revenue.
Revenue was $17 billion, increasing 31% and 29% in constant currency ahead of expectations driven by continued customer demand for our differentiated hybrid and cloud offerings overall.
Overall server products and cloud services revenue increased 35% and 33% in constant currency Azure and other cloud services grew 50% and 48% currency ahead of expectations driven by our consumption based services.
Pretty user business, the enterprise mobility and security installed base grew 30% to over 196 million seats.
Our on premises business on a low prior year comparable revenue increased 14% and 13% in constant currency ahead of expectations strengthen our annuity business was driven by healthy demand for our hybrid offerings that include Windows server and sequel server running in multi cloud environment and higher in period revenue recognition.
Including benefit from annuity purchasing ahead of the Windows server 2020 to launch Enterprise services revenue grew 9% and 8% in constant currency driven by growth in Microsoft consulting services and enterprise support services.
Segment gross margin dollars increased 28% to five 6% constant currency and gross margin percentage decreased roughly one point year over year, excluding the impact of the change in accounting estimate gross margin percentage increase roughly two points driven by improvements in azure, partially offset by sales mix shift to azure.
Operating expense increased 13% and 12% in constant currency and operating income grew 39% and 37% in constant currency.
Now to more personal computing revenue.
<unk> revenue was $13 $3 billion, increasing 12% and 11% in constant currency with better than expected performance in windows OEM and gaming.
Windows OEM revenue.
Percent driven by a stronger than expected PC market, particularly in the commercial segment, which has higher revenue per license. These results include roughly seven points of impact from the $210 million revenue deferral related to Windows 11 licenses sold to OEM prior to general availability the deferral was lower.
Expected Oems prioritize upgraded eligible device built early in the quarter.
Windows commercial products and cloud services revenue grew 12% and 10% in constant currency driven by demand for Microsoft 365 surface revenue declined 17% and 19% in constant currency on a strong prior year comparable.
Search and news rabbit advertising revenue ex Tac increased 14% and 39% in constant currency in line with expectations benefiting from the advertising market noted earlier ending.
And in gaming revenue increased 16% at 14% in constant currency ahead of expectations better than expected console supply and continued strong demand resulted in Xbox hardware revenue growth of 166% and 162% in constant currency Xbox content and services revenue.
<unk>, 2% and was relatively unchanged in constant currency against a strong prior year comparable segment gross margin dollars increased 10% and 8% in constant currency gross margin percentage decreased roughly one point year over year, driven by sales mix shift to gaming hardware operating expenses increased 15%.
Driven by this panamax acquisition as well as Windows 11 marketing.
Operating income grew 7% and 5% in constant currency now back to total company results capital expenditures, including finance leases for $74 billion in line with expectation and cash paid for PP&E was $5 8 billion, our capital investments, including.
The new data center regions and expansion in existing regions continue to be based on significant customer demand and usage signals cash.
Cash flow from operations was $24 $5 billion, increasing 27% year over year, driven by strong cloud billings and collections free cash flow was $18 $7 billion up 30% year over year.
This quarter other income and expense was $286 million higher than anticipated, primarily driven by net gains on investment as a reminder, we are required to recognize mark to market gains or losses on our equity portfolio.
Our non-GAAP effective tax rate was approximately 16% and finally, we returned $10 $9 billion to shareholders through share repurchases and dividends.
Now before we turn to our outlook I'd like to provide a couple of reminders first the outlook, we get them unless specifically noted otherwise is on a U S dollar basis.
Second my remarks for the next quarter do not include the impact from the nuance acquisition, which we now expect to close by the end of Q2 or early Q3.
With that let's move to our second quarter outlook in our commercial business, our differentiated market position compelling solution portfolio and consistent execution should drive another strong quarter.
Commercial bookings growth should again be healthy, but impacted by modest growth in the Q2 expiry base and the normal quarterly volatility from large long term azure contracts previously discussed.
Microsoft Cloud gross margin percentage decreased roughly two points year over year, excluding the impact of the change in accounting estimate previously discussed Q2 gross margin percentage will increase roughly two points driven by continued improvement across our services despite revenue mix shift to azure.
Longer term, we expect the Microsoft cloud gross margin percentage to be impacted by revenue mix shift to Azure increased usage of our Microsoft cloud services and ongoing strategic investments to support our customer success.
And on a dollar basis, we expect capital expenditures to be roughly in line with last quarter as we continue to invest to support growing demand.
Now the FX.
Based on current rates, we expect FX to increase revenue at a total company and all individuals' segment levels by approximately one point and have no impact on total Cogs, our operating expense growth.
Next to the segment guidance and productivity and business processes, we expect revenue between $15 seven and $15 nine $5 billion in office commercial revenue growth will again be driven by office 365, but they see growth growth across customer segments and continued momentum in <unk> five.
In our on premise business, we expect revenue to decline in the high teens consistent with the ongoing customer shift to the cloud and office consumer we expect revenue to grow in the mid teens with continued momentum in Microsoft 365 consumer subscriptions.
A strong job market and continued engagement on the platform should drive revenue growth in the mid 30% range and in dynamics, we expect revenue growth similar to Q1, driven by strength in dynamics 365, including continued momentum and power apps.
For intelligent cloud, we expect revenue between $18, one and $18 three $5 billion revenue will continue to be driven by Azure, which as a reminder, can have quarterly variability primarily from our per user business and from in period revenue recognition, depending on the mix of <unk>.
<unk> and.
Q2, we expect healthy broad based growth in our Azure consumption and then consistent with recent trends and our per user business, while continuing to benefit from Microsoft Microsoft 365 suite momentum should see a moderation in growth rates given the size of the installed base and our on premises server business on.
A higher prior year comparable we expect revenue growth in the mid single digits driven by continued demand for our hybrid solutions.
In enterprise services, we expect revenue growth to be in the high single digits.
In more personal computing, we expect revenue between 16.35 and $16 $75 billion. Despite ongoing supply chain constraints OEM revenue should grow low to mid teens, including six points of impact from the $210 million Windows 11 deferral.
That shifted revenue from Q1 to Q2 and.
In Windows commercial products and cloud services customer demand for Microsoft 365, and our advanced security solutions should drive low double digit growth.
And surface, we expect revenue to decline single digits as we continue to work through supply chain uncertainty, particularly in our premium devices.
And search and news advertising ex Tac, we expect revenue growth in the low to mid twenties is supply chain uncertainty reduces advertising budgets, our results will be negatively impacted and in gaming on a high prior year comparable that included the launch of our new consoles and strength across Xbox.
Content services, we expect revenue growth in the high single digits console sales will continue to be impacted by supply chain uncertainty and Xbox content and services, we expect revenue growth in the mid teens and strong engagement on Xbox platform and our holiday quarter that will include several AAA title launches.
Now back to the company guidance, we expect Cogs of 17% to $17 $2 billion in operating expense of 12, 7% to $12 8 billion.
Other income and expense income expense should offset each other and finally, we expect our Q2 effective tax rate to be approximately 17%.
In closing.
We are off to a strong start in FY 'twenty, two with tremendous opportunity to drive sustained long term revenue growth.
We remain focused on growing high value users across our.
<unk>, Microsoft cloud offerings, and delivering exciting new consumer experiences with windows 11 surface or Xbox gaming platform as we enter the holiday season.
Our consistent approach to investing for these and other future opportunities, while continuing to deliver solid operating performance will drive strong results throughout FY 'twenty, two and beyond now Brett let's go to Q&A.
Thanks, Amy we'll now move over to Q&A out of respect for others on the call. We request that participants. Please only ask one question.
Operator can you please repeat your instructions.
Absolutely if you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Keith Weiss with Morgan Stanley. Please proceed with your question.
Excellent. Thank you guys for taking my question and congratulations on another remarkable quarter Saturday I was hoping you could talk a little bit about the edge computing opportunity something that you started off your remarks with and also something that we're hearing a lot of chatter about within the investor community and within the technology community can you talk to us about how you think about that.
Sizing that opportunity in terms of the programmable edge and maybe help us understand the Microsoft architectural approach versus perhaps some of the competitors coming into the marketplace and CDN perspective, who are talking about the competitive differentiation by having a more of them last mile solution can help us kind of understand the differentiation in those approaches.
Thank you so much Keith.
A great question, because we've always as you know keep it off.
Architected Azure for the distributed computing fabric to remain distributed in other words, when we talked about hybrid computing, even five years ago. The idea was always that we will always have a cloud and then we will have a distributed cloud infrastructure for application deployment. So the when we think about cloud plus <unk>.
<unk>, we even put even the multi cloud control plane in there right. So whether it is what's happening with say five G and how naturally compute will go to where data is getting generated with low latency access to a factory floor to a hospital.
Cities, where you want to play X cloud gaming, that's sort of one phenomena. The other is just literally treating every cloud whether it's the on premise data center. It's the other public cloud in a public cloud and being able to use azure arc and its control plane to ease the deployment across all cloud. So that's another thing that we're seeing.
So when I think about what.
What he is going to be key in such a distributed world is.
Having that full suite of application infrastructure right all the way from the management and security control plane, something like Azure active directory managing the security principles.
And identities, all and two management control planes like Azure arc, and so we feel well positioned for it.
And I think that the multi cloud multi edge world is sort of really how we built azure in the first place and I think we're still very early and all of that playing out, but we feel well positioned.
Excellent. Thank you guys.
Okay.
Yeah.
Thanks, Keith Operator next question please.
Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
Amy commercial bookings up 14% impressive, but it's slowdown from last quarters 25 against the.
More difficult comp I think you had mentioned some color around azure and the size and duration can you just maybe anything else you would call out there.
Unrealized realize it's I'll come off of tough comps.
Thanks, Brent Yeah, I think the important thing when you think about bookings performance is to talk about what happened before you get to those vol.
Volatile large azure commitments that create some of the tough comparables that we're talking about and that's really the opportunity to execute against selling.
The Microsoft day to day, a rate, which is dynamics Microsoft cloud.
Get hub in the broader universe, our execution on that was actually quite good.
Very good renewal very good recapture rates very good add ons, meaning you sell outside of the normal.
Pattern and so I feel very good very good.
<unk> execution to your point, Brett on this quarter versus others.
You know, it's sort of important not to time some of these larger long dated.
Azure contracts that where the volatility is the day to day execution of Azure commitments actually was very consistent the volatility comes with some of the bigger things in a way.
A lot of them in Q4 are less on a comparable basis and he wanted and that happens from time to time.
Thank you.
Yeah.
Thanks, Brent Operator next question please.
Our next question is coming from Karl Keirstead with UBS. Please proceed with your question. Thank.
Thank you Amy heading into this Q1 release I'd say, there was a higher than normal level of worry from investors about your windows PC segments in light of all of the unit shipment and supply chain issues and yet you put up a windows OEM number that blew away your guidance and your guidance for <unk>.
The Windows OEM business in December was also I think way above what people are modeling. So I guess in essence, how did you dodged that bullet Amy maybe you could unpack that OEM performance for us and in your view into the second half of the fiscal year. Thank you.
Okay.
Thanks Carl.
To start by saying and repeating something that talked to I think it was careful to include in his remarks and it is the central nature of the PC to really the nature of those.
Hybrid work and fundamentally about getting jobs done.
And I think the central role, let's play we've talked about I think now for a number of quarters and I think the reality of that continues to exist I think become more real for people as we as we talk about what hybrid is going to look like and continue to learn what type is going to look like and to that end.
P sees the market grew this quarter and it was constrained by supply.
I believe Q2 will also be a strong demand quarter.
And that is constrained by supply, but even with that we see a growing market and in particularly in both Q1 and Q2, we see a strong demand in the commercial segment.
That ties directly back to some of <unk> comments about the central nature of the device.
Then of course, we do get some benefit Karl because our revenue per license is higher in commercial than it is in the in the broad market those things together, which is a growing market.
Strong windows performance within that market in commercial in particular, and then the resulting higher revenue per license our results and I think a very strong.
In Q1 in Q2.
Got it congrats on that result, Amy.
Thank you.
Thanks, Karl Operator next question please.
Thank you. Our next question is coming from the line of Mark <unk> with Bernstein Research. Please proceed with your question.
Thank you very much and such Amy congratulations on the.
Really strong quarter with inflation at least in the U S increased sequels and likely to further accelerate due to government spending Amy how do you think this increasing inflation will impact your customers and your business is south here in your remarks. He discussed how digital is deflationary and inflationary world can you give more color on how.
The shift to cloud and digital offset inflationary pressure beyond purely pricing. Thank you.
Yeah, maybe I'll just start and then Amy you can add to it.
In an inflationary environment. The first place every any business should go to is how to really ensure that they're able to get productivity gains.
And even dealing with constraints for example, if you have supply chain constraints one of the things you want to do is run your factories at the efficient frontier that means things like digital twin simulation are the ones, where youre going to make sure that every production run has the least amount of weight stage. So I think any which way you look whether its in.
The knowledge worker first line workers, whether it's actually digital twins and stimulation.
All of those things are going to be the best way for any company to deal with inflationary pressures. So that they can in fact have.
The best productivity and thereby the best ability to be able to meet aggregate demand out there. So that's why we are very very excited about sort of making sure our software products are.
Our available to our business customers all around to be able to manage through this inflationary environment and I'll, let Amy add to that.
Yeah. Thanks, all of you and I think really thought he got to the heart market, where I tend to go when you think about.
When you see the intensity.
Of.
Customers across industries and across geographies wanting to adopt digital technology for many of the reasons. The stock you just explained in the and there's numerous scenarios across I think most industries.
That acceleration of course, regardless frankly of the overall environment is a place where we feel like we offer the best.
Portfolio with the Microsoft cloud and with our industry clouds. So it makes that doable with a very fast time to value.
And so our ability to execute against that regardless of the spend environment means when you've got the right portfolio and a high value to.
Customers, that's deployable quickly they can get them results when they need it and I think that's reflected in most of the surveys.
That really quite to a preference for our cloud to help customers do that so well.
Of course, it's hard to predict what any quarter or second half will do the things I believe to be sustainable or a push to digital our push to cloud that help customers get value quickly and us being a trusted advisor and partner to help that happen.
Thank you that's extremely helpful. I appreciate it and congrats again.
Thanks, Mark Operator next question please.
Our next question is coming from the line of Kash Rangan with Goldman Sachs. Please proceed with your question.
Alright. Thank you very much great quarter, you gave us great useful perspective on inflation I'm curious if you can expand your thoughts.
On the labor shortage were saying in the tech market. How are you dealing with that and also a little bit more of a deeper perspective on supply chain and how does Microsoft get visibility considering that you're growing your cloud business and your capex commitments seem to be quite impressive how much visibility do you have into the component availability and.
Your ability to ramp up your capex. Thank you so much.
Thanks, Josh for the question so on the labor market, maybe I'll start Amy you can add to this.
All up the first place where we are very very focused on is to making sure that with Linkedin, we're doing everything to help everyone find their best economic opportunity I, then when Ryan Rhodes Lonski I was the CEO of Linkedin talks about the great reshuffle I think.
Along with the hybrid work chain.
Change there is a real question everybody's asking not only where and how they work, but why they work and so to be able to make sure.
We can help them find the opportunity that they're looking for is I think the most critical work that we can be doing the second side to this though is also to take the productivity of the people whether they're on the front lines in the first line workers or the knowledge workers or even software developers and making sure that they have the best tools whether they're.
The Github harness and visual studio code for people, who are developers or whether it is a power apps or whether it is.
The office 365, and then Microsoft 365 tooling to help them be most productive that's I think the thing that we're very very focused on because key to dealing with labor shortages as productivity gains and.
That plus the work we're doing in Linkedin is where we are focused on so with that Amy I'll hand, it over to you.
Thanks Scott.
And caches you as you probably noted I did talk about this quarter, we did add a year over year or 14% head count growth.
That's important because when you talk about how what and why we do remain focused on being a great employer to help people achieve those goals and be able to achieve them here.
Secondly, you asked some good questions about the supply chain impact and specifically around data center, given our spend in this quarter and my guidance it should be similar next.
A lot of that cash is long lead time.
So we do have good understanding of lead times required.
To meet the capacity and signals that we're seeing them I think we do a good job good job managing that is not to say were not impacted.
Multiple suppliers are important to be able to manage through that and I feel the team has done a very good job in terms of specific impacts.
Did it.
And so in my remarks, I do think demand will exceed supply in Pcs and surface for us.
This quarter, particularly in premium devices and consoles for Xbox and another event of another challenge I noted it will just be a well just need to watch the advertising market through the quarter, because obviously their willingness to spend is is entirely connected to their to their suppliers.
Well.
Brilliant thank you so much.
Thanks, guys. Operator next question please.
Our next question comes from the line of Raimo <unk> with Barclays. Please proceed with your question.
Thank you.
Could you speak a little bit too.
In your remarks, you talked a lot more about the hybrid cloud and how serve them towards does that keep seeing a lot of benefits from that what are you seeing on the client thought about that dynamic in terms of you know.
People moving to the cloud and kind of workloads migrating over to you on himself that serve them towards versus actually kind of that debt being a net benefit for you. It seems like the pendulum swing the other direction for you somehow.
Some help there would be thank you.
Okay.
Maybe I can talk.
A bit to sort of what you're seeing.
Let's take the most I would say the classic model of lift shift and modernize motions, which is I think at the core of hybrid cloud.
That's still it still early innings. So every day I wake up to talk to customers, we're planning out that.
That motion and making sure that they're able to modernize that entire application portfolio.
In various ways. So that obviously is still very very strong the interesting thing for us even in that context is.
Even in the height of our success in the client server era, we really were never a tier one company that is now we are in the sense that you take all the S&P workloads that are running on Azure, which I talked about our other tier one workloads that are migrating whether its HBC our transactional database workloads. So that's the other thing which is happening is.
Real production workloads moving over.
And then on the data estate, that's the place where perhaps we're seeing significant traction and I referenced that in some of my remarks, all the way from what's happening with the operational data stores like Cosmos, DB with synapse linked to synapse or power bi to synapse or in fact dynamics 365 data worse to synapse, so there's tons and tons.
<unk> of coming together off the data estate with for example, regulatory requirements now there you need to have real governance on data that's red Azure per view becomes again, a pretty big driver of that data gravity to the cloud from a governance perspective. The other side of this is what's happening.
With Dev tools right when you start having you'll see ICD to your cloud and modern new applications.
And the agility with which you bill so with good harvest code, becoming essentially default for any modern Bev shop.
In the enterprise or otherwise that's the other thing that we see but perhaps more than anything else.
The interesting circuit for US is what happens with teams very good teams do you suddenly now have a new platform in which applications get hosted whether it's developed by the enterprise or by a third party and I referenced that in my remarks, and those applications in many cases get built on a cloud use things like Azure DB use things like power.
Platform.
And so the reinforcing and compounding side of teams to power apps dynamics to Azure is probably one of the most of the unique things. We are seeing in terms of new applications getting built and then there is the cloud plus edge, which I referenced in the answer to the first question, which is in a multi cloud.
Multi edge World you still need a control plane that manages all that complexity, and that's where something like Azure arc.
And and Github become the two standards you develop in one place you deploy in one place and then you propagate through every cloud that he wanted to deploy it.
And Raimo.
But yes, you may have been asked me also just about the nature of some of that comes out was making about on Prem server resolved it really points to hybrids shrinks. That's the way I tend to think about it and whether that's the fact that people are committed to windows and sequel server and.
They run that in azure or whether they run it in a multi cloud environment. It's a commitment to the platform and so I just wanted to make that probably more clear as one of the one of the drivers of our server products and cloud K P. I our execution this quarter.
Perfect. Thank you very clear congrats.
Thanks, Paolo Operator next question please.
Our next question comes from Brad Reback with Stifel. Please proceed with your question.
Great. Thanks, very much. So recently several of your tier one is size has talked about having trouble hiring fast enough to keep up with demand and clearly your results sort of speak to that but as we look going forward have you seen any early indications that customers are potentially having to slow down the pace with which they are.
Move to your commercial cloud.
Sure.
I mean, I sort of point to Amy guide for the next quarter as far as we are sort of looking at is the.
The demand across the entire stack is pretty robust and obviously what happens in the labor market, whether it's in the tech labor market or any other labor market will ultimately be something that we will all be subject to but.
The thing at least about the software businesses are in order to deal with a lot of other constraints, whether they are labor shortages or supply shortages deploy.
Deploying digital Tech is one way to sort of really overcome them. So that's sort of what we see clearly I think in the in the tech sector. Today that is more structural demand then perhaps supply all around.
But we like that position because of the some level. We just want to make sure that we have the most competitive products out there and as long as we continue to do so I think we'll be fine.
Yeah, I do think.
Frankly, Brad and just the signals we're seeing on consumption.
And usage.
Hey.
Customers are doing a good job of figuring out the priority list that delivers value to them, but I thought you sang I do know obviously that are in the labor market has a real impact and I think that's also why you're seeing investments being made by us in particular and.
Into training and skills are.
Making deployment easier make time to value faster are really having documentation that makes getting started and trials are far more.
Accessible and so when you're talking about adding productivity. It's also an investment we at Microsoft need to make and to making our products easier and really terrific to get going.
And so that you're not constrained.
And the way that you're talking about.
That's great. Thank you.
Thanks, Brent operator, we have time for one last question.
Thank you. Our final question comes from Brad Sills with Bank of America. Please proceed with your question.
Oh, great. Thanks, guys for taking my question congratulations on a real nice quarter here such I wanted to ask about comments you made earlier in the call around investments coming in new releases coming for some of the industry cloud financial services manufacturing how do we how should we view. This should should we think of the Azure business results kind of driven increasingly by these music.
Industry cloud type solutions away from horizontal type projects like ERP.
Database, that's obviously been there but is this an incremental opportunity that's coming that.
But we should be thinking about thank you so much.
Yes. Thank you for the question absolutely we think of the Microsoft Cloud, which includes Azure. It includes dynamic 365. It includes Microsoft 365 and includes things like power platform that includes even get hub in V. S code. So that's why we keep stressing the full modern tech stack that may.
Microsoft Cloud and then with the industry cloud, we add value on top of that which is specific whether it's in retail whether it's a manufacturing obviously in health care.
And our pending nuance acquisition will add further to that so obviously, we are very very focused on first of all not any just one piece, which we each one of those has to be competitive on their own. It's the coming together of the Microsoft Cloud and then the industry cloud adds further value on top of it so yes, I think ultimately.
Our competitiveness comes because of all of those layers integrated and delivering that time to value for our customers, while maintaining openness in each layer and competitiveness in each layer.
That's great. Thanks Roger.
Thanks, Brad that wraps up the Q&A portion of today's call. Thank you for joining us today, and we look forward to speaking with all of you soon.
Thank you.
Yeah.
Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.