Q2 2022 Microsoft Corp Earnings Call
Driven by continued strength of the Microsoft cloud, which surpassed $22 billion in revenue up 32% year over year.
We are living through a generational shift in our economy and society digital technology is the most valuable resource are the world's disposal to overcome constrains and re imagine everyday work and life.
We are innovating and expanding our entire portfolio across consumer and commercial segments to help people and organizations thrive in this new era.
Now I'll highlight examples starting with Azure.
As every company becomes a digital company they will need a distributed computing fabric to build manage secure and deploy applications anywhere.
We have more data center regions than any other provider delivering fast access to cloud services, while meeting data residency requirements, we are extending our infrastructure to the five <unk> network edge, helping operators and enterprises create new business models and deliver ultra low latency services closer to the end.
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AT&T for example is bringing together, it's five G network with our cloud services to help general Motors deliver next generation connected vehicle solutions to drivers.
Our Azure arc customer base has tripled year over year.
We are now helping thousands of organizations from BP to rabobank unify their on premise hybrid and multi cloud infrastructure.
And as the digital and physical worlds come together, we're seeing real enterprise meta versus usage from smart factories smart buildings to smart cities, we're helping organizations use the combination of Azure Iot digital twins and mesh to help digitize people places and things in.
Order to visualize simulate and analyze any business process. Ecolab. For example is using these tools to build its own platform to model and optimize water management.
Across Azure, we are seeing growing adoption across every sector Cvs health Johnson <unk> Johnson medical devices can draw and Wells Fargo, All chose our cloud as their preferred provider this quarter.
Now onto data from best in class databases, and analytics to AI and data governance, we have the most comprehensive data stack to help every organization to earn its data into predictive analytical PA Cosmos DB is the database of choice for cloud Native App development at any scale.
Data volumes and transactions increased over 100% year over year with Azure synapse, we're removing traditional barriers between enterprise data warehousing and big data analytics. So anyone can collaborate build and manage analytics solutions.
Data governance is emerging as an important and growing category and Azure per view is leading here, helping thousands of organizations achieve a more complete understanding of the data estate.
AI, we have one of the most powerful supercomputers in the cloud and we're using it not only to train new models, but to deliver them as platforms to our customers our new Azure open AI service isn't preview and that brings together advanced language models with the enterprise capabilities of Azure.
Get a co pilot is using this capability to help developers write better code.
More broadly we continue to see strong usage across our cognitive services with over $30 million. So speech transcribed last quarter up nearly <unk> compared to a year ago.
Now to developers from Github to visual studio to Azure Paas services, we have the most popular tools to help every developer.
Going from idea to code and code to cloud.
As companies prioritize embedding security into their developers workflow, we're investing across github to secure open source incur.
Increasingly every Dev ops workflow will start with Github advanced security and we are seeing strong demand from both digital natives like after pay and Mercury as well as established companies like <unk> and Bosch and organizations are increasingly turning to both visual studio and a paas services.
Like container apps and chaos studio to streamline development and build modern more resilient cloud native applications.
Now to power platform low code no code tools are rapidly, becoming a priority for every organization digital capability building.
We are innovating to help organizations like Airbus Centrica and Johnson controls rapidly scale their use of power platform using end to end suite to automate workflows create applications build virtual agents and analyze data.
At <unk> more than 30000 employees have use power platform to drive productivity gains.
Created more than 1500 applications flows and dashboards to date for everything from managing office capacity to tracking team goals and at Kroger more than 420000 associates are using a return to workplace solution, which is built on power platform to ratify their health and vaccination status.
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Now on to dynamics 365.
To counter demand shocks and supply constraints in this economy every business will need to become a hyperconnected business unifying data process and teams across the organization.
Our cross dynamics 365, we continue to take share as companies turn to our expanding portfolio of business applications to address these and other challenges.
With dynamics 365 connected spaces, we are creating a new software category to help organizations manage physical operations across diverse industries from real estate to retail to factories and construction.
<unk> like Chipotle and home depot are relying on a new customer experience platform to take control of their data connecting customer touch points to deliver more personalized experiences.
Daimler trucks, North America is using dynamics 365 supply chain insights to preempt supply chain issues, and just yesterday, we announced a new logistics as a service offering with Fedex combining data and insights from the company's network with dynamics 365 to help brands better fulfill shipment service customer orders.
Now on to industry solutions, just over a year ago, we introduced our first industry cloud offering, bringing together our industry specific customization with our entire stack to help customers improve time to value increase agility and lower costs. We now have six industry clouds and they are driving.
Significant increases in usage across the Microsoft cloud.
For retail was front and center at <unk> and retailers from a wholesale delays in GNC share.
Sharing how they are using our solutions to deliver seamless customer experiences.
Our cloud to sustainability unifies data to help customers record report and reduce their carbon emissions industry leaders, including Nissan motor are turning to the offering to help meet sustainability goals.
Now on to Linkedin.
We are experiencing a great reshuffle across the labor market is more people in more places than ever rethink, how where and why they work in this new economy Linkedin has become mission critical to connect creators with their communities job seekers with employers learners with skills and sellers with buyers.
Last quarter, we once again saw record engagement and Linkedin has become one of the world's largest platform for professional events with more than 24000 events created in $1 5 million artist Rsvp's each week.
Confirmed hires were up 110% year over year, and we've added tools to make it easier to discover open roles that align with how and where people want to work with entrepreneur ship on the rise our new service marketplaces.
Nearly 3 million freelancers, and small businesses discover new clients.
We also saw strong growth in Linkedin sales solutions, which surpassed $1 billion in revenue over the past 12 months for the first time our sales.
Sales talent marketing and Premier subscriptions lines of business have all now reached this milestone.
Now on to Microsoft 365 and teams.
Reorganization today needs of digital fabric to connect and empower everyone inside and outside the organization from knowledge and frontline workers to customers and partners at the center of this digital fabric is teams, which surpassed 270 million monthly active users this quarter.
Organizations are using teams to run their business with collaborative applications that bring business processes data right into the flow of work monthly usage of third party applications and custom built solutions has grown 10 X in the last two years with new and updated apps this quarter from Atlassian Monday Dot com.
SAP and workday.
United Airlines is using box within teams to create tighter connections between operations and flight crews and marks <unk> Spencer's uses power apps and teams to streamline internal helpdesk requests as.
As hybrid work becomes the norm every organization will need to rethink their approach to space with teams rooms, we are bringing teams to a growing ecosystem of devices to help people stay connected and participate fully in meetings from anywhere the number of active teams room devices.
It's more than doubled year over year and with mesh for teams, we're bringing the <unk>, helping employees that organizations like Accenture access assured immersive experience, where they can have water cooler type conversations and even white boarding sessions.
Teams is rapidly becoming the standard for unified communications over 90% of Fortune 500 companies use teams formed this quarter and we continue to take share across PSTN and Voip as organizations like bank of Montreal, Chevron General Motors, Elvia, Mitch and net App turn to <unk>.
<unk> to meet their internal and external collaboration needs.
All up we are seeing teams growth in every segment from frontline worker usage up two X year over year.
Zebra technologies will bring team's walkie talkie communications to devices used by millions of employees on retail floors, and Walmart chose teams for their more than 2 million frontline workers this quarter.
And we are expanding our opportunity with teams essentials. The first standalone teams offerings, specifically designed to meet the needs of small businesses. It's early days, but we are very encouraged by the strong demand.
With Microsoft we are creating a new employee experience category, combining communications knowledge learning resources and insights to help people feel connected to the company's mission and culture.
Now broadly available Veeva is being used by more than 1000 paid customers, including bloom nationwide and Rei to help address challenges like employer burnout and retention.
All this innovation is driving growth across Microsoft 365 from Heineken to Hilton to Zurich insurance organizations continue to choose our premium <unk> offering for advanced security compliance voice and analytics.
Now on to Windows.
We've seen a structural shift in PC demand.
More than ever people are turning to Pcs to exercise their agency and unleash their creativity, whether it's meeting and virtual reality offer remote work writing code are collaborating and documents live streaming video or playing games offer graphic design and engineering design as new use cases are born every day.
And existing ones see a resurgence we are experiencing a PC Renaissance with increase in time spent on PC and PC per household.
Three months in we are delighted by the response to Windows 11, we're seeing more usage intensity and higher quality than previous versions of our operating system and Windows took share. This quarter, we are delivering windows and new ways to meet evolving customer needs. This quarter, we introduced windows 11.
<unk> cloud first operating system purpose built for schools and with Windows 365, we are bringing the operating system to the cloud helping businesses like coats North America, and Regeneron Pharmaceuticals stream the full windows experience to any employee device.
There are now more than one 4 billion monthly active devices running windows 10, or Windows 11, and they are a powerful on ramp for both our first party and third party services rendered.
Windows 11 users engage with the Windows App store at nearly three X the rate of Windows 10.
And across being an edge, we are creating differentiated high value experiences for consumers and advertisers in key verticals, including shopping.
Just one year since the launch of coupon and price comparison features in edge, we already have surface more than $800 million in savings.
More broadly we are expanding our opportunity and advertising.
Over the past 12 months, our total advertising revenue inclusive of Linkedin surpassed $10 billion ex Tac.
And with our acquisition of vendor, we will bring to market new advertising solutions that combine our deep audience understanding and customer base with vendors large scale data driven platforms.
Now on to security.
<unk> crime is the number one threat facing every business today.
Our aim is to help organizations implement a comprehensive zero trust architecture that protects people devices applications and data holistically across the heterogeneous cloud and client environments.
Protect our customers in two interconnected ways first we incorporate security by design into every product, we build and second we deliver advanced end to end Cross cloud Cross platform security solutions, which integrate more than 50 different categories.
Cross security compliance identity device management, and privacy informed by more than 2004 trillion threat signals, we see each day.
Analysts we are a leader in modern more security category is now 19 than any other provider.
<unk> cloud multi platform innovation is driving growth across commercial and consumer more than 1 billion monthly active users now rely on Microsoft account to securely access favorite App products and services with just one login.
More than 15000 customers now use our cloud native same Microsoft Sentinel to stop threats before they happen up over 70% year over year and all up the number of customers that use our advanced security solutions accelerated this quarter to over 715.
More than half have four or more workloads up 75% year over year underscoring our end to end differentiation.
On average customers save 60% compared to multi vendor solutions.
As a result of our customers Trust, our security business revenue surpass $15 billion over the past 12 months up nearly 45% year over year.
Now on to gaming.
The big bets, we have made across content community and cloud over the past few years are paying off.
Saw record engagement as well as revenue this quarter game pass has more than 25 million subscribers across PC and console.
Differentiated content is driving the services growth and we released new AAA titles. This holiday to rave reviews and record usage.
$18 million of played Forza horizon, five to date and more than $20 million have played halo infinite, making it the biggest haler launch in history and with our planned acquisition of Activision Blizzard announced last week, we're investing to make it easier for people to play great games wherever whenever and however, they want and also.
Shape what comes next for gaming as platforms like the matter was developed.
In closing as digital technology as a percentage of global GDP continues to increase.
We're innovating and investing across a diverse and growing Tam with common underlying technology stack.
And an operating model that reinforces our calling strategy culture and sense of purpose.
That I will hand, it over to Amy who will cover our financial results in detail and share our outlook and I look forward to rejoining you for questions.
Thank you Scott and good afternoon, everyone. This quarter revenue was $51 7 billion up 20% year over year earnings per share was $2 48.
Increasing 22% U.
The U S dollar strengthened during the quarter and as a result, FX had no impact on total company and segment revenue growth.
Was a one point headwind compared to expectations.
Despite this we delivered another quarter of strong double digit revenue growth in each of our business segments, reflecting our unique and differentiated market position across a connected portfolio.
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In our commercial business strong execution by our sales teams and partners combined with continued demand for our Microsoft cloud offerings drove significant growth in large long term azure contracts as well as increased usage of teams and alright, and security and identity offerings.
And Linkedin.
Physicians benefited from a strong job market again this quarter.
In our consumer business increased PC demand and usage is thought you highlighted benefited our windows OEM business continued advertising market growth drove another strong quarter and Linkedin marketing solutions as well as searching is advertising.
And a strong holiday quarter for gaming, we saw record revenue and engagement on the platform with significant growth in game pass subscribers and first party titles as well as continued demand for Xbox series X and S consoles.
Now to our overall results.
Commercial bookings grew 32% and 37% in constant currency significantly ahead of expectations driven by the large long term azure contracts earlier and strong execution across our core annuity sales mission <unk>.
Commercial remaining performance obligation increased 31% and 2% in constant currency to $147 billion.
Roughly 45% will be recognized in revenue in the next 12 months or 26% year over year, the remaining portion which will be recognized beyond the next 12 months increased 37% year over year, highlighting the long term commitment customers are making to the Microsoft cloud.
And our annuity mix increased one point year over year to 94% Mike.
Microsoft Cloud revenue grew 32% to $22 $1 billion again ahead of our expectations.
Microsoft Cloud gross margin percentage decreased slightly year over year to 70%, excluding the impact from the change in accounting estimate for the useful life of server and network equipment assets, Microsoft Cloud gross margin percentage increased roughly three points driven by improvement across our cloud services, partially offset by sales mix shift to.
As noted earlier with the strengthening U S dollar through the quarter FX had no company, our segment revenue growth impact and minimal impact on Cogs and operating expense growth gross margin dollars increased 20% gross margin percentage was 67% relatively unchanged year over year exclude.
The impact of the change in accounting estimate gross margin percentage increased roughly two points driven primarily by the improvement in our cloud services.
Earlier.
Operating expense increased 14% lower than expected, primarily driven by investments shifted to future quarters.
At a total company level head count grew 16% year over year as we continue to invest in key areas such as cloud engineering sales customer deployment gaming and Ken.
Operating income increased 24% and operating margins expanded one point year over year to 43%.
Excluding the impact of the change in accounting estimate operating margins expanded roughly three points year over year now to our segment results.
Revenue from productivity and business processes was $15 nine.
$1 billion and grew 19% year over year, which included a one point FX headwind relative to expectations. Excluding this headwind revenue exceeded expectations driven by Linkedin.
All of US commercial revenue grew 14% office 365 commercial revenue growth of 19% was driven by installed base expansion across all workloads and customer segments as well as higher <unk>.
Demand for our advanced security compliance and voice offerings drove continued momentum in five revenue this quarter.
Paid office 365 commercial seats increased 16% year over year, driven by another strong quarter of growth in our small and medium business and frontline worker offerings.
Office commercial licensing to pay 17% in line with expectations and consistent with the answer outgoing customer shift to the cloud.
Office consumer revenue grew 15% driven by continued momentum in <unk>, and Microsoft 365, subscriptions, which grew 19% to $56 4 million.
Dynamics revenue grew 29% year over year, driven by dynamics, 365, which grew 45% and 44% in constant currency.
Demand for our modern low code App development solutions drove another strong quarter with 161% revenue growth and power apps.
Linkedin revenue increased <unk>, 7% and 36% in constant currency with continued strength of parking solutions, which grew 43% year over year as well as better than expected performance in talent solutions from a strong job market earlier.
Segment gross margin dollars increased 20% and 19% constant currency and gross margin percentage was relatively unchanged year over year.
Excluding the impact of the change in accounting estimate gross margin percentage increased roughly two points driven by improvement across all our services.
Operating expense increased 13% and operating income reached 24%.
Next the intelligent cloud segment.
Revenue was $18 $3 billion, increasing 26% year over year, which included a one point FX headwind relative to expectations. Excluding this headwind revenue grew ahead of expectations driven by continued customer demand for our differentiated hybrid and cloud offerings.
Overall server products and cloud services revenue increased 29% year over year Azure and other cloud services growth of 46% was driven by continued strength in our consumption based services.
In our per user business, the enterprise mobility and security installed base grew 28% to over 209 million seats.
And our on premises business revenue increased 6% in line with expectations driven by healthy demand for our hybrid offerings that include Windows server and sequel server running in multi cloud environments.
Enterprise services revenue grew 8% and 7% in constant currency driven by growth in enterprise support services and Microsoft consulting services.
Segment gross margin dollars increased 21% and 22% in constant currency and gross margin percentage decreased roughly two points year over year.
Excluding the impact of the change in accounting estimate gross margin percentage increased slightly with improvements in azure, partially offset by the sales mix shift to azure.
Operating expense increased 14% and operating income grew 26%.
Now to more personal computing.
<unk> was $17 $5 billion, increasing 15% year over year with better than expected performance in windows OEM surface and searching this advertising.
Growth included a one point FX headwind relative to expectations.
Windows OEM revenue increased 25% significantly ahead of expectations driven by the strong PC market noted earlier, particularly in the commercial segment, which has higher revenue per license.
As a reminder, these results include roughly six points of positive impact from the $210 million rep to deferral related to Windows, 11, which shifted revenue from Q1 to Q2.
Windows commercial products and cloud services revenue grew 13% and 14% in constant currency driven by demand for Microsoft 365.
Surface revenue grew 8% year over year ahead of expectations as we were able to ship more devices than anticipated into a strong demand environment.
Search and news advertising revenue ex Tac increased 32% better than expected benefiting from strong advertising market noted earlier.
And you saw share gains in our edge browser on Windows, 10, and 11 devices.
And in gaming revenue increased 8% in line with expectations Xbox hardware revenue grew 4% and 3% in constant currency driven by continued strong demand and better than expected console supply on strong prior year comparable that included the launch of the Xbox series X and S.
Xbox content and service revenue increased 10% lower than expected.
Strong growth in first party titles and game pass subscriptions was partially offset by weaker third party titled performance.
Segment gross margin dollars increased 20% year over year gross margin percentage increased roughly two points driven by sales mix shift to higher margin businesses and improvements in search and advertising.
Operating expenses increased 17% driven by investments in gaming, particularly zenimax searching as advertising and Windows marketing operating income grew 22% and 21% in constant currency now.
Now back to total company results.
Capital expenditures, including finance leases were $6 $8 billion up 25% year over year lower than expected, primarily due to quarterly spend volatility in the timing of our cloud infrastructure build out.
Cash paid for PP&E was $5 9 billion, our capital investments, including both new data center regions and expansion in existing regions continued to be based on significant customer demand and usage signals.
Cash flow from operations was $14 $5 billion increased 16% year over year as strong cloud billings and collections.
Partially offset by higher supplier payments related to hardware inventory builds.
Free cash flow was $8 $6 billion up 3% over year, reflecting higher capital expenditures in support of our growing business.
This quarter other income expense was $268 million higher than anticipated, primarily driven by net gains on investments.
The tax rate was approximately 17% 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 my.
My remarks for the next quarter do not include the impact from the nuance acquisition, although we do expect it to close during Q3.
Second the outlook, we give unless specifically noted otherwise is on a U S dollar basis.
With that let's move to the third quarter outlook.
First FX.
With the stronger U S dollar and based on current rates. We now expect FX to decrease total revenue growth by approximately two points and to decrease total Cogs and operating expense growth by approximately one point.
In the segments, we anticipate roughly two points of negative FX impact on revenue growth in productivity and business processes and intelligent cloud and one point in more personal computing.
Next we expect our differentiated market position customer demand for our high value hybrid and cloud offerings and consistent execution to drive another strong quarter of revenue growth in commercial bookings growth should be healthy but.
But we will be impacted by the strong prior year comparable as well as low growth and the expiry base.
As a reminder, the growing mix of larger long term azure contracts, which are more unpredictable and their timing drive increased quarterly volatility in our bookings growth rate.
Microsoft Cloud gross margin percentage should be roughly flat year over year, excluding the impact of the change in accounting estimate Q3 gross margin percentage will increase roughly two points driven by continued improvement across all cloud services, despite revenue mix shift to azure.
And on a dollar basis.
Capital expenditures to be slightly down sequentially with normal quarterly variability in the timing of the cloud infrastructure Buildout.
Next to segment guidance.
In productivity and business processes, we expect revenue between $15 six and $15 $85 billion in office 365 healthy revenue growth will be driven by the same factors as Q2 with similar seat growth across customer segments and continued momentum of the five are on premises business.
Revenue to decline in the high teens with continued customer shifts to the cloud.
In August consumer we expect revenue to grow in the high single digits with continued momentum in Microsoft 365 consumer subscriptions.
Linked in the strong job market and healthy engagement on the platform should drive revenue growth in the low 30% range and in dynamics, we expect revenue growth in the mid 20% range driven by strength in dynamics 365, including continued momentum and power apps.
For intelligent cloud, we expect revenue between $18 75, and $19 billion revenue will continue to be driven by Azure.
As a reminder, can have quarterly variability primarily from our per user business and from in period revenue recognition, depending on the mix of contracts in Azure, we expect revenue growth to be up sequentially in constant currency driven by our azure consumption business with strong growth on a significant base.
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In our per user business should continue to benefit from Microsoft 365 suite momentum, though we expect some moderation in growth rates given the size of the installed base.
On premises server business continued demand for our differentiated hybrid offerings should drive revenue growth in the low to mid single digits and in enterprise services, we expect revenue growth to be in the low to mid single digits.
More personal computing.
Revenue between $14, one five and $14 four $5 billion.
Continued strength in PC shipments, particularly in the commercial segment should benefit windows OEM. Despite ongoing supply chain constraints, we expect windows OEM revenue growth in the high single digits.
In Windows commercial products and cloud services customer demand for Microsoft 365, and our advanced security solutions should drive growth in the low double digits.
Surface revenue should grow in the mid teens with strength from our premium devices.
And search and news advertising ex Tac.
Expect revenue growth in the mid to high teens against a strong prior year comparable that was driven by a recovery in the advertising market.
And in gaming on a prior year comparable that included significant strength in hardware from or the consoles as well as across the Xbox content and services.
We expect revenue growth in the mid single digits console sales will continue to be impacted by supply chain uncertainty.
And in Xbox content and services, we expect revenue growth in the mid to high single digits with strong engagement and continued momentum across the platform.
Now back to company guidance.
Expect Cogs of 15, 5% to $15 7 billion and operating expense of $13 four to $13 $5 billion driven by head count investments in high growth strategic areas to drive continued long term revenue growth.
And other income and expense interest income and expense should offset each other as a reminder, we are required to recognize mark to market gains or losses on our equity portfolio.
And we expect our Q3 effective tax rate to be approximately 18% slightly higher than our full year expected tax rate of approximately 17%.
And finally.
For FY 'twenty, two given our strong performance in the first half of the fiscal year and our current HQ outlook full year operating margins should be slightly up year over year, even with the impact of changes in accounting estimates noted earlier.
And the significant strategic investments, we are making to capture the tremendous opportunities ahead of us.
In closing.
Youll technologies are increasingly essential to empowering every person and organization on the planet to achieve more.
And we are well positioned with innovative high value products.
Our diverse yet connected portfolio of solutions.
<unk> end markets customer sizes and business models.
Meekly, enabling us to deliver long term revenue and profit growth.
With that Brett let's go to Q&A.
Thanks, Amy we'll now move over to Q&A.
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Our first question is coming from the line of Keith Weiss with Morgan Stanley . Please proceed.
Excellent. Thank you guys for taking the questions and congratulations on a very nice quarter.
He is a high level question about the overall demand environment and whether we've seen any changes given.
The disruptions, we've seen from omni crime and in a lot of what's going on in the environment. There has been a narrative amongst all for investors and a lot of time the asset prices. He will lead the narrative I wanted to check in with you guys on how you feel about the overall demand environment, particularly around digital transformation and how durable is that going to be into calendar year <unk>.
Two do you still see a lot of wood to chop. If you will a lot of activity taking place in that direction. Thank you.
Thank you Keith I'll take that and maybe you can add onto it overall, what we see.
Strong demand signal and quite frankly going into the pandemic, we saw demand increase because of the constraints. The pandemic book on corporations are on.
The increased consumer activity and then coming out of the pandemic, we are seeing actually a lot of constraints in the economy and the only resources as I said in my remarks.
That can help drive productivity, while keeping costs down is digital tax so when I think it takes something like power apps is just a great example of something that's right in the middle of a stack.
Really helps drive the next level of productivity in.
In the Labor force for any company in any industry and so the demand signals, we see across the stack from security to our cloud infrastructure to business applications.
Solutions like teams is very strong.
The other area, obviously, we're seeing strength is our end.
In gaming, that's where we have doubled down in terms of our consumer category.
Creation then.
We see the intensity of usage and the business model diversity around games, but increasingly the economics of gaming franchises is also radically becoming much more software like so we sort of overall see good demand.
Demand signals.
Ross the stack.
Got it and to be clear the constraints that you talk about for the broader economy head count constraints and and the like that it doesn't sound like that's constraining your opportunity youre not kind of running short on people to sell or implement your solutions or not having a hard time, finding the people you need to make the inverse.
What's behind the product is that is that the right read through.
I mean, there is definitely a very competitive time in market and we are competitive in that talent market and you see it even in our Opex projections that Amy shared we are growing our head count because we see the opportunity.
We are not immune from.
What happens overall in the labor market, but I think over I think we have.
Good brand and an attractive brand to both to get people in to regain people with everything that we're doing so but at the same time, we do want to make sure that in our channel and our ecosystem remain healthy and all the signals at least we're getting is that there are no constraints per se other than at the end of the day all businesses are going.
Subject to the laws of economic growth in the overall economy.
Thank you very much guys.
Thanks, Keith Operator next question please.
Our next question is coming from Mark Martin Lore with Bernstein Research. Please proceed with your question.
Thank you very much for taking my question and congratulations on the.
The strong growth across the overall business.
Really nice outlook.
Subject given all the commentary on the meta versus what are the key components of the meta versus multiple metal versus.
Youre seeing.
What is what does Microsoft have this today.
We're positioned to be able to deliver to meet those requirements and what do you believe you might be lacking is the partner ecosystem meet those requirements to Amy with the hype cycle underway and increased industry interest in the meta versus are you changing your investments to meet the potential opportunity.
Thank you for the question so the way we see this is as.
As an opportunity and a very classic Microsoft sense, both at the platform infrastructure level and then the application level. So that's why I think even in my remarks, I tried to reference all the places where we're investing today and seeing customer use cases really develop at the firm.
The place where we see this is avi.
The increasing digitization of people places and things to be able to really help businesses automate processes to the next level and so today between Azure Iot digital twins and mesh we have many examples.
<unk>, where customers are engaged with us so thats won't show up in Azure and we are investing significantly they're off the stack I would say dynamics.
365 connected spaces, that's a solution that's been booked previewed today, that's about really being able to take a retail space on a connected factory or a building and essentially create a complete new software category, which is about managing physical processes, just like CRM and ERP and supply chain management, we now have a suite.
<unk>, which is all driven by.
By connected spaces, which is going to automate physical processes teams is going to have mesh meetings. So these immersive meetings, which will stock first and foremost <unk> screens, whether its species of phones and then lead up to even immersive experiences. If you ran your VR or AR goggles. So that's another place and then of course gaming that'll be it.
Natural place for Us and today, if you think about the activity when I talked about the four as our numbers right. I mean, that's a place where you could say already people are investing in there all the power as people are building our main crop was and so very naturally you can see us extend.
Gaming as the meta works evolves.
On the devices side, one of the things we are very excited to be doing is what we're doing with hollow lens and all the experience. We are gaining on the optics on the silicon side and all the way to the cloud in terms of some of the foundational services driven by all the homelands use cases in the enterprise. So that's the broad portfolio, we're going to invest abroad.
The entire tech stack the demand will come in different forms for different categories, but we feel very well positioned.
To be able to catch what I think is essentially the next wave of the Internet right just like the first wave of the Internet allowed everybody to build a website.
I think the next wave of the Internet will be a more open world where people can build their own meta words words, whether their organizations or game developers or anyone else.
And Mark maybe just one.
One one bit of perspective to talk through the answer which is.
I would bring people's attention to the holistic nature in which he answered the question starting at the top for layer all the way up through the importance of content and a player and that the investment will show itself in each component as opposed to maybe in one stand alone.
Our team.
And it's because I think of the transition Satya just talked about it.
If it's that if it's at the platform layer and it applies to all the components, it's better to do that frankly.
Across the teams where they can apply it in the right way and I think that's how I would point to the investment showing itself.
Thank you very much I really appreciate it thanks.
Thanks, a lot operator next question please.
Our next question is coming from Brent Thill with Jefferies. Please proceed with your question.
Amy you really underscored the strength ahead on commercial bookings of 37% many are asking.
Where are you seeing the strength in interior Azure comment for next quarter, obviously, the acceleration, what's giving you the confidence.
Thanks Brent.
Interestingly, a I would not say that there is.
One location Tonight, I would tie that back to the answer actually Saunter you gave to Keith's first question, which is if the underlying driver.
Is digitization.
And our belief that it impacts every industry every end market.
Then you would expect at AR and the nature of the commitments to show themselves on a global basis.
And across end markets and that is in fact, what we saw in Q2.
No I I continually point out these can be a little volatile because.
We really focus on getting the right deal does that matches the customer's holes and.
While we got a lot of those dots are in Q2, it can move around a little bit as I talked about in Q1.
But the execution was very good by.
The sales team this quarter, but I would not characterize any geo or industry as being different or distinct from others.
And for a second let me that connect that as you asked into how to think about the guide for Azure on a constant dollar basis being up sequentially into Q3.
I sort of continually remark that.
It can move around a few points here and there and yet have the consistent signs of consumption.
30.
And we saw that again, frankly, Q1, Q2 Q3 consumption growth by end market by industry by customer size has remained quite steady.
So while you'll see some volatility in that number.
You know increased data usage the data products has really been a strong performer I thought you mentioned some of those in his comments.
So I do think in some ways.
There are connected but I tend to put bookings execution on the azure side.
Into a long term commitment bucket, where customers are picking a partner to help them change the cost structure or the outcome structure that satya talked about and I tend to put these trend lines on azure into a bucket called <unk>.
Are we getting projects and successful projects set up at customers around the world and both of those things, where we're very good by the sales teams.
Thanks.
Thanks, Brent Operator next question please.
The next question is coming from Karl Keirstead with UBS. Please proceed.
Thank you Amy you started the fiscal year guiding to down margins.
Including the impact of the accounting change in two quarters and you are now guiding to up margins.
Even with presumably some reversal of work from home related teeny savings, even with what I'm, assuming is an uptick in labor cost can you unpack that a little bit is it is it sales mix, where some of the high margin businesses like Windows have outperformed love to hear a little color. Thank you.
Thanks, Karl I think it's really a combination of things as it is when you go through our fiscal year.
Really I believe that our execution in a.
Very good demand environment has given confidence our revenue performance has been quite consistent to your point, we have seen some.
Continued upside.
The same strength in gaming, we've seen strength in our Microsoft cloud products, we think that consistency out of dynamics I mean at some level you really wanted to look at the trend lines you'd say this has been a very consistent execution by the team across really most of the business units.
And so if you think about then what goes into confidence is when you start to add heads.
Count and you add head count with goals of RLI and you look at that accountability I feel like the teams have done a nice job, where we've added heads they bid into strong markets.
<unk> well sales teams have done the same and then on top of that Karl I would say theres been good execution on the gross margin numbers I tend to be on operating margin focused.
Communicator with you all and inside the company, but gross margins have also been quite good the teams have executed well on cost per goals through the year.
Got it that's helpful. Congrats.
Thanks.
Thanks, Karl Operator next question please.
Our next question comes from Phil Winslow with Credit Suisse. Please proceed with your question.
Hi team congrats on another great quarter.
Wanted to focus in on office 365, commercial obviously, another strong quarter there, but in terms of revenue, but also see growth in Amy in your commentary you highlighted F&B.
C performance as well as frontline workers in Sacramento, a doubling of the frontline workers, who are here, which is impressive but you also commented on on revenue per user going up I Wonder if you could help us kind of walk through the growth algorithm here called the P times Q because there are different trends going on both the P. In the Q and just sort of how that might be changing going forward versus what you have seen.
Sure Let me, let me take a shot at that one Phil you know this is one where would.
Would you have it is a P times Q that I I think you tried to disclose but theres a couple of currents running through that maybe take a second to walk you through those.
Absolutely on seat growth I think we are encouraged as we.
Focus on more products that are more specific to the unique scenarios that say small businesses and frontline workers and really bringing the value Microsoft 365 to that.
I think you're even seeing that.
It offers like teams essentials, right, where it's at.
Concerted effort to realize the challenges can be different in that part of the market and improving our execution and youre seeing that in continued seat growth.
Over I would say I feel good about those numbers over the past probably six quarters.
With continued good execution on those now however, they'll do often comp.
At lower.
Revenue per month that we would see in our enterprise businesses buying the full suite of products. So in some ways have been very strong fee growth at the frontline worker and small business.
Units do mask some of the progress that we've been making in particular I'm thinking offers in the enterprise.
Value props that are really resonating and five and thought they may bring up some other ones. He mentioned quite a few in his comments a security compliance.
And increasingly voice as a value prop and show.
Sometimes to your point are increasing seats.
Lower average price points can basket of progress that we're making on our peers are in the enterprise.
Great. Thanks keep up the great work.
Thanks, Phil Operator next question please.
Our next question is from Brad Zelnick with Deutsche Bank. Please proceed with your question.
Great Congrats on another record quarter.
Sorry to hear that there is a massive skills gap within the industry and it's particularly acute in cyber security, where I noticed Microsoft's campaign that kicked off in Q2 to help scale and recruit 250000 cyber jobs by 2025, which is quite a bold undertaking can you comment on the extent to which the gap is filled by people.
Versus products in automation and also the extent to which Microsoft sees cyber security as its responsibility versus it being a commercial opportunity that you can continue to monetize.
A great set of questions.
The first one I think it's first and foremost re absolutely need the skills and the people.
And for the people to be more evenly distributed in the broader economy public sector private sector people, who are working on behalf of small businesses because absolute.
Digital tack becomes more pervasive across <unk> as well as O T across the economy I think the cyber threat is just going to be more pervasive and so therefore, we need the people on the skills and people do everything there.
And <unk>.
<unk> power to sort of make sure that that happens in terms of democratizing even.
One acquire these skills, that's kind of we're not that you'd be happy to take a broader definition of what these skills are and how one can acquire the certifications and this is where and what we're doing even with Linkedin.
Very very bullish on on the product side as well like something like Sentinel I do believe for example, we are now doing very large scale AI on all of those are signals that go into our cloud native Sim and that I think is going to help sift through signal from noise and help the productivity of the cyber professionals.
Any organization.
So we are excited about how god workflow gets more efficient.
0.1 of the fundamental responsibilities for us as a platform company is through by design. It's all about shifting left on security and building it in.
The products are.
And if anything when we think about our monetization our monetization is about really recognizing that the real world is not some homogenous Microsoft infrastructure World. It is a multi cloud multi platform world and we will definitely monetize those aspects that we have best of breed solutions in Sui.
<unk> and offerings are and by the way as I said in my remarks, the people who are adopting the Microsoft solutions our savings 60%.
And so to some degree there is real time to value and cost savings for anybody.
Using our solution. So we're going to be very very mindful of our responsibility as you said.
And at the same time, we think we have a security opportunity in being able to secure the entire heterogeneous digital estate of our customers.
Thank you very much.
Thanks, Brent Operator next question please.
Thank you. Our next question is coming from Richie Deloria with RBC. Please proceed with your question.
Wonderful. Thank you so much for taking my questions and nice to see continued strength in the business.
Maybe I wanted to ask a little bit philosophically, a saturday so the pandemic clearly accelerated everyone's timeline to migrate to the cloud even if there wasn't necessarily a big pull forward there I think.
Think about it.
Omicron World, where there is some level of office reopening some visibility into that how should we think about the potential to see maybe another wave or another acceleration of those cloud migrations with that ability to have an office in and have hybrid work maybe walk us through that thank you.
Yeah, I mean, the as I said.
Some of the contours of demand will change for example, one of the.
Our solutions are highlighted is.
Coming out of the pandemic rebuilt and dynamics or supply chain insights module, we were seeing significant demand for what was our customer insights module going into <unk>.
The pandemic because everybody needed to deploy essentially their.
Their online presence and use customer data to be able to reach customers and thats, how commerce happened.
During the pandemic coming out of the pandemic, we were hit with supply chain issues. So supply chain insights became the most important thing so that's where the demand picked up so as I look at our portfolio.
We are seeing a slightly different set of solutions same thing with power platform right and you are sort of saying we have a labor force shortage and we need to do more with less I guess why do you Don do more automation tools, and that's where something like power platform, especially given you can even train your first line workers.
To be able to be app builders and automate workflows, that's proving to be a productivity drivers. So we are seeing differences in demand I think the stable state here would be the structural shift that's happened because of the pandemic combined with even with some of these constraints, whether there is supply shocks or others will hopefully go away.
But the one thing that Ain't going to go away is the need for increasing levels of digitization. Both in terms of tools that people use to improve the productivity of your opex.
And the Cogs you have in your enterprise will probably now have a digital component to it because that's where the leverage of cost will come. So that's what we're betting on is a person I always go back to that simple formula as a percentage of GDP. What is it spend broadly defined and what is it going to be a year from now two years.
From now five years from now 10 years from now it's just going to be more and we've got to do a good job of seeing the trends before that conventional wisdom and gaining share and so that's where we will remain focused.
Okay wonderful. Thank you so much.
Thanks Rishi.
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.
<unk>.
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.