Q3 2022 Microsoft Corp Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Microsoft fiscal year 2022 third quarter earnings Conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Brett Iverson General manager of Investor Relations. Thank you you may begin.
Good afternoon, and thank you for joining us today on the call with me are Satya Nadella, Chairman and Chief Executive Officer, Amy Hood, Chief Financial Officer, Alice Chawla, Chief Accounting Officer, and Keith Dolliver Deputy General Counsel.
The Microsoft Investor Relations website, you can find our earnings press release and financial summary, slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures.
Unless otherwise specified we will refer to non-GAAP metrics on the call.
The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP.
They are included as additional clarifying items to aid investors in further understanding the company's third quarter performance. In addition to the impact these items and events have on the financial results.
All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted we will also provide growth rates in constant currency when available as a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations where it.
Growth rates are the same in constant currency, we will refer to the growth rate only.
We will post our prepared remarks to our website immediately following the call until the complete transcript is available today's call is being webcast live and recorded if you ask a question. It will be included in our live transmission in the transcript and in any future use of the recording.
You can replay the call and view the transcript on the Microsoft Investor Relations website.
During this call we will make forward looking statements, which are predictions projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Actual results could materially differ because of factors discussed in today's earnings press release and the comments made during this conference call and in the risk factors section of our Form 10-K forms 10-Q, and other reports and filings with the Securities and Exchange Commission, we do not undertake any duty to update any forward looking statement.
And with that I'll turn the call over to Satya.
Thank you Brett It was a record third quarter driven by the continued strength of the Microsoft Cloud, which Boston $23 billion in revenue up 32% year over year.
Going forward digital technology will be the key input that powers the world's economic output.
Across the Tech stack, we are expanding our opportunity in taking share as we help customers differentiate build resilience and do more with less.
Now I'll highlight examples starting with Azure.
We are building a distributed computing fabric across the cloud and the edge to help every organization build run and manage mission critical workloads anywhere.
This quarter, we have more customers than ever are simplifying and accelerating their cloud migrations and it's still early days, we are winning tier one infrastructure workloads leaders in every industry from Blackrock to Bridgestone to Lufthansa are all moving mission critical workloads.
Asia and we are the market leader for customers SAP workloads in the cloud a toss chevron Fujitsu and Woolworths all migrated their SVP applications to Azure in recent months overall, we are seeing larger more strategic azure commitments from <unk>.
<unk> leaders, including Boeing Kraft Heinz U S Bank invest back who all chose our cloud to accelerate their digital transformations.
The number of $100 million, plus azure deals more than doubled year over year, and we have seen consumption growth across every industry customer segment and geography.
Now to data and AI, our data stack is unique in bringing best in class operational databases analytics and governance into one integrated data fabric Cosmos DB transactions in data volume increased over 100% year over year for the third quarter in a row.
Synapse data volume more than doubled year over year, and we're seeing strong adoption above U as we help organizations government protect and manage their data estate across platforms and clouds from Deutsche Boerse say two <unk> customers in every industry are using our end to end data platform.
In AI, we continue to see strong usage of Azure machine learning the number of monthly influence requests increased 86% year over year with companies like Pepsico using the service to predict which products are most likely to sell and our Azure open AI service brings together.
Gather advanced language models with the enterprise capabilities of Azure, helping companies like Carmax done customer reviews into customized content for shoppers.
Now to developer tools.
From Azure Dev ops, and Github to visual studio, we have the most comprehensive and love developers SaaS service.
Increasingly every new developer projects starts with our tools, which will studio has more than 31 million monthly active users, including most of the fortune 500, and get up usage is increasing among both independent developers and startups as well as the world's most established enterprises.
90% of the Fortune 100 use Github in fact, Mercedes Benz for example is using Github enterprise to provide a unified development platform for more than 20000 employees to build ship and maintain software.
Now on to power platform power platform has become the leading business process automation and productivity suite for domain experts in every industry.
Our platform surpassed $2 billion in revenue over the past 12 months up 72% year over year, making it one of the fastest growing businesses at scale.
Power apps is the market leader in low code No code App development and power BR has more than 200000 customers and our acquisition of mine. It adds new process mining capabilities, helping organizations identify bottlenecks and opportunities for operational efficiency.
Now to dynamics 365 dynamics 365 is growing faster than the business applications market. Overall for example in a world of supply chain constraints, we are helping companies like cracker barrel and Unilever predict disruptions before they happen.
With like Heineken, and Siemens are turning to dynamics 365 to drive and deliver more consistent and personalized customer engagement and service.
We are leading innovation and new industrial matter words to help companies optimize their operations using technologies, such as Iot digital twins connected spaces and mixed reality applications and we are further differentiating the Microsoft cloud by bringing together dynamics 365 teams and synapse to Usher.
In a new era of collaborative applications that transform every business function and process.
When it comes to industrial six industry clouds are helping customers speed time to value.
Our cloud for health care was front and center at HIMSS last month, where we introduced Azure health data services to unified disparate clinical imaging and Med Tech data Cleveland clinic will use the solution to normalized data from different systems and integrate insights into the clinician workflow.
And with our acquisition of nuance I'm excited about our opportunity to apply the company's deep enterprise AI expertise to accelerate the growth of both nuances business and our industry clouds.
Now onto Linkedin.
Once again saw record engagement is more than 830 million professionals use the platform to connect learn and grow and get hired.
The great Reshuffled, we are seeing our skills first labor market emerge the number of companies using skills filters on Linkedin to fill open roles has doubled year over year and this dynamic labor market hires on Linkedin as increased 88% talent solutions revenue was up four.
<unk>, 3%, marking the sixth consecutive quarter of accelerating growth our marketing solutions business continues to thrive as we offer advertisers high reach and ROI.
And creators are increasingly turning to the platform to establish their voices and grow their communities using tools like newsletter to share content, they're passionate about 28 million members now subscribe to at least one newsletter on Linkedin up 51% over the past quarter alone.
Now on to Microsoft 365 and teams.
The last two years have proven that every organization needs of digital fabric that connects the entire organization from the boardroom to the frontline to customers and partners No company is better positioned to meet this need and Microsoft with Microsoft 365, and teams teams is the most skus and the most advanced.
<unk> platform for work and the only solution with meetings calls chat collaboration and business process automation.
And organizations from enterprises to Smbs are relying on teams to run their business.
Our comprehensive approach reduces complexity and costs.
Microsoft 365 customers can save as much as 60% compared to a patchwork of single point identity productivity collaboration and meeting solutions team.
Teams usage has never been higher we are seeing growth in every segment, including very small businesses with teams essentials teams.
Teams is the leading platform for collaborative apps from Sona to Zen desk that are over 1003rd party apps available the teams App store and companies in every industry, including CBRE Cvs health and the National Health service in the United Kingdom have built custom line of business apps within teams bring.
<unk> business process directly into flow of work and we are adding new growth engines to meet the demands of hybrid work with teams rooms team's fone and Microsoft Veeva team.
Teams room is bridging the gap between people working remotely and those in the office with innovations like front row teams phone with operator connect enables organizations to easily bring their existing calling service to teams total operator connect minutes increased eight X quarter over quarter.
And Veeva has more than 10 million monthly active users at companies like Bloom son marks and Spencer This quarter, we added Linkedin glint employee engagement tool to veeva, ensuring leaders can more easily solicit employee feedback and receive actionable insights.
All this innovation is driving growth across Microsoft 365 organizations across private and public sector, including American family insurance, the Queensland government and Telefonica are increasingly choosing our premium <unk> offerings for advanced security compliance voice and analytics.
Now onto Windows.
The PC has never been more relevant to work life and play the number of use cases is increasing as is the amount of time spent on Pcs more than 100 million Pcs have shipped in each of the last eight quarters and windows continues to take share.
With vendors 11, we continue to see the highest quality scores of any version of the operating system. The enterprises are adopting windows 11 at a faster pace than any previous release with Windows 36, five we are bringing the power of Azure computing to windows computers, enabling businesses like <unk>.
<unk>, Ses and Xerox to screen the full windows experience to any employee device new integrations between Windows 11, and Windows 365 will make it possible to switch between cloud PC in the local PC with a single click.
And we continue to help organizations like AIG Grant Thornton and Sage shift their on premise virtualization services to the cloud with Azure virtual desktop.
In consumer Windows is key to Curating, our content and services to help every person with their everyday tasks from browsing and searching to learning and gaming and shopping all with security and privacy built it we are seeing strong engagement with nearly 500 million monthly active users of our personalized com.
And feed Microsoft stock.
As usage continues to grow we are seeing a flywheel emerge between content consumption and commerce as we generate new opportunities for content creators as well as advertisers and our browser Microsoft edge continues to gain share as we help people save money and shop securely.
Now the security <unk>.
Security is a top priority for every organization undergoing a digital transformation two.
To keep our customers secure rebuild security by design into every product, we sell and we deliver end to end solution spanning security compliance identity device management and privacy across clouds and platforms informed by 'twenty four trillion threat Cigna.
Each day. This comprehensive capability has been critical during the recent world events, and we continue to disrupt cyber attacks and shared threat intelligence with the Ukrainian government as well as other public sector agencies multi cloud multi platform support is central to our approach in security.
We're the only cloud provider with native multi cloud protection for the industry's top three cloud platforms in identity. We now provide permissions management across all clouds Azure active directory is the undisputed market leader with more than 550 million monthly active users in management the number.
Of Windows, Android and iOS devices protected by in June grew over 60% year over year, and we are expanding to new market segments with Microsoft defender for business, which will help keep small businesses secure.
This innovation and differentiation is driving our overall growth all up the number of customers who trust our security solutions grew nearly 50% year over year to 785000, including Citrix Domino's Pizza, Fujitsu Heineken, Petro NAS, who rely on us to protect their multi.
Cloud infrastructure and we have over 15000 partners in our security ecosystem more than anyone else in the industry.
Now on to gaming.
Our ambition is to power gamers to play when and how and where they want.
With our Xbox series S and X consoles, we have taken share globally for two quarters in a row and we are the market leader this quarter among the nexgen consoles in the United States, Canada, UK and Western Europe .
And with X box cloud gaming, we are redefining how games are distributed played and viewed to date more than 10 million people have streamed games. Many of our most popular titles, including flight simulator are now accessible on phones tablets low spec <unk> for the first time our game pass library now includes hundreds of tight.
Across PC and console, including more games from third party publishers. They never before billions of hours have been played by subscribers over the past 12 months up 45%.
And with Azure, we are building the best cloud for game studios of all sizes to build host and grow their games, new capability speed time to development and to help connect players across platforms.
Asia gaming revenue fiscal year to date increased 66%.
In closing we are entering a new era, where every company will become a digital company.
Our portfolio of durable digital businesses in diverse business models built on a common tech stack position us well to capture the massive opportunities ahead with that I'll hand, it over to Amy.
Thank you Satya and good afternoon, everyone.
This quarter revenue was $49 4 billion up 18% and 21% in constant currency earnings per share was $2.22 and increased 14% and 18% in constant currency when adjusted for the tax benefit from the third quarter of fiscal year 'twenty one.
Several items impacted our financial performance that were not included in the guidance provided on our January earnings call first nuance.
My comments today across Q3 results and Q4 outlook include the impact from the nuance acquisition, which closed on March the fourth our results include $111 million in revenue and a negative impact to earnings per share, including purchase accounting integration and transaction related expenses within our results.
Unless specifically noted otherwise.
This was not a material driver of growth rates. We continue to expect the nuance acquisition will be minimally dilutive in FY 'twenty, two and accretive in FY 'twenty three to non-GAAP EPS.
FX.
Dollar strengthened throughout the quarter and created an incremental one point FX headwind to total company revenue compared to expectations. As a result revenue and EPS were negatively impacted by $302 million and <unk> <unk> per share respectively.
The warranty Frank we.
We suspended all new sales of our products and services in Russia.
<unk> in Russia represents less than 1% of total company revenue and we expect that it will decline significantly impacts operating income this quarter was roughly $130 million split evenly between lower revenue and higher bad debt expense, resulting in a negative <unk> <unk> impact to EPS.
Our results for the quarter are better than we expected across revenue operating income and EPS as we again delivered another strong quarter of top and bottom line growth.
In our commercial business healthy demand for our differentiated hybrid and cloud offerings together with excellent execution by our sales teams and partners drove increased commitment to our platform as well as higher usage of our services that Jim mentioned earlier.
Commercial bookings increased 28% and 35% in constant currency significantly ahead of expectations driven by strong execution quick Houston across across our core annuity sales motions.
We also saw better than expected growth in large long term azure contracts against the very strong prior year comparable.
Lance.
Bookings by roughly five points.
Our on premises transactional licensing revenue across both the office and server businesses was more negatively impacted than expected due to the transition from our open licensing program to our cloud solution provider program <unk>.
Commercial remaining performance obligation increased 32% and 34% constant currency to $155 billion.
With a roughly equivalent split between the revenue that were recognized within and the portion beyond the next 12 months.
And our annuity mix increased two points year over year to 96%.
Commercial cloud revenue was $23 4 billion and grew 32% and 35% in constant currency again ahead of expectations.
Microsoft Cloud gross margin percentage decreased slightly year over year to 70%, excluding the impact of the change in accounting estimate useful lives Microsoft cloud gross margin percentage increased roughly three points driven by improvement across the cloud services, partially offset by sales mix shift to azure.
In our consumer business as you heard from Socgen.
Market share gains across the seas gaming consoles and our edge browser.
Now back to the company level.
As noted earlier U S dollar strengthened throughout the quarter FX.
FX decreased total revenue by three points, one point unfavourable expectations increase.
Increased costs by one point in line with expectations and decreased operating expense growth by two points, one point favorable to expectations.
Margin dollars increased 18% and 21% in constant currency and gross margin percentage decreased slightly year over year to 68%, excluding the impact of the change in accounting estimate gross margin percentage increased approximately one point driven primarily by improvement our cloud service business earlier.
Operating expense increased 15% and 17% in constant currency slightly longer than expected as investments, but shifted to future quarters were partially offset by the inclusion of nuance.
At a total company level head count grew 20% year over year as we continue to invest in key areas, such as power engineering customer deployment Linkedin and sales.
And included approximately four points of growth from the addition of <unk> operating income increased 19% and 23% in constant currency and operating margins increased slightly year over year to 41%, excluding the impact of change in accounting estimate.
Operating margins expanded roughly two points year over year now to our segment results revenue from productivity and business processes was 15, 8 billion and grew 17% and 19% in constant currency in line with expectations better than expected results across office 365 linked in.
In office consumer were offset by impacts from incremental FX open licensing transition, Russia, as well as lower than expected results in dynamics.
Office commercial revenue grew 12% and 14% in constant currency.
Office 365, commercial revenue increased 17% and 20% in constant currency driven by installed base expansion across all workloads and customer segments as well as higher RPM from continued momentum by revenue.
Eight office 365 commercial seats grew 16% year over year to nearly $345 million with continued growth in our small business and frontline worker offerings and nearly 45% of our office 365 commercial seats were purchased through Microsoft 365.
Five.
Office commercial licensing was lower than expected at 28% and 25% in constant currency driven by the factors discussed earlier and a lower mix of contracts with higher in period revenue recognition.
Office consumer revenue grew 11% and 12% in constant currency ahead of expectations driven by continued momentum in Microsoft 365, subscriptions, which grew 16% to $58 4 million.
Dynamics revenue grew 22% and 25% in constant currency driven by dynamics, 365 grew 35% and 38% constant currency substantially faster than the market, although a bit lower than expected as we focus on stronger execution on our recent investments.
Linked in revenue increased 35, 4% and 35% in constant currency with better than expected performance in talent solutions as well as continued strength in marketing solutions and record levels of engagement on the platform.
Gross margin dollars increased 16% and 19% in constant currency and gross margin percentage was relatively unchanged year over year, excluding the impact of a change in accounting estimate gross margin percentage increased roughly two points driven by improvement across all our services.
Operating expense increased 13% at 14% in constant currency operating income increased 19% and 23% constant currency.
Next the intelligent cloud segment, which includes approximately four weeks of results from the launch.
Revenue was $19 $1 billion, increasing 26% and 29% in constant currency, excluding the impact of nuance and the approximately $150 million greater FX and expected revenue results were ahead of expectations.
Overall server products and cloud services revenue increased 29% and 32% in constant currency.
<unk> and other cloud services grew 46% and 49% in constant currency head of expectations driven by continued strength in our consumption based services. The inclusion of nuanced cloud services did not change the azure constant currency growth rate.
In our per user business enterprise mobility, and security installed base grew 25% to over 218 million seats.
And our on premises server business revenue increased 5% and 7% constant currency ahead of expectations driven by healthy demand for our hybrid offerings, partially offset by the open licensing transition mentioned earlier.
Creation of nuance on premises offerings did not change the server constant currency growth rate.
Enterprise services revenue grew 5% at 6% in constant currency driven by growth in enterprise support services inclusion of nuance professional services impacted the constant currency growth rates by one point.
Segment gross margin dollars increased 24% and 27% in constant currency and gross margin percentage decreased roughly one point year over year excluding.
Excluding the impact of the change in accounting estimate gross margin percentage increased roughly one point with improvements in azure, partially offset by the sales mix shift to azure.
Operating expense increased 17% and 19% in constant currency and operating income grew 29% and 33% in constant currency.
Now to more personal computing.
Revenue was $14 5 billion, increasing 11% and 13% constant currency above expectations, driven by better than expected performance in searching windows offset by surface.
FX decreased segment revenue of approximately $100 million greater than expected.
Those OEM revenue increased 11% with continued strength in the commercial PC market, which has higher revenue per license windows commercial products and cloud services revenue grew 14% and 19% in constant currency ahead of expectations driven by demand for Microsoft 365 with some.
<unk> from a greater mix of contracts with higher in period revenue recognition.
Surface revenue grew 13% and 18% constant currency lower than expected driven by consumer channel, partially offset by strength commercial.
Search and news advertising revenue ex Tac increased 23% and 25% in constant currency better than expected benefiting from an increase in search volumes, even as we saw headwinds during march from the impact of the war and Ukraine.
And in gaming on a high prior year comparable revenue increased 6% and 8% constant currency Xbox hardware revenue was better than expected as increased supply of consoles in quarter drove growth growth of 14% and 16% in constant currency Xbox content and services revenue.
It grew 4%, 6% constant currency below expectations.
Driven by lower engagement across the platform, even as it remains above pre pandemic levels.
Segment gross margin dollars increased 10% and 13% in constant currency and gross margin percentage decreased slightly.
Operating expenses increased 17% and 18% in constant currency and operating income grew 7% and 10% constant currency.
Now back to total company results capital expenditures.
Jurors, including finance leases were $6 $3 billion in line with expectations cash paid for PP&E was $5 3 billion.
Cash flow from operations was $25 $4 billion, increasing 14% as strong cloud billings and collections were partially offset by higher supplier payments related to hardware inventory builds as we manage continued uncertainty in the supply chain.
Free cash flow was $20 billion up 17%.
This quarter other income and expense was negative $174 million lower than anticipated driven by net losses on investments, including mark to market losses on our equity portfolio and net losses on foreign currency re measurement.
Equity market declines.
Net losses, this quarter compared to net investment gains last year, a negative two point impact on year over year EPS growth.
Our effective tax rate was approximately 17% and finally, we returned $12 $4 billion to shareholders through share repurchases and dividends.
Now before we turn to our outlook a few reminders first FX with the stronger U S dollar and based on current rates. We now expect FX to decrease total company revenue growth by approximately two points and to decrease total Cogs and operating expense growth by approximately one point within the segments.
Dissipate roughly three points of negative FX impact on revenue growth in productivity and business processes and two points in intelligent cloud and more personal computing.
My remarks for the next quarter include a full quarter of impact from the nuance acquisition.
Third we anticipate the war in Ukraine to continue to impact our business in Q4, with a roughly $110 million impact on revenue and minimal impact on operating expenses.
Next we.
We have taken into account the current impact of shutdowns in China and our outlook.
However, extended production shutdowns that reach into may, which further negatively impact our outlook across windows OEM surface and Xbox hardware.
The outlook, we guess unless specifically noted otherwise is on a USD basis.
With that context in place, let's turn to our Q4 outlook.
In our largest quarter of the year, we expect our differentiated market position customer demand across the solution portfolio.
And consistent execution to drive another strong quarter of revenue growth and.
In commercial bookings and growing Q4 expiry base strong execution across our core annuity sales motions and increased commitment to our platform should drive healthy growth against a strong prior year comparable.
As a reminder, a growing mix of larger long term azure contracts, which are more unpredictable and their timing always drives increased quarterly volatility in our bookings growth rate.
Microsoft Cloud gross margin percentage should be down roughly one point year over year, excluding the impact of the change in accounting estimate Q4 gross margin percentage will increase roughly one point driven by continued improvement across our cloud services, partially offset by a revenue mix shift to azure.
Capital expenditures, we expect a sequential increase on a dollar basis as we continue to invest to meet growing global demand for our cloud services next segment guidance in productivity and business processes, we expect revenue between $16, six 5% and $16 $9 billion in.
Office commercial revenue growth will again be driven by office 365, with healthy growth across customer segments, and <unk> growth through <unk> five.
Office 360, <unk> revenue growth to be sequentially lower by a point or two on a constant currency basis and our on premises business. We expect revenue to decline similar to last quarter and office consumer we expect revenue to grow in the high single digits, driven by Microsoft 365 subscriptions for Linkedin, we expect.
Revenue growth in the high Twenty's, driven by strong job market and healthy engagement on the platform and in dynamics, we expect revenue growth similar to last quarter for.
For intelligent cloud, we expect revenue between 21, 1% and 21.35 billion.
The 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 contracts.
Azure revenue growth to be sequentially lower by roughly two points on a constant currency basis with a bit more FX impact on U S dollar growth than at the segment level Azure revenue will continue to be driven by strong growth in our consumption business in our per user business should continue to benefit from Microsoft.
365 sleep momentum, though we expect moderation in growth rates given the size of the installed base.
And our on premises server business, we expect revenue to decline in the low to mid single digits as demand for our hybrid offerings will be more than offset by the strong prior year comparable which included four points of benefits benefit from contracts with higher in period revenue recognition as well as continued transactional weakness.
From the licensing program transition noted earlier.
In enterprise services, we expect revenue growth to be in the high single digits.
In more personal computing, we expect revenue between 14, six five and $14 95 billion as mentioned earlier our guidance reflects the current constraints from the shutdowns in China, which has negatively impacted Q4 supply for OEM surface and Xbox consoles and windows.
OEM, we expect revenue growth in the low to mid single digits driven by the continued shift to a commercial led PC market where revenue per license is higher.
Windows commercial products and cloud services customer demand for Microsoft 365, and our advanced security solutions should drive growth in the low double digits in surface revenue should grow low double digits in search and news advertising ex Tac, we expect revenue growth of approximately 20%.
And in gaming, we expect revenue to decline in the mid to high single digits, driven by lower engagement hours year over year as well as constrained console supply.
Xbox content and services revenue to decline mid single digits. So engagement hours are expected to remain higher than pre pandemic levels.
Now back to company guidance.
The cons of $16 six to $16 8 billion and operating expense of $14 eight to $14 9 billion, resulting in another quarter of operating margin expansion, excluding the change in useful life.
We expect other income and expense to be negative $50 million, reflecting FX remeasurement impact based on market conditions in April .
Similar to the rest of our guidance further equity and FX movements through Q4 are not reflected in this number as a reminder, we are required to recognize mark to market gains or losses on our equity portfolio, which can increase quarterly volatility and.
And we expect our Q4 effective tax rate to be approximately 18%.
We expect to close FY 'twenty two.
In a more complex macro environment with the same consistency we have delivered throughout the year.
Strong revenue growth share gains and improved operating margins as we invest in the areas that are key to sustaining that growth.
As we look towards FY 'twenty, three our track record of delivering high value to our customers across many diverse and durable growth markets gives us confidence that we will drive continued healthy double digit revenue and operating income growth.
Now Brett let's go to Q&A. Thanks.
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.
Can you please repeat your instructions.
Absolutely, ladies and gentlemen, if you would like to kill the question at this time. Please press star one on your telephone keypad. The confirmation would indicate that your line is in the question queue. You May Press Star two if you 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.
First question is coming from Keith Weiss with Morgan Stanley . Please proceed with your question.
Excellent. Thank you guys. So much for taking the question and.
Really impressive results.
And what we see is a pretty difficult.
Difficult climate out there definitely from a stock market perspective, but if we think about interest rates, we think about inflation.
A conflict going on in Europe , right now it does seem to be a tough backdrop, because our operating super well.
The acceleration and address that scale is truly awesome and I am not mistaken office 365, commercial accelerated as well in the quarter. So really impressive result, but I think the question that most investors are going to have is where do you garner the confidence in the durability of this growth given how volatile this macro backdrop. It is it conversations youre having with customers.
Is that what you see in the backlog, maybe if you could give us some kind of insight into what gives you guys. The confidence to put out that guide to put out there was healthy comments for FY 'twenty. Three what are you seeing that could maybe help us give us and give investors a little bit more confidence in the durability of this growth in this environment.
Yes, maybe ill start maybe at three levels Keith one is.
Just the competitiveness of <unk>.
Our tech stack.
All up sort of from infrastructure, all the way to the SaaS applications when it comes to the commercial cloud.
And as well as how we are able to monetize for example, the installed base of our consumer franchises as well so both of these places.
We feel we are competitive and increasingly so coming out of the pandemic to gain share.
I would also say that in many of these places we have.
Price leadership, I mean take the one point I made which is if there is any macro headwind.
You have more value for less price means you win.
And in our case when it comes to our commercial cloud offerings, we have significant advantages.
On that across the stack. The second thing is in the conversations we're having with our customers. The interesting thing I find from perhaps even past challenges.
Whether macro and micro is no I don't hear of businesses looking to their key budgets or digital transformation projects is the place.
Cops, if anything some of these projects all the way theyre going to accelerate the transformation or for that matter automation. For example, I have not seen this level of demand for automation technology to improve productivity.
Because in an inflationary environment, the only deflationary forces software. So that's the second micro thing that tone thing thats different.
At the end of the day, though I mean, none of US here are trying to forecast macro so all we'd think of as the patterns that we are competing in a large as a percentage of GDP tech spend is on a secular basis by the end of the decade going to double we just want to keep driving usage driving share and become.
<unk>, so that's kind of how we view.
What we are doing and Thats, where our confidence comes from in terms of our outlays, whether it's opex or capex. So I don't know Amy if you want to add to that.
I think the only thing I might add is I think we've always and I think we've used as language quite frequently focus on the long term opportunity you talked about it is that.
Tim that we're focused on I would say also there's still a lot of that town left to go left to go after and it is quite early still and the transitions you're talking about from a digital transformation perspective from an automation perspective from type of value and real productivity enhancements.
That can be made and so I think the continuity of the execution.
Has certainly been very good from the sales and partner side.
So say to your point, we're investing for a long term opportunity and are confident that that long term outcome is right as well and I think that's the basis for where you and I are talking giving this answer from.
That's a great quarter.
Thanks, Keith Jesse next question please.
Absolutely. Our next question is coming from Brian <unk> with Jefferies. Please proceed with your question.
Thanks, Amy on your guidance are you changing any of your close rate considerations are adding.
More supply chain.
Strengths into that or is this the same guidance methodology that you've been giving us in the past.
I think we're specifically talking about most of the guidance and the more personal computing segment, where the supply chain constraints, which are specifically related to the production shutdowns and China agenda.
Generally follows the same principle I tried to follow which is I give you my best knowledge as of today.
Did note and tried to do that with a lot of clarity that we're or the production shutdowns to extend into may.
There would be further negative impact on those from a supply constraint.
<unk>.
As you know an OEM business that revenue is recognized at the point of production.
And then for.
Xbox consoles as well as surface it sell in so production delays even earlier in may.
You can obviously has a big impact on the quarter. So we're watching it and I've tried to make that transparent and the guidance outside that that my guidance is reasonably consistent with how I, how I like to do it.
Great. Thanks.
Thanks, Brent Jessica next question please.
Our next question comes from Mark Marcon with Bernstein Research. Please proceed with your question. Thank.
Thank you very much congratulations on the quarter and on the strong guidance I think it's going to not just help the stock hopefully help a little bit more across into the industry.
I'd like to look at office.
Which had had strike, it's probably more than people expected.
Where are we in the upsell opportunity from 83 to 85 can you give us any sense of the sizing of how much of the growth not just now but going forward do you think is going to come from frontline users. Thank you.
Maybe I'll start.
Answering that question and sorry, if you want to add anything.
Specifically, Mark I would say.
This quarter was quite similar in nature to what you saw in the past few.
Seat growth while across all segments was especially good in frontline worker in SMB.
That is masked a little bit as it often does the <unk> improvement given those tend to be lower priced skus.
The <unk> improvement that we're seeing from the transition to <unk> five the transition from <unk> to <unk> still has opportunity I would say we're in the earlier transitions of that so in terms of as I think about going forward.
Certainly still room for both seat growth specifically in frontline worker as you noted as well as SMB and then.
<unk> expansion.
<unk> five transition the thing I would add.
Talk you mentioned in his comments and again in this first answer is really the value that is available to customers in <unk>, whether that is security, whether it's compliance whether its phone whether it's analytics.
The value of that suite, and if you think even more broadly the value of Microsoft 365, which adds and board components around windows.
I think we are offering a high value, but that tends to give us a sum up.
You can continue to execute well in that segment.
Then you would add to that you counted well Amy I mean, I think the fundamentals are pretty strong here still whether it's E. Five Grove SMB growth frontline work I'd also add emerging markets. I mean this is the first time I feel.
There'll be how products that fit just emerging markets.
<unk> teams essentials, where we can even really penetrate markets that we've never sold anything in the past.
And then the new growth engines that you talked about teams phones teams rooms veeva.
And even windows six five are all things that we can again drive growth from.
And the point about sort of all value is probably.
A very very strong in a time like this in particular and we see it like the one thing also I would say the usage data that we are seeing peak everywhere and so that's the other thing is we definitely will optimize for driving usage and deployment.
And thats going to be our priority.
Thank you very much I really appreciate it congrats.
Thanks, Mark Jessica next question please.
Our next question comes from Karl Keirstead with UBS. Please proceed with your question Okay, Great. Amy you called out some transactional weakness, which in the March quarter, we can see in the on Prem office segment and in your guidance.
The server product you suggest we might see it there too is that something that you would characterize as Microsoft specific as you described in your comments Youre transitioning customers off your open license program or do you feel like that's a broader issue, where maybe we're starting to see a little bit of a tilt.
From on Prem to cloud even faster than we've seen before thank you.
Thanks Carl.
It's a very good question.
I would say it does not feel like the tilt.
On Prem to cloud felt any different in a way that would have impacted the quarter.
More so than it normally does in terms of the normal transitions that we've seen to your point on office.
Frankly, even server as we have people move those workloads and migrating workloads to the cloud this really was it.
Very significant.
Think of it as that we're partner.
Partners transact and we have such a broad and valuable.
It really eat it partner community that is very fast and we put this and had planned for this change for January one.
We executed the change on the repurchase plan and it's just taking us a little longer to onboard all of this community to make sure that they can transact the way they want to in the program. So I do think it's going to take us longer than we thought to continue to see that impact in Q4, and I know the teams are working hard to make sure that partners.
Comfortable with with the new system, which is which is important to us.
The only thing I'd add is.
The only thing I would add is that this change is super good for both the partners the customers and Microsoft locked up so.
Houston ahead, but we wanted to do this because.
Because it benefits everybody.
Got it thanks.
Thanks, Carl just the next question please.
Our next question comes from Mark Murphy with Jpmorgan. Please proceed with your question.
Yes, thank you very much.
Such a handful of infrastructure software companies have commented that their consumption activity actually has started to slow a few months ago and so I'm curious what in your view is allowing your azure trajectory to show better resilience.
And do you in fact see some of the newer products kicking in such as Azure, our synapse cognitive services.
AI and perhaps.
Contributing to the strength and health and resiliency of that Azure number.
Yes, I mean, what I would say our call is that what we're seeing is a classic what happens with <unk>.
Consumption meters, right, which is they grow and then they get optimized and they grow again, both existing and new and so it sort of will always have some amount of volatility that even amy referenced quarter over quarter, but if I walk up the.
One thing that we look at is growth coming from all segments right. So small business and enterprise or is it coming from all regions and it is we also look at the type of workloads, it's coming from.
And so it looks healthy in all of those and if you walk up the stack to your point on the infrastructure side. The tier one workloads is where I think we are seeing some big tier one workloads and I had many comments on SAP and other workloads moving.
The second thing I'd say is on the.
Paas services in our Dev SaaS, that's another area, where we have differentiated value. So we see good growth there data and AI for sure I mean, the thing that I find really to be something that I think in the long run is going to probably be one of the bigger drivers of our growth and differentiation is our data fabric because we are the only guys who.
You have a complete data fabric from the operational store that's fully integrated into an analytics engine that is fully integrated into governance and that increasingly is going to become more and more important right. I mean, you can be dealing with this new regulation coming on privacy and governance on one end and your operational store being divorced from that.
So we have a very differentiated offer and I talked about some of the growth numbers that the AI inference is also finally kicking in there.
Very small today, but even when I look at the total that's just essentially a compute meter there's growth there. So overall I think we will see quarter over.
Quarter, some cyclicality, depending on which customers in fact, we pay people at Microsoft to reduce customer bills, and which we should so given that we may see cyclicality in terms of how optimizations happen, but overall, we're still very early on as the world sort of migrates to the cloud and uses essentially cloud.
Structure in compute is sort of to drive their operational efficiencies and product.
Thank you.
Thanks, Marc just the next question please.
Our next question comes from Kash Rangan with Goldman Sachs. Please proceed with your question.
Thank you so much congrats on a spectacular quarter.
They're very clear on your comments and in particular, you talked about <unk> as a percentage of GDP doubling over the next seven to eight years or so nobody could have really predicted maybe besides yourself that azure would be this big and growing this fast at this point in time relative to say five six years back. So as you look forward.
Part of the Microsoft Tech Stack do you think is under represented in the digital World and has therefore more opportunity to gain.
As you build out your thesis on the Tac as a percentage of GDP doubling thank you so much.
I mean, the thing that I always go back cash is that all enterprise value at least as far as I can tell gets created at three layers of the tech stack, what happens with infrastructure whenever something can be panics better. So for example, when we talk about the next generation of multi edge multi cloud infrastructure remaining one of them.
Leaders, that's going to be a massive EV creation as as a percentage of GDP tech spend doubled so that's where everything from Azure Azure arc, our database our us all of that Super important. The other one is this is sort of the age of AI in other words, the core business logic is not being written.
<unk>, it's being written.
By software.
And I look at when I use Github co pilot.
And like the future of what how oil business logic gets written.
And so to me the AI layer, both the training supercomputers as well as the inference layer. That's a place where you will see us integrate what today you all consider to be two different businesses, whether it's azure in windows. There just one business to me because to me. We're in training happens where inference happens will be written ones.
By developers and then it will light up across the distributed fabric. So that's another place where I think there's tons of enterprise value that will get created over time and then of course, the UI layer always is the biggest one and the next inflection point whether it's.
What happens with <unk>, so what happens with even on the industrial side with Iot and digital twins.
Those are all things that I think will be the ones that we will be focused on so these three things translated into workloads.
And what we call our customer solution areas are the ways that at least we are investing in.
Eric Thank you so much.
Thanks Kash Jesse next question please.
Our next question comes from Michael <unk> with Wells Fargo. Please proceed with your question.
Hi, there good afternoon, and thank you for taking my question and great job with the results Azure growth in commercial bookings strength stand out you mentioned a step down expected in azure growth in Q4, but still suggests very impressive growth at that scale can you expand on the large deal commentary the longer term strategic deals you've referenced a few.
For the past couple of quarters, how those impact visibility or maybe the approach to framing targets there and anything you can add just around how the addition of new adds up the cloud business and the industry cloud approach as well as greatly appreciate it. Thank you.
So did you want to start with your comments, maybe on nuance overall, and then I can address sort of how the larger long term, yes I'm sure.
Just a couple quick things one is on <unk>.
The strategic commitments that are being made.
We're sort of looking at that workload at a time and so we feel very very good about.
Both the type of workloads in fact, there is a migration of a bunch of workloads that we may have one in the client server are migrating but the most exciting thing is the type of tier one workloads that we've never seen run on any Microsoft infrastructure Thats running on Azure today and being optimized on Azure. So that's the thing that we see as we win these law.
Our strategic deals on nuance for.
For me the thing that's exciting is nuanced is a platform layer for these AI driven applications that are getting deployed here that its in healthcare or even in the enterprise contact center. So we're very excited about nuance now being part of the Microsoft family Youll see us pretty aggressively go innovate there.
And grow the impact of these solutions in both models.
Large percentages of our GDP like health care.
I think things like tackling issues like physician burdens.
With new innovative solutions is much needed and we are really looking forward to exercising that.
And Michael maybe specifically here.
You're absolutely right I tend to mentioned the impact of large long term azure contracts in the context of commercial bookings and some volatility.
Austin can see and that because of that.
But really I think the way, we think about them maybe outside of this phone call is that it's the beginning of the commit that between us and our customer to start to work together to deliver value.
And so we go workload by workload opportunity by opportunity and I think Thats. What you are inferring is that is that it's almost the top of the funnel.
To create value for the customer we call it delivering success to.
To make sure they are spending the dollars the most effective way, making sure we're tackling the hardest problems that they need solved.
And with that comp as our investments that we've made in deployment resources and usage resources specifically in Azure.
To make that possible with customers and so youre.
Youre right to say I do talk about them in terms of volatility they create what it creates inside the company is the beginning of it.
To make sure we're tackling the workloads and the solutions that the customers.
Want to make happen.
All the workloads frankly that stock has talked about today.
Greg complementary points also highlight thanks very much.
Thanks, Michael Jesse we have time for one last question.
Thank you our final question will come from Keith Bachman with BMO. Please proceed with your question.
Hi, many thanks I wanted to break it up into two parts, but I was wondering if you could comment on.
What you see is.
The strength of the PC market as you look out over the course of the calendar year.
If you focus on the demand side of the equation the supply side of the equation and really the more important related parties.
Given the outlook that you may have for the PC market. How are you thinking about the durability of the windows side of your business.
And particularly if you'd comment on the fundamentals related to PC, Mark, but also the opportunities to keep mixing up so to speak.
Helped by Microsoft 365, many thanks.
So let me.
Sounds like why don't you start and I'll I'll I'll add one perfect. So I think on the commercial side.
It's well understood is that windows as the socket for Microsoft 365, we have tremendous value Amy referenced this earlier.
In fact, we just launched Windows 11.
Pro value with Windows, 365, Thats resonating super well the customer SaaS adoption rates when it comes whether it's security whether it has come to our productivity we feel good about the commercial business. So we will stay focused on it.
On the commercial side and on the consumer side.
Coming out of again the pandemic the intensity of usage has gone up so one of the areas of focus for US is some of the stuff that I talked about in my remarks is just the usage right. So when you think about 500 million users engaging with Microsoft stock that's not the type of engagement, we had in silver the lodge ins.
Stall base now we have significant room, there the browser share growth, we have significant room there.
And then of course, the subscription attaches, whether it's gaming or whether it's productivity.
Suite, So that's kind of how I look at what we're going to do at least in the immediate future.
<unk> remains a very important.
Category.
Think People's lives is what we've discovered during the pandemic and if anything the intensity of usage has increased and they will be cyclical demand that will go through but the number of use cases is definitely I think structurally increased.
Exactly I think the one thing I would add on your demand side, we have seen the transition from I would say in the middle.
<unk> definitely.
Consumer driven demand cycle.
We've transitioned that to be a commercial part of the demand side and so I do expect that to be the case, obviously heading into the second quarter in a row, we've seen that transition.
Back to you for that even more of that and then well wait and see how the second half of the year shapes up.
Okay. Many thanks congratulations.
Thanks Keith.
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.
Thanks, everyone. Thank you everyone.
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.
Okay.
[music].
Yes.
Yes.