Q4 2022 Microsoft Corp Earnings Call

Greetings and welcome to the Microsoft fiscal year 2022 fourth 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.

Key pad.

As a reminder, this conference is being recorded it.

It is now my pleasure to introduce your host Brett Iverson, Vice President of Investor Relations. Thank you you may begin.

Good afternoon, and thank you for joining us today.

With me are <unk>, Chairman and Chief Executive Officer, Amy Hood, Chief Financial Officer, Alex <unk>, Chief Accounting Officer, and Keith Dolliver Deputy General Counsel.

On 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 fourth quarter performance. In addition to the impact these items and events have on the financial results.

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 growth rates are the same in constant currency, we will refer to the growth rate Ali.

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'll be making forward looking statements, which are predictions projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of 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 statements.

I'll turn the call over to Satya.

Thank you Brett Amit this macroeconomic environment, the Microsoft Cloud <unk> $25 billion in quarterly revenue for the first time up 28% and 33% in constant currency.

When I talk with customers. It's clear there is a real opportunity to help organizations in every industry use digital technology to overcome today's challenges and emerge stronger.

In this enrollment we are focused on three things first no company is better positioned than Microsoft to help organizations deliver on their digital imperative. So that they can do more with less.

From infrastructure and data to business applications and hybrid work, we provide unique differentiated value to our customers.

We will invest to take share and build new businesses and categories, where we have long term structural advantage lastly, we will manage through this period with an intense focus on prioritization and execution excellence in our own operations to drive operational leverage.

With that let me highlight our progress starting with Azure.

Organizations in every industry continue to choose our cloud to align their it investments with demand we are seeing larger and longer term commitments and won a record number of $100 million plus and $1 billion plus deals. This quarter, we have more data center.

Regions than any other provider and we will launch 10 regions over the next year, our new Microsoft cloud for sovereignty helped public sector customers meet urgent compliance security and privacy requirements.

With Azure arc, we are meeting customers, where they are enabling companies like GM Greg's UBS and unit to run applications across on Prem edge and multi cloud environments. We have seen more customers move their mission critical workloads to Azure.

American Airlines for example chose our cloud to run its key operational workloads, including its data warehouse and Telstra will move its internal it workloads to azure.

And we are the platform of choice for CPE apps on the cloud.

Leaders in every industry, including Kraft Heinz Fujitsu and unit level have migrated ERP workloads to Azure just last week, we announced a new service to accelerate adoption of Oracle workloads on Azure, we are the only public cloud with simplified direct access to Oracle databases running in the Oracle cloud.

Now on to data and AI.

With our Microsoft intelligent data platform, we provide a complete data fabric spanning operational databases analytics and governance, helping customers focus on creating value instead of integrating fragmented data state.

More than 65% of the Fortune 1000 used three or more of our data solutions and we are growing faster than the market. We are seeing leaders in every industry from la Liga and Lenovo to Swiss re in Walgreens unify the data using our tools Cosmos DB is the Goto database powering the world's most demanding.

Mission critical workloads at any scale transactions in data volume increased over 100% year over year for the fourth quarter in a row. When it comes to AI. We are seeing a paradigm shift as the worlds larger models become powerful platforms themselves with our Azure open AI service a diverse set of cost.

<unk> from HSBC, Pwc, and RTL group to shell and Wipro are applying language models to advanced scenarios like content and cogeneration now on to developer tools, we have the most popular developer tools across any cloud and any platform.

<unk> in every industry from a whole delhaize to KPMG to Philips are all choosing get how to build software get up copilot as the first of its kind AI Pep program, which helps developers write better code foster more than 400000 people who have subscribed since we've made it generally available a month ago.

And with our expanding portfolio of container services organizations like H and M can build modern more resilient cloud native applications. All op revenue from Azure container services increased by Triple digits now on to power platform with power platform, we are helping domain X.

It's rapidly drive productivity gains at a time when it's never been more important we now have nearly 25 million monthly active users and we are innovating to make it even easier for teams of pro and citizen developers to build end to end business solutions together <unk>.

<unk>.

Akron or Toyota Vodafone and Zurich insurance have all build centers of excellence to train employees at scale on how to use power platform.

<unk> for example, expects to save at least 720000 hours of by eliminating redundant and manual processes across employee workflows now onto dynamics 365, we're helping organizations digitize their customer experience service finance and supply chain functions as we continue.

You to outgrow the market in every category, our new Microsoft Digital contact Center platform brings together dynamics 365, Microsoft teams as well as enterprise AI capabilities from nuance to help customers like HP deliver omnichannel customer engagement and new integrations between dynamics 365 and <unk>.

Intelligent order management and teams helped people collaborate in the flow of work to overcome supply chain disruptions, we are winning customers as we help organizations address their most pressing challenges.

Coffee is modernizing its supply chain with our business applications Carlsberg standardizing its field service and customer service operations and visa switch to dynamics 365 for both the sales and call center organizations.

When it comes to our industry and cross industry clouds, we are seeing strong adoption as we take a platform driven approach to help organizations deliver on their digital imperative.

For example, Microsoft cloud for healthcare inclusive of nuances, becoming the platform of choice for companies across the healthcare value chain looking to drive meaningful clinical and financial outcomes, whether it's a provider modernizing care delivery, our health plan transforming the member experience or a retailer expanding into health services.

Having a technology partner that is truly dedicated to empowering their success is a significant differentiator for us Intermountain healthcare for example chose to cloud for health care as well as nuances Dax ambient intelligence solution as the pillar of its new digital strategy now.

Now onto Microsoft 365 and teams in.

In this economic environment every organization is looking to support employee flexibility and improve productivity hybrid work is now just work and it's imperative that organization to reconnect and re engage the workforce at home in your office and everywhere in between to do this companies need a digital fabric.

That connects employees as well as customers and partners wherever and whenever they work, while reducing cost and complexity.

Our all in on teams over the past year, we have introduced more than 450 capabilities to empower frontline and knowledge workers to collaborate synchronously, Andy synchronously as well as remote and in person.

<unk> is taking share across every category from collaboration to chat to meetings to calling and seeing higher usage intensity as companies turn to the platform to accelerate their digital transformation and orchestrate all of their business process and the flow of work Isps from Adobe to workday have built deep.

<unk> with teams and more than 100000 companies, including Johnson <unk> Johnson lumen technologies and Progressive insurance have deployed custom line of business applications and teams all up the number of third party and lob apps with active usage increased by 40% year over.

<unk> team's fone is the market leader in cloud, calling across Voip and PSTN. We now have over 12 million PSTN users nearly double the number a year ago and teams rooms bridges the gap between people working remotely and those in the office with innovations like AI.

Powered cameras more than 60% of the fortune 500 have chosen teams rooms to connect employees across the hybrid workplace.

We're also building a completely new suite with Microsoft Veeva as we create a new employee experience category. This is both a priority for our customers and an expansive and hydro Tam for US 25% of the Fortune 500 already use veeva as organizations increasingly recognize that employee experience.

And well being are essential to their productivity.

We have seen broad adoption across segments and industries from Commonwealth Bank Fidelity investments in Mastercard to Astrazeneca and Schlumberger.

And this innovation is driving revenue growth across Microsoft 365.

Sure He Expedia group and Qualcomm all chose our premium offerings to transform how employees work E. Five seats increased more than 60% year over year.

Now on to Windows with Windows, we are putting people at the center to help them securely work connect and play despite a changing market for Pcs during the quarter, we continue to see more PC shipped than pre pandemic and are taking share.

And we're seeing higher monthly usage of Windows 11 applications with increased time spent across creative work collaboration gaming media and writing code as people rely on the PC for its unique productivity capabilities rich interactive experiences and just stay connected.

We are transforming how windows is experienced and managed with Azure virtual desktop and Windows 365, Azure virtual desktop monthly active usage increased nearly 60% year over year.

One year in we are seeing strong adoption of Windows 365 from organizations in every industry from Hangbo commercial bank and can draw two Lego group and schroders as they use cloud Pcs to rapidly onboard new and temporary employees and speed M&A integration, while reducing costs.

Now on to security as.

As the rate and pace of threats continue to accelerate security is the top priority for every organization, we provide comprehensive solutions that integrate more than 50 categories informed by more than 43 trillion signals each day, reducing cost and complexity, we're taking share across all major.

The categories, we serve all up our security revenue increased 40%.

The only cloud provider with protection for the top three cloud platforms, and we are seeing more and more customers turn to us to protect their multi cloud multi platform infrastructure Pearson Vue and Vodafone boat shows our security stack to protect their digital estate across clouds, and we're going further to help protect.

Organizations are new enter a product family includes tools for permissions management identity governance and identity verification and we now offer managed threat detection and response with Microsoft Security experts the world's largest hedge fund Bridgewater Associates for example will use the service to supplement.

Its own security operations.

Now onto Linkedin.

We once again saw record engagement among the more than 850 million members a testament to our mission critical the platform is to connect job seekers with jobs learners with skills and market tiers with buyers, we are seeing job candidates and employers alike prioritize skills to more efficiently find and.

Source work more than 40% of the company's on Linkedin now rely on skills filters to identify candidates Linkedin talent solutions surpassed $6 billion in revenue over the past 12 months up 39% year over year and linked in marketing solutions surpassed $5 billion in annual revenue.

For the first time, we are a leader in <unk> digital advertising and we continue to see customers choose us for higher reach and ROI.

More broadly despite the current headwinds in the AD market, we are expanding our opportunity in advertising as we look towards the long term, we are creating a new monetization engine for the web and alternative that offers market tiers and publishers more long term viable AD solutions and supports consumer privacy.

And strong data governance. It starts with our first party Internet experiences we are focused on increasing our share in engagement across edge being in our personalized content feed Microsoft stock daily content consumption across start in categories like news, whether finance and sports increased 18% since we launch.

To service, one year ago, and edge continues to gain share as consumers use it to save money with a built in coupon and price comparison features our approach extends to our third party AD network. We closed our acquisition of Vanda last month, and now power one of the world's largest marketplaces.

Premium advertising with Microsoft advertising every media and consumer Internet company now has a trusted platform for their own AD innovation and monetization.

Just two weeks ago, Netflix chose us as its exclusive technology and sales partner for its first AD supported subscription offering are.

Validation of the differentiated value, we provide to any publisher looking for a flexible partner willing to build and innovate with them and.

And with promote IQ, we are providing a platform for retailers like home depot, kohls and Kroger to build their own digital commerce and marketing channels. This quarter Sephora chose our solution to help build a new advertising revenue stream, while maintaining ownership of their own data and customer relationships.

Now on to gaming.

We offer the best value in the gaming industry, our Xbox game pass subscription service includes access to hundreds of games and Xbox series S is the most affordable next generation console, we sold more console life to date than any previous generation of Xbox and have.

Being the market leader in North America for three quarters in a row amongst nexgen consoles and with Xbox Cloud gaming, we are bringing games to new endpoints players now can stream Xbox games on Samsung Smart Tvs, and we partnered with epic games to make fortnite available for free via the browser over 4 million people.

Stream the game to date, including over 1 million, who were new to our ecosystem.

In closing we are investing in sharpening our focus to help our customers. During this critical moment and to capture the massive technological shifts underway a portfolio of best of category products and best of suite solutions, along with our durable business model and intense focus on prior.

<unk> execution excellence make me confident about our opportunity ahead in the coming year with that I'll hand, it over to Amy.

Thank you Satya and good afternoon, everyone. This quarter revenue was $51 $9 billion up 12% and 16% in constant currency earnings per share was $2 23 increased 3% and 8% in constant currency.

Like to start by discussing the impact of the macroeconomic environment on our results. This quarter first FX U S dollar strengthened throughout the quarter, creating an additional headwind beyond what we shared this quarter as a result for the full quarter revenue and EPS were negatively impacted by $595 million in <unk>.

<unk> per share beyond our expectation shared in April .

Next extended production shutdowns in China that continued through May and the deteriorating PC market in June contributed to a negative windows OEM revenue impact of more than $300 million and slightly reductions in advertising expense impacted linked and marketing solutions and <unk>.

Search and advertising revenue by more than $100 million.

Tumor business.

Fight those macro challenges.

Another quarter of share gains for windows in the PC market and for edge and browsers.

In our commercial business Q4 was the largest quarter ever for long term commitments to our platform and as you heard from <unk>, yet we saw share gains in areas, such as data and AI dynamics teams and security.

Against a strong prior year comparable commercial bookings increased 25% and 35% in constant currency significantly ahead of expectations.

Our record commitment quarter was driven by increases in the number of $100 million, plus azure and $10 million plus Microsoft 365 contracts as well as consistent strong execution across our core annuity sales motions.

Commercial remaining performance obligation increased 34% and 37% in constant currency to $189 billion, roughly 45% will be recognized in revenue in the next 12 months up 28% year over year, the remaining portion which will be recognized beyond the next 12 months increased 39% year.

Every year in our annuity mix increased one point year over year to 96% Microsoft.

Microsoft Cloud revenue was $25 billion and grew 28% and 33% in constant currency.

Microsoft Cloud gross margin percentage decreased slightly year over year to 69%, excluding the impact from the change in accounting estimate for useful lives Microsoft cloud gross margin percentage increased roughly one point driven by improvement across our cloud services, partially offset by sales mix shift to azure.

Now back to total company level.

Earlier FX decreased total company revenue by four points two points unfavorable to expectations. Additionally, FX decrease Cogs and operating expense growth by two points, one quite favorable to expectations gross margin dollars increased 10% and 15% constant currency and gross margin percentage decreased year over year.

To 68%, excluding the impact of the change in accounting estimate and FX gross margin percentage increased slightly as the improvement in cloud services noted earlier was partially offset by sales mix shift to cloud.

Operating expense increased 14% and 16% constant currency driven by increased investments in cloud engineering, Linkedin and nuance.

Opex growth included roughly two points from the decision to scale down operations in Russia employee severance and the impacts from the standard acquisition, which closed in June at a total company level head count grew 22% year over year as we continued to invest in key areas such as kind of engineering.

Sales and customer deployment and included roughly six points of growth from the nuances and or acquisitions.

Operating income increased 8% and 14% in constant currency and operating margins decreased year over year to 40%, excluding the impact of the change in accounting estimate and effects operating margins were relatively unchanged as the improvement in cloud services noted earlier and sales mix shift to higher margin businesses. We're all set.

By the impact of the nuance acquisition.

Now to our segment results.

Revenue from productivity and business processes was $16 6 billion and was 13% and 17% in constant currency FX decreased segment revenue of $159 million more than expected when adjusting for the additional FX headwind overall segment results were right in line with expectations.

Office commercial revenue grew 9% and 13% in constant currency office 365, commercial revenue increased 15% and 19% constant currency in line with expectations driven by installed base expansion across all workloads and customer segments as well as higher are from continued momentum in <unk>.

Five.

Paid office 365 commercial seats grew 14% year over year, driven by our small and medium business and frontline worker offerings, although growth was impacted by some moderation in new deal volume outside of the side, particularly in the small and medium business customer segment demand for security and compliance.

And voice value in Microsoft 365 drove strong momentum again this quarter <unk> now accounts for 12% of our office 365 commercial installed base.

Office commercial licensing was down 32% to 28% in constant currency lower than expected driven primarily by a lower mix of contracts with higher in period revenue recognition office consumer revenue grew 9% and 12% in constant currency in line with expectations driven by continued momentum.

And Microsoft 365, subscriptions, which grew 15% to $59 7 million.

<unk> grew 19% and 24% in constant currency, driven by dynamics, 365, which grew 31% and 36% in constant currency slightly below expectations due to lower than expected growth in new business, even as our cloud growth continues to outpace the market Lincoln.

Linkedin revenue increased 26% to 29% in constant currency lower than expected as marketing solutions was impacted by the slowdown in advertising spend noted earlier and talent solutions was impacted by weaker online job posts late in the quarter.

Segment gross margin dollars increased 12% and 17% in constant currency and gross margin percentage decreased slightly year over year, excluding the impact of the change in accounting estimate gross margin percentage increased roughly one point driven by improvement across all cloud services operating expense increased 12%.

Scent and 14% constant currency and operating income increased 12% and 19% in constant currency.

Next the intelligent cloud segment revenue was $20 $9 billion, increasing 20% and 25% in constant currency.

<unk> decreased segment revenue was $309 million more than expected excluding the additional FX headwind segment results were in line with expectations overall server products and cloud services.

22% and 26% in constant currency Azure and other cloud services revenue grew 40% and 46% in constant currency.

A point lower than expected driven by a slight moderation in azure consumption growth across customer segments.

Per user business, the enterprise mobility and security installed base grew 21% to over 230 million seats with some impact from the small and medium business deal moderation earlier.

Our on premises server business revenue decreased 2% and increased 1% in constant currency ahead of expectations driven by a greater than expected number of contracts with higher in period revenue recognition enterprise services revenue grew 5% and 8% in constant currency lower than expected.

Driven by declines in Microsoft consulting services.

Segment gross margin dollars increased 15% and 19% in constant currency and gross margin percentage decreased roughly three points year over year, excluding the impact of the change in accounting estimate gross margin percentage declined roughly two points driven by sales mix shift to azure, partially offset by improvements in our margins.

Yes.

Operating expenses increased 20% and 22% in constant currency, including roughly seven points of impact from nuance and operating income grew 11% and 18% in constant currency.

Now to more personal computing.

Revenue was $14 4 billion, increasing 2% and 5% in constant currency FX decreased segment revenue of $127 million more than expected. Excluding the additional FX headwind segment results were below our guidance range driven by the PC ad.

<unk> mentioned earlier.

Windows OEM revenue decreased 2% year over year, despite the deteriorating PC market, we saw share gains again, this quarter and volumes remained above pre pandemic levels.

Windows commercial products and cloud services revenue grew 6% and 12% in constant currency lower than expected.

Some impact from the small and medium business steel moderation noted earlier.

Surface revenue grew 10% and 15% in constant currency driven by commercial sales.

Search and news advertising revenue ex Tac increased 18% and 21% in constant currency lower than expected driven by the slowdown in advertising spend noted earlier, partially offset by the inclusion of three weeks of results from Sandler.

And in gaming.

They declined 7% and 5% in constant currency in line with expectations, Xbox hardware revenue declined, 11% and 8% in constant currency Xbox content and services revenue declined 6% and 4% in constant currency driven by lower engagement hours and monetization and third party and first party.

Content, partially offset by growth in Xbox game pass subscriptions.

Segment gross margin dollars were relatively unchanged and increased 4% in constant currency and gross margin percentage decreased roughly one point year over year, driven by increased usage of windows commercial cloud services operating expenses increased 8% and 10% in constant currency and operating income decreased five.

5% and was relatively unchanged in constant currency.

Now back to total company results capital expenditures, including finance leases or $8 $7 billion in line with expectations.

Cash paid for PP&E was $6 $9 billion or.

Our data center investments continue to be based on significant customer demand and usage signals.

Cash flow from operations was $24 $6 billion, increasing 8% driven by strong cloud billings and collections free cash flow was $17 8 billion up 9% year over year.

This quarter other income and expense was negative $47 million, primarily driven by net losses on investments, including Mark to market losses on our equity portfolio equity market declines drove that investment losses, this quarter compared to net investment gains last year, resulting in a negative three point impact on EPS growth.

Our effective tax rate was approximately 18%.

And finally, we returned $12 $4 billion to shareholders up 19% year over year through share repurchases and dividends, bringing our total cash returned to shareholders to over $46 billion for the full fiscal year.

Now moving to our outlook.

My commentary for both the full year and next quarter does not include any impact from activation, which we still expect to close by the end of the fiscal year.

Let me start with some full year commentary for FY 'twenty three.

First effective at the start of FY 'twenty three we are extending the depreciable useful life for server and network equipment assets and our cloud infrastructure from four to six years, which will apply to the asset balances on our balance sheet as of June 32022, as well as future asset purchases investments in our <unk>.

Software that increased efficiencies in how we operate our server and network equipment as well as advances in technology have resulted in lives extending beyond historical accounting is for lives. This change only impacts the timing of depreciation expense in the future for these assets as a result based on the outstanding balances as of June <unk>.

We expect fiscal year 'twenty, three operating income to be favorably impacted by approximately $3 $7 billion for the full fiscal year and approximately $1 $1 billion in the first quarter. This has been included in the guidance. We will provide on today's call additional details on the mechanics of the change or in our earnings.

Second on FX, assuming current rates remain stable, we expect a roughly four point impact to full year revenue growth with headwinds in each one greater than in H. Two FX should also decrease Cogs and operating expense growth by two points.

Now to our full year business outlook based on the current macro environment.

At every level of the company, we manage performance on a constant currency basis as we have for many years. Therefore with the FX volatility we have seen I will comment on full year in constant currency and in U S dollars.

We continue to expect double digit revenue and operating income growth in both constant currency and U S. Dollars revenue growth will be driven by continued momentum in our commercial business and a focus on share gains across our portfolio operating expense growth will be significant early in FY <unk>.

23, and will moderate materially over the course of the year as we slow the rate of hiring to focus on key growth areas increase the productivity of prior year head count investments and anniversary that nuance and Xander acquisitions.

And even with this significant level of investment in our future. We expect operating margins based on constant currency to be approximately flat year over year in FY 'twenty three excluding the benefit from the latest change in useful life.

And in U S dollars, we expect FY 'twenty three full year margins to be roughly flat as the useful life benefit is mostly offset by FX headwind mentioned earlier and finally, we expect our FY 'twenty three effective tax rate to be roughly 19% now to the outlook for the first quarter, which unless.

Specifically noted otherwise is on the U S dollar basis first FX with.

With the stronger U S dollar and based on current rates, we expect FX to decrease total revenue growth by approximately five points and to decrease total Cogs and operating expense growth by approximately three points within the segments. We anticipate roughly six points of negative FX impact on revenue growth and productivity and business processes.

And intelligent cloud and three points in more personal computing overall, our outlook has the trends we saw in June continues for Q1.

Weakness in the PC market demand and advertising spend will impact windows, OEM surface link and and search and news advertising revenue, our differentiated market position customer demand across our solution portfolio and consistent execution across the Microsoft cloud should drive another.

Strong quarter of revenue and share growth, although we expect to continue to see growth moderation in our small and medium sized business segment and commercial bookings strong execution across our core annuity sales motions and increased commitment to our platform should drive healthy growth on a flat expiry base as a reminder, the growing next.

Larger long term azure contracts, which are more unpredictable timing always drive increased quarterly volatility in our bookings growth rate.

Microsoft Cloud gross margin percentage should be up roughly two points year over year, driven by the latest accounting estimate change noted earlier, excluding the impact of the change in accounting estimate Q1 gross margin percentage will decrease roughly one point driven by revenue mix shift to azure and the impact from the nuance acquisition, partially offset.

That continued margin improvement in Azure.

And capital expenditures, we expect a sequential decrease on a dollar basis with normal quarterly spend variability and the timing of our cloud infrastructure build out.

Next the second guidance in productivity and business processes, we expect revenue to grow between 12, and 14% in constant currency or $15 95 to $16. Two 5 billion U S dollars and office commercial revenue growth will again be driven by office 365 with seat growth.

Cross customer segments, and our gross <unk> five we expect office 365 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 the segment level and our on premises business on a prior year comparable which benefited from contracts with high.

In periods of rapidly recognition, we expect revenue to decline in the mid to high Thirty's and office consumer we expect revenue to grow in the low to mid single digits driven by Microsoft 365 subscriptions for Linkedin. We expect continued strong engagement on the platform, although results will be impacted by the slowdown in advertising.

And hiring resulting in low to mid teens rep growth and then dynamics, we expect revenue growth in the mid to high teens driven by share growth in dynamics 365 for.

For intelligent cloud, we expect revenue to grow between 25, and 27% in constant currency or 23% to 26 billion U S dollars.

It 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, we expect azure revenue growth to be sequentially lower by roughly three points on a constant currency basis.

Asia revenue will continue to be driven by strong growth in consumption in our per user business should continue to benefit from Microsoft 365 suite momentum.

No we expect moderation in growth rates, given the size of the installed base.

Our on premises server business, we expect revenue to decline low single digits, driven by strong demand for our hybrid offerings offset by the prior year comparable which included benefit from contracts with higher in period revenue recognition.

In enterprise services, we expect revenue growth to be in the low single digits driven by enterprise support partially offset by declines in Microsoft consulting services and more personal computing, we expect revenue to grow between one and 4% in constant currency or 13 to $13 4 billion.

In U S dollars and Windows OEM, we expect revenue to decline in the high single digits, excluding the impact from the Windows 11 revenue deferral last year revenue would decline mid teens, reflecting continued weakness in the PC market in windows commercial products and cloud services customer demand for Microsoft three.

65, and our advanced security solutions should drive growth in the high single digits.

Surface revenue should decline in the low single digits.

Search and news advertising ex Tac should grow in the mid to high teens, roughly 10 points faster than the overall search and news advertising revenue driven by growing first party revenue and the inclusion of Sandler and in gaming, we expect revenue to decline in the low to mid single digits.

Driven by declines in first party content, partially offset by growth in game pass subscribers and consoles.

Xbox content and services revenue to decline in the low to mid single digits now back the company guidance.

The Cogs to grow between 12, and 14% in constant currency or to be between $14 nine and $15 1 billion U S dollars and operating expense to grow between 19, and 20% in constant currency or to be between $13, three and $13 4 billion U S. Dollar.

Total company head count is expected to continue to grow with 11000 hires expected to start in Q1, primarily in cloud engineering, Linkedin customer deployment and commercial sales.

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, which can increase quarterly volatility and we expect our Q1 effective tax rate to be approximately 19%.

Finally, as a reminder, our Q1 cash flow, we will be making $3 $2 billion of tax payments related to the T. C. J a transition tax and the transfer of intangible property completed in Q1 of FY 'twenty two.

In closing, we continue to see strong demand for our products and services and increased commitment to our platform as we remain focused on delivering compelling customer value in this dynamic environment, resulting in continued share gains.

As we manage through this period, we will continue to invest in future growth, while maintaining intense focus on operational excellence and execution discipline with that let's go to Q&A Brett.

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 ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

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

Excellent. Thank you guys for taking the question and very impressive results.

A very difficult environment that we're all dealing with particularly when it comes to those commercial cloud bookings and that's where my my question lies you talked about.

The largest ever number of big deals that you guys were able to sign in Q4, typically we think this type of environment. It makes it harder to sign those big deals.

Can you talk to us a little bit about how you got that done was the.

The consolidated impact that Microsoft brings to the market the price performance.

And maybe the macro is that actually a benefit for you guys to close these deals in this type of environment or was it just kind of a typical Q4 end of end of your kind of budget flush kind of thing for you guys.

And it was absent of the environment are not really related to the environment.

Thank you Keith for the question.

It was a record even for us even with the context of Q4.

So.

There's obviously something going on in the macro environment, which does feel that it does play to our strengths. There are two things at least out of one is the whether the bookings number or the Mac deals.

Size of the Mac deals and the number of them.

I think speak to very much what we have been talking about for a long time, now which is as a percentage of GDP <unk>.

Spend is going to increase because every business is trying to fortify itself with digital tech to in some sense navigate this macro environment. So that I think is probably what is reflected in those numbers and then the second aspect is also what you just referenced which is we do have every layer of the tech stack provide weather.

It's in fraud data hybrid work security.

Even power platform in each one of these we do have this best of suite value, which includes best of category products.

And that is leading to share gains. So if you want to bet on a window on a long term basis, where you have that best of suite value and then you're able to sort of consume it on your thumbs I think that that's effectively what some of those numbers are indicated off.

Authentic thank you guys.

Thanks, Keith Jesse next question please.

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

Thank you very much and congratulations on the quarter.

I'd like to follow up a little bit on that with all the concerns about macro recession everyone's trying to understand how cloud and Microsoft case, more specifically I S pass operator, and a slowdown in recession, how do you think about azure.

Brazilian see how do you think about Azure has exposure to advertising business consumer Internet in SMB, if we do see a real recession. Thank you.

Yeah, maybe I'll start and Amy feel free to add I mean overall, we're not immune to what's happening in the macro broadly right to Keith's question. In your question Mark I think I'd say I'd start there because whether it's on the demand side with consumers or Smbs I think Amy in our remarks.

<unk> about some of that even in our results in the quarter.

But what's happening with it in Azure, though is.

In some sense business is trying to deal with.

The overall macroeconomic situation and doing trying to make sure that they can do more with less.

So for example, moving to the cloud is the best way to shape your spend with demand uncertainty right because in fact, if anything one of the things that we are seeing is an increased shift towards the cloud.

And then of course, optimizing your bill and we are in setting even our own field to ensure that the bills for our customers comes out and that in fact, even shows up in some of the volatility in our Azure numbers, because that's one of the big benefits of the public cloud and that's why I think coming out of this.

Macroeconomic crisis, the public cloud will be even a bigger win because it does act as that deflationary force.

So that's sort of what we are seeing in the Azure numbers, we will be exposed to.

Two consumer driven businesses smbs, but at some level our strength as a company is much stronger in the core commercial so.

So I think that will do fine there. The other one is also people building new applications that are completely new frontier. I mean, there are two numbers that I talked about one is the triple digit growth in cosmos, DB and triple digit growth in container App services you take those two things and you say what are people doing people are writing.

<unk> applications at a completely different frontier of efficiency, which is a cloud native silver less container based types of applications and so to me. That's another way for you to make sure that your it spend goes a long way in a time like this.

Thanks, Mark Jessica next question please.

Absolutely. Our next question is coming from the line of Brent Thill with Jefferies. Please proceed with your question.

Amy Great to hear the double digit guidance I guess, many are asking are you embedding a worsening macro environment or a similar environment that we're in.

To get to that type of growth.

Thanks, Brian as I said, it's trying to take into account the correct.

Macro environment and as I said I took what we saw in June applied it.

We thought we could get through the course of the fiscal year.

And if you think about healthy and if you try to look over the course of the year.

My comments you'd say, okay in H one versus age two.

Three things that changed a bit over the course of that time.

First of course.

Talking about USD would be FX.

It's a bigger headwind in H, one of it's less of a headwind in H two.

The second thing I would.

Two with the Opex as we've talked about in each one.

We've.

Obviously added 22% head count this quarter, we still have 11000 hires that we have starting in Q1.

Still got nuance, Zander and acquisitions and we anniversary a lot of that as we focus our hiring and focus on the productivity of all of the hiring we've done over the past year and then the OEM Comparables, obviously get a lot different when you get from a slot into H two and so as you.

Trying to think about the shape of it and how did I consider it.

I sort of took those things into account.

Thought about the trends we've been seeing in June and applied them as best we can.

Thanks, Brent Jesse next question please.

Our next question is coming from the line of Karl Keirstead with UBS. Please proceed with your question.

Thanks, very much I'd love to probe a little bit more on Azure.

U N South you talked about very robust large new deal activity.

Thought your guidance for Azure or constant currency growth in the September quarter of a three point do you sell the 43 is fairly solid but you did mention that in the June quarter, you experienced a little bit of consumption softness do you mind, explaining what that was and when you put all this together how.

Are you feeling about the Azure business in the next couple of quarters in terms of the slope of the likely deceleration. Thank you.

Thanks, Carl maybe I'll start and then talk to you.

Obviously should add onto the commentary I would put your Pearl really just some of the things you mentioned, which is and we said in our comments, we did see some deceleration of point.

More than we had expected and the consumption side through the course of Q4, it really applied across all customer segments and in general applied across geographies.

All customers as Satya discussed much like they always do focus on optimization.

Continuing to think about with new workloads to prioritize and start we've really taken.

That.

Frame and applied it as we thought to H, one and specifically to Q1 and that guidance does assume.

Continued.

<unk> deceleration of three points quarter to quarter I still feel very good about the patterns. We're seeing I feel good about the workloads that Sop, you've mentioned and where we feel like we could take some share but at the same time, we really are focused on taking the agreements that we signed in Q4, making sure were working.

With the customers on deployment projects that have quick time to value investing to make sure theyre starting to projects that can save them money that can help them innovate.

And I think that's.

Probably our larger focus rather than just.

The pure consumption number.

Thanks, Carl just the next question please.

Our next question is coming from the line of Raimo <unk> with Barclays. Please proceed with your question.

Thank you along those lines on the <unk>.

Customers kind of.

Having slightly different spending priorities as they kind of try to maneuver at this environment can you talk a little bit more about what youre seeing in office, because obviously with all those five you're offering a much more comprehensive solution that is kind of getting very very competitive on several aspects. What are you seeing there in terms of your willingness.

Two of customers to kind of use this time to kind of consolidate program. Thank you.

Yeah, maybe I'll just start and then you can add there.

Two numbers.

That our usage user growth numbers right the 14% growth in.

The number of seats of Microsoft 365, and then the five growth of.

60% I think speak to again that best of suite value in the core add Denise five so we are very very competitive.

On both of those and that's what you are seeing in that seat growth.

And I think where I would point to maybe just just to add a little bit as you can see it.

Do you think we've been building momentum really with <unk> five.

There's so much value and we've added and continue to add value to the E. Five suites and add that value has become more and more competitive both at the category level and at the suite level.

Very focused on making sure our customers get every bit of value in that SKU. So focus on deployment, increasing usage moving resources. There some of our investment that we've spent over the past six months and looking forward.

For hiring will be in those areas to make sure we're helping customers get the most out of that SKU the team and in Q4 and specifically in some of the bookings numbers <unk> was a strong point in terms of both receivables and people, adding <unk> five two.

To their existing contract.

Makes sense. Thank you congrats.

Thanks, Justin next question please.

Our next question is coming from Phil Winslow with Credit Suisse. Please proceed with your question Hi, Thanks for taking my questions. Congrats on a strong quarter.

Wanted to focus in on your comments about about capital spending, but also just utilization within.

Obviously quite a few major issues, we mentioned before.

Since the stores, where utilization Stanford around Azure and as you think about sort of.

Manned trends relative to supply chain.

How are you feeling about sort of where capacity stands right right now and is this actually driving any changes in your customer behavior.

Great.

Our reserve.

Et cetera, that'd be great. Thank you.

Thank you maybe.

Let me start by talking about Q4 as capital spend obviously, the big driver of our growth. This quarter was in data center spend both new and do builds as well as adding capacity to existing data centers, we are seeing.

Obviously, good demand signal.

So hence we've guided to another strong spending quarter in Q1.

The capital, although it's a sequential decline I would think about that before as being timing it's always.

It can move around a little bit just based on when builds are complete or when shipments come in.

We do feel.

That you've got in.

In a good place on capacity on a global basis.

And our focus on making sure our customers can drive for new units they need the new users they need in those in those data centers I don't know if you wanted to add anything to that yes, I mean, I think you captured it right and it is also right that customers are using more reserved instances and so that's essentially a price discount right. So that's the kind of optimization.

Do you see so we are growing not good numbers, where post team consumption is with all of that optimization in place.

Thanks, Phil Justin next question please.

Our next question is coming from the line of Kirk <unk> with Evercore ISI. Please proceed with your question.

Hi, Thanks, very much for taking the question. Amy you noted a couple of times just seeing some weakness in more of the small business segment can you just talk about what's going on there is that an opportunity for you all to go in and try to sell more bundles in your suite.

How much of a drag has that been and do you see it getting better or worse I was just if you got a little bit more color on that part of your business. It would be helpful. Thank you.

But it's that's a great question Kirk I did allude to it a couple of times.

When discussing office.

MFS or the Azure per user service as well as windows commercial and of course that is because it's all related to selling Microsoft 365.

And we did see as I noted.

New deals.

Clearly in the SMB segment.

Outside of E. Five so to your point think of them as skews. It really intended right for that type of type of audience of end customer base.

And it came from a couple of things one of which we.

We talked about before is that we are that is primarily sold through a partner and so we need to make sure. We've got the best value props, you've got to make sure. The prices right offers right and make sure that we are tuned.

Tuning that value prop to what small business customers need today, which has great value and so we will keep executing battery partner, we're in the middle of that transition, we talked about last quarter and we're still working on it. The second thing is I would also say that is a spot where you tend to see macro weakness show itself.

And we alluded to that as well in my call that because while I can't tell you in particular, which part of that is some of the partner transition work were doing versus macro it certainly feels like boats and so that's certainly a spot that we're watching I think.

Your point around making sure we've got the right bead, which is absolutely do more with less and that we can help them both modernize to get great value.

The suites.

But it's an important caveat.

To that but you saw it the way it shows itself as you might notice as you saw at the seat growth be a little lighter than you would've expected in the quarter.

And then in Q1 that shows itself is a little bit of T cell and that office 365, gross number quarter to quarter.

Thank you.

Jessie we have time for one last question.

Our final question will come from the line of Alex Zukin with Wolfe Research. Please proceed with your question.

Hey, guys. Thanks for sneaking me in I guess I wanted to double down on the consumption commentary with respect to Azure, specifically I guess do you feel as though clearly the guidance I think it is very.

That's a very competent posture when you think about your visibility into those consumption dynamics is it that youre seeing customers optimize their spend are you seeing them commit to longer duration con.

Contract and therefore, you've kind of okay.

The different linearity of that consumption pace and then if you think about it on a global basis.

Are there any different patterns domestically versus internationally.

Moderating project starts or just general optimization conversations.

Maybe I'll start and let start to you add.

And when we talked about it what we saw in June .

The quarter and then as we're thinking about Q1 as we have seen that deceleration in consumption apply really across customer segments.

In general it was across Geos I wouldn't point in particular to any specific G. O is showing a very different pattern than any other G O.

And certainly we've not applied that logic as we've looked at it.

Q1.

I do think it speaks to what <unk> said, which is we see customers continuing to optimize whether that's whether it's through reserve instance, westbridge through existing workloads the purchase patterns.

And I expect that to continue which is absolutely what the guide implies and it implies.

That these azure commitments that we signed through the course of the year because it takes time to convert those large contracts until actual consumption and new project growth is as that work gets completed both the customer and with our help you'll.

You'll start to see new projects add.

As the plot to the optimization that occur so it doesn't really I would not point to it as being different.

That we have certainly seen to this point, it's just a consistent.

Deceleration that we've talked about.

Thanks, Alex.

That wraps up the Q&A portion of today's earnings call. Thank you for choice today, and we look forward to speaking with all of you soon.

Thank you. Thank you.

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.

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