Chapter: Productivity & Business Process - Highlights
Chapter: Productivity & Business Process - Overview
Chapter: Intelligent Cloud - Highlights
Chapter: Intelligent Cloud - Overview
Chapter: More Personal Computing - Highlights
Chapter: More Personal Computing - Overview
Chapter: Other Financial Highlights - Part 2
Chapter: Outlook - FY18
Chapter: Outlook - FY18Q1
Chapter: Microsoft FY17Q4 Earnings Release
MSFT Earnings Conference Call
Chris Suh, Satya Nadella, Amy Hood
Thursday, July 20, 2017
CHRIS SUH: Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella,
chief executive officer, Amy Hood, chief financial officer, Frank Brod, chief accounting officer, and John Seethoff,
deputy general counsel and corporate secretary.
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 the 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 that these items and events had 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 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.
At the start of fiscal 18, Microsoft adopted ASU 606, the new revenue accounting standard. Today’s Q4 earnings
report and any forward looking statements follow the current revenue accounting standard, consistent with our reporting
throughout FY17. In early August, we will be holding a conference call to provide you information that will
aid you in the transition to the new standard.
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 until July 20th, 2018.
Chapter: Forward looking Statements
During this call, we will 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, in the comments made during this conference call, and in the risk factor 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.
SATYA NADELLA: Thank you, Chris, and thank you to everyone on the phone for joining.
Chapter: Quarterly Business Highlights
This quarter we delivered $24.7 billion in revenue — up 10 percent in constant currency. For the year, we’re at $96.7
billion in revenue, up 5 percent.
I’m proud of the progress, particularly the strength of our commercial cloud results. FY17 all up was a tremendous
year of customer momentum with cloud, AI progress and digital transformation.
Our technology world view of an Intelligent Cloud and an Intelligent Edge is resonating with businesses everywhere.
Every customer I talk to is looking for both innovative technology to drive new growth as well as a strategic partner
who can help build their own digital capability.
Microsoft is that trusted partner.
Now let’s look at the progress we made this quarter by segment, starting with Productivity and Business Processes.
The workplace is transforming — from changing employee expectations, a need for more diverse skills and globally
distributed teams, and an increasingly complex threat environment. Only Microsoft gives customers a comprehensive
approach for this new culture of work.
Earlier this month we introduced Microsoft 365, which brings together Office 365, Windows 10 and Enterprise Mobility
& Security in a complete, secure solution to empower employees, safeguard businesses and simplify IT management.
Microsoft 365 is a fundamental shift in how we design, build and go-to-market to address customer needs. Fortune
500 customers Fed-Ex, Dow Chemical, Staples and Progressive Insurance all chose Microsoft 365. The success of our
Secure Productive Enterprise offering with its triple digit seat growth is one reason we are investing in Microsoft
365 for businesses of all sizes.
We continue to see strong growth of Office 365 with customers like Nissan, Quicken Loans, Key Bank and Deutsche Telekom
all choosing Office 365. And importantly, customers are moving beyond core workloads to adopt higher value workloads.
For example, we’ve seen a significant increase in SharePoint usage, which nearly doubled year-over-year.
The classroom is also transforming. This quarter we introduced Microsoft Teams in Office 365 for Education, the digital
hub for students and teachers. Microsoft Teams gives educators a whole new way to create and inspire modern classroom
environments. With rich learning tools and the ability to have digital conversations with students, share materials
and manage assignments, Teams gives educators more time to focus on doing what they love most – teaching.
Now I’ll talk about the second part of our ambition in this segment –reinventing business processes.
We are investing in the LinkedIn flagship experience to create new value for members and customers and accelerate
growth. We saw continued momentum in mobile and strong engagement across the platform, with sessions up more than
20 percent for the third consecutive quarter. And we continue to innovate new ways for members to maximize the value
of the platform. We launched a new messaging overlay resulting in record levels of messages sent on LinkedIn, and
introduced a career advice marketplace that will let members easily tap into the professional expertise of more
than 500 million members around the world. On top of that, Talent Solutions saw record level growth in confirmed
hires and InMail response rates this quarter.
I’ve talked about the opportunities with Dynamics and LinkedIn. Earlier this month, we launched the Microsoft Relationship
Sales solution, bringing together LinkedIn Sales Navigator and Microsoft Dynamics, as well as Dynamics 365 solutions
for Retail and Talent. In a world where customers are increasingly digitizing every business process, we continue
to invest in and expand our portfolio of modern, modular business applications that are infused with AI.
We also introduced ISV Cloud Embed to make it easier for partners to modernize their existing business applications
and build new ones using Dynamics 365, Power BI, Power Apps and Microsoft Flow. Global healthcare solution provider
and partner Indegene is using it to create a mobile CRM solution for medical sales.
Customers like HSBC, Best Buy and Dolce & Gabbana all chose Dynamics 365 to transform their own businesses processes
and experience the benefits of moving away from monolithic suites.
Now, let’s talk about the progress we are making in our Intelligent Cloud segment.
Our commercial cloud annualized revenue run rate now exceeds $18.9 billion.
This quarter’s cloud growth puts us squarely on track to reach the goal we set a little over two years ago, of $20
billion in commercial cloud ARR in fiscal 2018. More than ever before, customers are placing their trust in the
Azure revenue accelerated this quarter, growing 97 percent year-over-year.
CIOs and Business Decision Makers increasingly prefer Azure as they make decisions about their cloud strategy. They
value our hybrid consistency, developer productivity, AI capabilities, and trusted approach. And we keep investing
in cloud computing to create broader economic benefit and opportunity, as we’ve done with our South Africa datacenter
expansion, bringing Azure to 40 regions globally – more than any other cloud provider. And as part of our commitment
to trust, we are helping our customers prepare to be GDPR compliant and meet the requirements of the European Union
ahead of the enforcement deadline.
AXA Global, KPMG, Dun & Bradstreet, Hearst, Walgreens, T-Mobile and Sephora all chose Azure to transform their
Box announced that it will bring its content and collaboration services to Azure and plans to use our AI to simplify
discovery and use of all types of content across the enterprise. And Baidu will use Azure to take its autonomous
driving platform worldwide.
The core currency of any business going forward will be the ability to convert their data into AI that drives competitive
advantage. It all starts with having support for the comprehensive data estate spanning Azure Database, Cosmos DB,
Data Warehouse and Data Lake, combined with SQL Server.
Azure Cosmos DB is the industry’s first globally distributed database service. It enables customers to securely and
reliably power data-intensive applications at unprecedented scale and performance, from IoT to AI to mobile and
much more. Retailer Jet.com is using Azure Cosmos DB to process trillions of transactions every day.
Customers are infusing AI into their products & services using Azure AI infrastructure and services such as Bot
Framework and Cognitive Services. Sabre, a leading technology provider to the global travel industry, is piloting
AI-powered solutions for travel agencies to better serve customers. And Dixons Carphone is using Azure and our Cognitive
Services to boost customer engagement and provide a more consistent, seamless experience across online and in their
Azure is also unique in its support for emerging intelligent cloud and intelligent edge applications.
Azure IoT Edge extends cloud intelligence to edge devices. This means IoT devices can act locally – at the edge,
while taking advantage of the cloud for global coordination and machine learning at scale.
Azure is the first cloud to provide true hybrid support that customers predominately choose. Azure Stack extends
Azure to enable developers to build and deploy applications the same way whether they run on the intelligent cloud
or at the intelligent edge, so customers can meet any regulatory requirement and bring cloud applications to remote
or disconnected locations like cruise ships or oil rigs.
Now I’ll turn to our progress in More Personal Computing.
Against the backdrop of more than 500 million Windows 10 monthly active devices and continued broad progress across
the Windows ecosystem, I want to highlight a couple of key strategic areas this quarter.
Windows 10 is made to inspire the creator in all of us and is pivotal to enabling employees to transform the way
they work. Increasingly, commercial customers value Windows 10 as the foundation for a secure, modern workplace.
Enterprise and education deployments increased 33 percent over the last quarter, as companies like NASCAR, Emirates
Airline, BMW Group and Bank of China all adopt Windows 10.
This quarter, we introduced Windows 10 S, streamlined for simplicity, security and superior performance and tailored
for the classroom. Our goal for Windows 10 S is to develop a vibrant ecosystem with partners like Acer, ASUS, Dell,
Fujitsu, HP, Samsung, and Toshiba to introduce a new class of modern devices that enable affordable, powerful new
scenarios from Windows ink to 3D. We also introduced Surface Laptop and the new Surface Pro this quarter to continue
to build and create momentum for new Windows device categories.
Now on to gaming. Our gaming business is now more than $9 billion, and growing profitably. The gaming world is evolving
faster than ever before – from game play across multiple devices, to the explosive growth in streaming and eSports,
to new subscription services and mixed reality scenarios. We are uniquely positioned to capture a larger share of
this opportunity because of our ability to unite the global community of gamers through Xbox Live – now 53 million
strong and growing – and to enable new experiences across PC, console and mobile. Our approach is to let gamers
play the games they want, with the people they want, on the devices they want.
At E3, we celebrated the passion of gamers by introducing the Xbox One X, broadening our portfolio of gaming devices
with the world’s most powerful console.
We launched two new services that broaden our reach and enrich the gaming experience, both of which are off to a
very strong start. Mixer, our new live streaming service, makes it easier than ever before for gamers to create
and share across platforms and interact in entirely new ways. Xbox Game Pass is a digital subscription service that
expands our existing gaming value proposition.
In closing… I’m proud of the progress this year – both in our own continued transformation and in how we are empowering
customers to digitally transform.
As technology disrupts every industry and has the power to make a difference in the lives of everyone, we strive
to create local opportunity, growth and impact in every country around the world. Our platforms and tools help drive
small business productivity, large business competitiveness and public sector efficiency. They also support new
startups, improve educational and health outcomes and empower human ingenuity. Our sense of purpose lies in our
Transformation is a continuous process of renewal and reinvestment. We will continue to invest in the highest growth
opportunities, lead innovation in the cloud and AI, and bring our technology and products together into experiences
and solutions that unlock new value for customers.
Chapter: Q4 Financial Summary
Now I’ll hand it over to Amy to walk through this quarter’s results in more detail and share our outlook.
I look forward to rejoining you after for questions.
AMY HOOD: Thank you, Satya and good afternoon, everyone.
This quarter, revenue was $24.7 billion, up 9 percent and 10 percent in constant currency, with stronger than expected
performance across all segments. Gross margin grew 11 percent and 12 percent in constant currency. Operating
income increased 13 percent and 16 percent in constant currency. And earnings per share was 98 cents, increasing
42 percent and 43 percent in constant currency, which includes 23 cents from the utilization of phone-related losses
from prior years that were previously non-deductible.
Chapter: LinkedIn Financials
At a company level, LinkedIn contributed approximately 5 points of revenue and gross margin growth. LinkedIn’s
operating loss of $361 million was a 6 point drag on total company operating income growth, and is entirely attributable
to the $371 million of amortization of acquired intangibles recorded in COGS and Opex.
Chapter: Quarterly Commercial Highlights - Part 2
From a geographic perspective, our results were mostly in line with macroeconomic trends, though large markets like
the US, Germany and Japan performed better than we expected.
We had a strong quarter in our commercial business, reflecting terrific execution from our sales teams and partners
in the largest quarter of our year. We increased commitment to our commercial cloud and healthy renewals on a record
volume of expirations. We closed the highest number of multi-million-dollar Azure deals to date, and improved our
annuity mix to 86 percent, up 3 points year-over-year. As a result, commercial bookings grew 30 percent, and commercial
unearned revenue was $27.8 billion, significantly higher than we expected. Our contracted not billed balance increased
to more than $31.5 billion.
As Satya mentioned earlier, our commercial cloud annualized revenue run rate exceeded $18.9 billion this quarter,
growing 56 percent. We finished the year with nearly $15 billion in commercial cloud revenue.
At the start of the year, we committed to material improvement in commercial cloud gross margin percentage and dollars.
This quarter, our commercial cloud gross margin percentage was 52 percent, up 10 points year over year, with positive
gross margin in each cloud service. Commercial cloud gross margin dollars grew 92 percent from strength across all
Chapter: Other Financial Highlights
Our company gross margin was 66 percent, up 1 point from the prior year, as sales mix of higher margin products and
services offset the impact of the growing mix of cloud revenue and $217 million of LinkedIn amortization costs.
FX was mostly in line with our expectations, with 1 point of negative impact on total revenue growth even with a
slightly weaker than expected US dollar. At the segment level, FX had a negative impact of 2 points on Productivity
and Business Processes, 1 point on Intelligent Cloud and 1 point on More Personal Computing.
Total operating expenses grew 9 percent and 10 percent in constant currency, with LinkedIn contributing 12 points
of growth, including $154 million of amortization of acquired intangibles expense.
Chapter: Productivity & Business Process - Highlights
Now to our segment results.
Revenue from our Productivity and Business Processes segment grew 21 percent and 23 percent in constant currency
to $8.4 billion, with LinkedIn contributing 15 points of growth.
Office Commercial revenue increased 5 percent and 6 percent in constant currency. Office 365 commercial revenue grew
43 percent and 44 percent in constant currency with continued installed base growth across all workloads, ARPU expansion
and emerging E5 momentum. For the first time, Office 365 Commercial revenue surpassed revenue from our traditional
Office Consumer revenue increased 13 percent driven by recurring subscription revenue and growth in our subscriber
Our Dynamics business grew 7 percent and 9 percent in constant currency, and Dynamics 365 grew 74 percent and 75
percent in constant currency.
LinkedIn revenue for the quarter was approximately $1.1 billion, a bit better than expected.
Chapter: Productivity & Business Process - Overview
Segment gross margin dollars grew 14 percent and 16 percent in constant currency, with 12 points of contribution from LinkedIn,
including $217 million of amortization. Gross margin percentage declined from an increasing cloud revenue mix and
the impact of LinkedIn related amortization. Operating expenses increased 41 percent, with 40 points from LinkedIn
including $154 million of amortization expense. Operating income declined 8 percent and 5 percent in constant currency,
with 12 points of impact from LinkedIn.
Chapter: Intelligent Cloud - Highlights
The Intelligent Cloud segment delivered $7.4 billion in revenue, growing 11 percent and 12 percent in constant currency.
Our server products and cloud services revenue grew 15 percent and 16 percent in constant currency with double
digit annuity revenue growth. Azure revenue growth accelerated to 97 percent, up 98 percent in constant currency.
Azure Premium revenue grew triple-digits for the twelfth consecutive quarter.
Enterprise Services revenue declined 3 percent and 1 percent in constant currency, driven by a lower volume of Windows
Server 2003 custom support agreements partially offset by growth in Premier Support Services.
Chapter: Intelligent Cloud - Overview
Segment gross margin dollars grew 8 percent and 9 percent in constant currency, and segment gross margin percentage
declined due to increasing cloud revenue mix and lower Enterprise Services margins, partially offset by material
improvement in Azure margins. We grew operating expenses by 2 percent and 3 percent in constant currency with continued
investment in sales capacity and developer engagement. Operating income increased 15 percent, up 18 percent in
Chapter: More Personal Computing - Highlights
Now to More Personal Computing. Revenue from this segment was $8.8 billion, down 2 percent and 1 percent in constant
currency, with 4 points of decline from phone.
Our OEM business grew 1 percent this quarter, as both our commercial and consumer OEM businesses were slightly ahead
of the PC market. OEM Pro revenue grew 3 percent, ahead of the commercial PC market mainly due to a higher mix
of premium SKUs. Windows 10 deployment cycles continue to drive commercial customer hardware demand.
OEM Non-Pro revenue was flat, ahead of the consumer PC market, with continued positive impact from Windows premium
device mix. Inventory levels remained in the normal range.
Windows commercial products and cloud services grew 8 percent driven by annuity revenue growth. Enterprise customers
increasingly chose Windows 10 on new and existing devices, which led to install base growth and higher adoption
of our cloud security solutions.
Patent licensing declined this quarter, primarily from lower revenue per unit. Search revenue ex-TAC grew 10 percent
and 11 percent in constant currency driven by higher revenue per search and search volume.
Devices revenue declined 28 percent and 27 percent in constant currency. Our Surface business performed better than
we expected, declining 2 percent and 1 percent in constant currency, with strong sales execution on our Surface
Pro product transition and early positive signals from customers and partners on our Surface Laptop launch in June.
Our gaming business grew 3 percent and 4 percent in constant currency. Xbox software and services growth of
11 percent, 13 percent in constant currency, offset declines in hardware. And our engaged user base grew 8 percent
to 53 million monthly active users across console, mobile and Windows 10 platforms.
Chapter: More Personal Computing - Overview
Segment gross margin dollars increased 9 percent and 10 percent in constant currency. Gross margin percentage increased
primarily due to sales mix shift to higher margin products and services.
Operating expenses declined 10 percent, and 9 percent in constant currency, from lower Phone expense as well as
Surface and gaming marketing spend in the prior year. As a result, operating income grew 68 percent and 72 percent
in constant currency. Now back to overall company results.
Chapter: Other Financial Highlights - Part 2
This quarter, we invested approximately $3.3 billion in capital expenditures, including capital leases, up sequentially
in part due to planned Q3 datacenter spend pushed into this Q4. This includes approximately $2.3 billion of cash
paid for property and equipment, which was down year-over-year as we utilized more capital leases.
Free cash flow grew 50 percent year over year, driven primarily by operating cash flow growth of 30 percent as well
as lower cash outlays for capex. Operating cash flow increased due to higher collections from customers following
strong billings growth, as well as working capital improvements in our hardware business.
Other income and expense was $215 million, more than originally planned, as we continued to see opportunities in
the equities market to realize gains throughout the quarter.
Our non-GAAP effective tax rate was negative 6 percent, significantly lower than we expected, due to a 1.8 billion
dollar impact related to the utilization of prior years’ losses from our phone business that were not deductible
in the years incurred. Excluding this item, our non-GAAP effective tax rate was 19 percent this quarter and 20
percent for the full year.
This quarter, we returned $4.6 billion to shareholders through share repurchases and dividends.
Chapter: Outlook FY18
Now let’s turn to the outlook.
The key trends for FY18 from the Financial Analyst Briefing remain largely unchanged.
For the full year, we expect about 1 point of negative FX impact assuming current rates remain stable.
In our commercial business, we anticipate that increasing demand for cloud services and healthy renewals will continue
to drive a higher annuity mix. Our commercial transactional business will continue to decline driven by the transition
to the cloud.
We remain focused on improving our commercial cloud gross margin percentage in each of our cloud services. As a reminder,
given seasonality and revenue mix, commercial cloud gross margin will experience quarterly variability.
Cloud migrations, deployments and new scenarios are driving greater customer usage. We will increase our capital
investment to meet growing demand and capacity needs. Total capex spend will continue to have variability
quarter to quarter.
At the company level, our gross margin percentage should decline about a point in FY18 with increasing cloud revenue
mix, a full year of LinkedIn amortization and hardware launches including our new console, Xbox One X. We expect
LinkedIn quarterly amortization expense in COGS to be approximately $220 million, or about $880 million for the
Next, operating expenses. You should think about our FY18 operating expenses in two categories. First – organic
Microsoft expenses, which we expect to grow between 3 and 4 percent, reflecting the investments we are making to
support our top line growth. Second, LinkedIn. We are making incremental investments in LinkedIn to fuel its
continued strong revenue growth. Additionally, we will recognize our first full year of operating expenses,
including $620 million of amortization expense.
Importantly, we expect our company operating margin to only decline by about a point as we continue to grow our cloud
revenue, fund new investment to support growth in strategic areas and absorb $1.5 billion of LinkedIn amortization
in COGS and opex. Excluding the LinkedIn impact, operating margin should be flat year over year.
Next, our effective tax rate. As a reminder, our tax rate is impacted by at least three major factors: the proportion
of services revenue versus licensing revenue, the geographic mix of revenue, and the timing of equity vests. As
cloud revenue mix increases, we anticipate our tax rate will move higher. With quarterly variability based on these
factors, we anticipate our full year non-GAAP tax rate to be 23 percent, plus or minus 2 points.
And finally, we expect LinkedIn, ex-purchase accounting, to be non-dilutive in FY18, as it was in Q4.
Chapter: Outlook - FY18Q1
Now to the outlook for next quarter.
Based on current FX rates, we expect less than 1 point of negative impact on revenue growth overall and for each
We expect commercial unearned revenue to be within the range of $24.85 to $25.05 billion.
In Productivity and Business Processes, we expect revenue between $8.1 and $8.3 billion. Office 365 commercial revenue
growth will continue to be driven by install base growth, ARPU expansion and adoption of premium services like E5,
and should outpace the rate of transactional decline. We expect a more moderate rate of growth in our Office consumer
business given prior year comparables. In our Dynamics business, Dynamics 365 will continue to drive our cloud mix
higher. And we expect approximately $1.1 billion of revenue from LinkedIn, adjusted for the impact of purchase accounting.
For Intelligent Cloud, we expect revenue between $6.9 and $7.1 billion. Customer demand for Azure and our hybrid
cloud offerings remains strong, and we anticipate another quarter of double-digit revenue growth across server products
and cloud services. Enterprise Services revenue should decline, given lower volumes of custom support agreements.
We expect More Personal Computing revenue between $8.6 and $8.9 billion. We anticipate OEM revenue will move more
closely in line with the PC market. Devices revenue growth will continue to be impacted by the prior year phone
comparable. Surface revenue will continue to be driven by the product lifecycle transition between Pro 4 and our
new Surface Laptop and Surface Pro. In Search, Bing’s revenue growth ex-TAC should be similar to prior quarters.
And we expect gaming to have the typical seasonality revenue pattern for a pre-holiday quarter.
We expect COGS between $8.2 and $8.3 billion, including approximately $400 million from LinkedIn. LinkedIn COGS include
about $220 million of amortization.
We expect capex, on an accrual dollar basis, to be similar to Q4 as we grow our investment to meet demand.
We expect operating expenses of $8.6 to $8.7 billion, with about $1 billion from LinkedIn, of which roughly $155
million is related to amortization.
Other income and expense should be about $250 million, as we expect to realize more gains from our equities portfolio.
Given the volume of equity vests that occur in our first quarter and based on today’s stock value, we expect our
first quarter non-GAAP effective tax rate to be approximately 4 points lower than the estimated full year tax rate.
Finally, we adopted the new revenue standard, ASU 606, effective at the start of fiscal year 18. To assist
in the transition, Chris along with our chief accounting officer, Frank Brod, will be hosting a conference call
in early August to discuss these changes, present historical restated financial results, and share Q1 guidance converted
to the new standard.
And with that, let’s go to Q&A.
CHRIS SUH: Thanks, Amy.
We’ll now move to the Q&A.
Operator, can you please repeat your instructions.
HEATHER BELLINI, Goldman Sachs: Great. Thank you very much for taking the question.
Amy, I had a question about Commercial Cloud COGS and I was wondering if you could give us a sense of what percentage
of these roughly is related to depreciation and how should we think about the pace of your CAPEX deployments versus
what you have been experiencing in Commercial Cloud to support the initiatives and the vast growth opportunities
that you see ahead, as we look out over the next 12 to 24 months. If there’s anything you can share with us
around that, thank you.
AMY HOOD: Let me break down the question a couple of ways. Overall when you think about COGS and
the pacing, the depreciation rates of our servers don’t change. It’s generally over a three-year period and
there’s other pieces of equipment that have longer, or shorter depreciation lives.
So that pace of depreciation doesn’t change, per se. If you’re looking to see how we see demand, obviously
this quarter in Q4 we felt very good about cloud demand across three services, but in particular with Azure.
I feel confident in our ability to produce gross margin improvement across all those services. I feel confident
in our ability to continue to make progress on our overall Commercial Cloud gross margin growth. And I am
encouraged by the demand signals we’re getting. All of those things I think it’s not really about the pace.
It’s as much about the progress and demand and meeting those things as closely as we can. And I feel
really good about the team’s execution.
HEATHER BELLINI, Goldman Sachs: Great, thank you.
CHRIS SUH: Thanks, Heather.
The next question, please.
KEITH WEISS, Morgan Stanley: Excellent, thank you guys for taking the question and very nice quarter.
There’s a lot of rumors and speculation around sales reorganization, of you guys sort of shifting around resources
to sort of better distribute sort of cloud and the new technologies. I was wondering if you guys could dig
into that for us a little bit. What kind of changes are taking place in terms of go to market distribution,
heading into FY ’18?
SATYA NADELLA: Let me start and first of all thank you for the question, Keith. Overall the approach
we have taken for multiple years now is to transform everything that we do inside the company, whether it’s about
creation, how we are organized in the R&D, how we think about breaking down any silos and category definitions
we may have had in the past, how we think about even marketing and the marketing approach and then, of course, even
with the go to market. And this transformation is ongoing.
This has been happening over multiple years, but we now have got very good customer momentum, because ultimately
this is all driven by the opportunity at hand, which is much bigger than anything that we have participated in the
past, so the total addressable market is much bigger. And second, our customer expectations and our partner
expectations of how we show up with them has changed. And so over the years we have been making changes and
now that we have a lot more momentum and critical mass we’re going to that next phase and that’s what you are seeing
us in terms of changing the skill sets, changing the scope of how we show up to support the digital transformation
needs of both large customers, as well as small businesses.
AMY HOOD: And I think in many ways, Keith, what we’ve done is really a natural extension of some of
the investments we’ve made over the past 18 months to add technical resources to be more present in customer accounts,
to really drive their transformation towards success outcomes. You’re seeing it even in our Intelligent Cloud
results last quarter and this quarter. We’re taking that learning over the past 18 months and really applying
it at a broader scale across the sales force to put those resources where we feel confident that they’ll have a
good long-term return in that next phase of transformation.
CHRIS SUH: Thank you, Keith.
We’ll take the next question, please.
KARL KEIRSTEAD, Deutsche Bank: Thank you, a question for Amy. Amy, there were a lot of numbers
in this print that look very strong, but one that stood out to me was the commercial bookings growth of 30 percent.
You did touch on it a little bit in your remarks, but if you don’t mind I’d love to ask you a few questions.
One is you mentioned that maybe part of the strength was terrific execution on renewals. Does it feel like
maybe last quarter was a little bit of a renewal flush? In other words, it might have been a bit of a one-time
Secondly, is Microsoft doing anything different around contract structure or invoicing that would result in bookings
being unusually high, maybe collecting a little bit more up front? And lastly, is it fair to interpret this
strong bookings performance as giving us, and I suppose you, comfort in your revenue growth profile in Fiscal ’18
as all those bookings obviously convert to reported revs? Thank you.
AMY HOOD: Thanks, Karl.
Let me make sure I cover off on most of those. Let me start by saying the biggest driver in commercial bookings
growth this quarter was excellent execution on a large base of renewals. The second component of that is the
execution on new revenue, in particular Azure, as well as Windows Commercial. And billings in the quarter
were very good and quite encouraging overall.
There was no change in any way to invoicing, people paying earlier, paying more up front. That’s definitely
not an impact on that number. And so overall I think while it is certainly aided by the large expiry base,
because it tends to impact the C&B balance the most, it’s really I think to your point it is clearly encouraging,
because it gives us a very good base of support going into FY ’18 to come in to the GAAP reporting numbers.
KARL KEIRSTEAD: Got it. Thank you, Amy.
AMY HOOD: Thanks, Karl.
CHRIS SUH: Thank you, Karl.
Next question, please.
WALTER PRITCHARD, Citi: Hi, thank you. Amy, I’m wondering on the gross profit growth, I was looking
through the slide deck and it looks like gross profit growth in PBP was up about 2 percent. You saw some strong
trends in different parts of that business and I think that 2 percent I would have thought would have been higher.
Could you help us understand the puts and takes around gross profit growth in PBP?
AMY HOOD: There’s a couple of things, but in general it’s almost always mix shift. While we saw
improvement in the gross margin percentage in Office 365 and continue to make progress on that, it’s also the balance,
right. This is the first quarter where we’ve actually seen the balance tip in terms of recognized revenue
to online versus perpetual.
So I actually feel very good, but as we continue to accelerate the growth trajectory that you’re not seeing, frankly,
much impact on the gross margin line and we’re seeing a lot of levers in that through OPEX all the way down to the
operating income line.
CHRIS SUH: Thank you, Walter.
We’ll take the next question, please.
MARK MOERDLER, Bernstein Research: Thank you, and congrats on the quarter.
Amy, Commercial Cloud ARR grew 24 percent q over q, which is the largest q over q growth so far. Completely
understand that Q4 is a big quarter for closing business, but $3.7 billion is a large number. Can you give
us some more color on exactly what’s driving this growth? And then I have a quick follow-on.
AMY HOOD: Sure. When you think about it, you’re right, it is a big number, and I feel very good
about it. And for the year on a pure basis it was $15 billion of Commercial Cloud revenue. We’re starting
to get that point, Mark, where you have a big base which is still growing at a fast rate. And so especially
ARR numbers can see big jumps in the one that you saw this quarter.
And you’re right, Q4 is also historically quite a bit quarter, and this one certainly was as well. But you
also saw, and what really does matter, especially in Azure, is usage growth, really consumption growth, having customers
use, deploy, be successful, and really continue to get these things, meters, up and running and that continues to
build on itself. And so when you start to see that you can, and I do think and we’ll continue to see good
growth in this number.
MARK MOERDLER: Excellent. As a quick follow-up, how should we think of how that sets us up for
’18 in terms of hitting expectations, beating expectations, continuing strong 40s, 50s percent year over year growth?
AMY HOOD: Let me start by saying, first, I feel very good about meeting our stated goal of $20 billion
in Commercial Cloud ARR. Next, I think across every service the momentum we’ve seen in Q4, and in particular
I would say I think not many people focus on it, but even things like Windows, E5, the Advanced Threat Protection
Services, those types of deployments really will add to momentum in our offerings.
One of the things we often talk about is we sell Microsoft 365. That’s Windows 10 with security and services.
It’s a modern workplace that includes up to date Office 365. It includes EMS. We really have deep
strength across all of them. So I don’t really think it’s about a percentage, but it’s about each of them
continuing to make progress.
MARK MOERDLER: Excellent and congrats.
AMY HOOD: Thank you.
CHRIS SUH: Thanks, Mark.
We’ll take the next question, please.
PHIL WINSLOW, Wells Fargo: Hey, thanks guys, and congrats on another great quarter. A question
first for Amy on Office 365. Office 365 Commercial revenue continues to outpace the unit growth and monthly
active users, so you’re still seeing that trend up to E3, 5, et cetera. Why don’t you take us through where
we are in that lifecycle.
And also just to follow-on your comment to the last question, Satya, you launched at Inspire Microsoft 365 that Amy
just mentioned. How should we think about Microsoft 365 in the context of Office 365 also just given the fact
that Windows Commercial actually accelerated this quarter as well?
SATYA NADELLA: Maybe I can start.
AMY HOOD: Why don’t you start and I’ll do the next one.
SATYA NADELLA: So one of the things that we’re very excited about and have learned a lot from is the
Secure Productive Enterprise offer that we’ve had now for the last year and, in fact, in Q4 it really accelerated
And so that’s helped us, in fact, come up with Microsoft 365. We have this very offering that brings together
Office 365, Windows 10 as well as our Enterprise Mobility and Security, and supports even cross-platform devices.
So we think of the modern workplace as having a very significant footprint of Windows, but also people will
use phones of iOS and Android, but they need both productivity, creativity, security across all of this estate of
theirs. And that’s where I think we have a competitive advantage and a great value proposition. So that’s
what Microsoft 365 embodies.
It’s today available for enterprises and in the fall you will have the mid-market version of it, which I think is
another very big opportunity because it really helps take what we have learned in the large enterprises and scale
it to where perhaps the need is even more acute. And so we are excited about that. At Inspire the partner
channel obviously is very excited about it as well.
AMY HOOD: And Phil, to your point, and it’s a nice transition from Satya’s point about especially the
mid-market offering coming in the fall for Microsoft 365 is the install base growth. You’re right in terms
of Office Commercial 365, the primary driver is still install base, both the transitions as well as new. I
think we’re optimistic as we head into FY ’18 of the install base growth that possible, in particular for some of
these mid-market offerings that we’re quite proud of.
The RPU growth that you saw and have seen in the past couple of quarters continues to primarily still be related
to the E1 to E3 transition. When we mentioned E5, I think that’s frankly encouraging for us, because all of
these premium offers do best when you start the deployment motion, people start using E1, then they use E3, and
then you start to see the momentum in E5. And we did see that. However, in terms of RPU impact, very,
very small in quarter. So that’s something that over time you would continue to see improvement in in terms
of impact on RPU.
CHRIS SUH: Thanks, Phil.
PHIL WINSLOW: Awesome, guys. Thanks a lot.
CHRIS SUH: We’ll take the next question please.
KASH RANGAN, Merrill Lynch: Hi, thank you very much. I’m curious if you can shed a little bit
more light on Commercial bookings growth of 30 percent. Clearly that’s off the charts. And also when
I look at the $18.9 billion of annualized revenue and judging from the fact that the Commercial business, non-Azure
part of it, was about steady growth rate. I’ve got to infer that Azure went through some significant acceleration
which has yet to be reflected in your forward-looking revenues.
So if you could just shed a little bit more light and drill into any two or three product SKUs or areas or geographies
that contributed to that off the charts performance, that would be great. That’s it for me, thank you very
much and congrats.
AMY HOOD: Thanks, Kash. Let me go though the bookings. Again, with that 30 percent the first
and best contributor to that is the strong performance on the renewals in quarter. It was reasonably consistent,
Kash. There’s not a geo in particular that I would say was a massive outlier. Although in two of our
largest geos, the U.S. and Germany, they did have very good years in particular in Q4.
Now if you separate the fact that we had the large base, which clearly contributes to that bookings number being
big, aside from that, in particular Azure in the last year point did it really show up in that $18.9? It didn’t.
The strong billings growth really showed up in that unearned out-performance, which you saw, versus the guide,
and it was significant. And a lot of that is the Azure billings. I think we felt very good. Those
as well I think were pretty broad based across industry.
I would also say across geo. And so while we, of course, get some strength from our largest geos, and I would
say they were probably the largest contributors, it was actually quite broad. There’s not really one place
for me to say that we just saw it, saw it here.
And then the final component that I would say was better than we anticipated and where you’d see that, Kash, again,
versus the unearned guidance and the beat that we had there was that final piece around our security value prop.
ATP, Windows annuity growth was very good. That’s in the KPI, Windows Commercial Products and Services
is the place you’ll look and see that number. And outside of that, those really are the biggest contributors.
KASH RANGAN: Thank you.
SATYA NADELLA: If I add one thing I’ll just say that nothing shows up in just one quarter. We’ve
been working on this for a long time, whether it’s the product and the approach we have taken from IaaS to PaaS
to SaaS, even the diversity of our SaaS offerings, and also how we think about going to market. All of these
have been multiple years of hard work and clearly there is momentum across the board, and that I think is what you’re
seeing. And we’re excited about this quarter’s execution and performance. And I think it bodes well
for what we do in the future.
But the key is for us to recognize that this is about sort of long-term commitment to a big opportunity and making
sure that you line up your execution against that.
AMY HOOD: And I think maybe I should have also mentioned when you think about seeing that type of performance,
as Satya mentioned, it’s not just because of work done this quarter. That’s a great point. But it’s
also the investments we’ve made. We’ve committed. We did sales overlays. We added technical resources.
We put resources at customers ahead of the curve. We did that. You saw that in the Intelligent
Cloud OPEX growth over the past few quarters. That execution is what’s landing.
KASH RANGAN: Clearly something inflected and it looks like you’re gaining share. So congratulations.
CHRIS SUH: Thank you, Kash.
We’ll move to the next question, please.
MARK MURPHY, J.P. Morgan: Yes, thank you very much and I will add my congrats.
Amy, going back to the size of the the large size of the expiry base in Q4, when we look back three years to
June of ’14 in that quarter the commercial bookings grew 23 percent. I’m just curious, is that representative
of the portfolio that flowed through into this quarter on a three-year cycle or is it more complex than that? And
also does it include or exclude LinkedIn contributions for the current period? And just finally I’m wondering,
again, looking back three years, it was a different number in the September quarter that follows. And can
you help us just with the year-over-year growth of the expiry base for the September quarter? I’m not sure
if you had commented on that.
AMY HOOD: Okay. You’re right, Mark. It’s not exactly if I said is the Q3 from three years
ago exactly the expiry base. It’s not exactly. But it’s directionally. And so that’s a good example
to say, you know, every three years tends to be the length of our agreements and so you do tend to see that repeated.
And so that’s what we mean by sort of the record or the largest expiry base. And that is the pattern.
In terms of LinkedIn having any impact, it did not. So that is the cleanest way to think about that
CHRIS SUH: Thanks, Mark.
We’ll move to the next question, please.
ROSS MCMILLAN, RBC: Thanks very much and my congratulations, as well.
I’m actually going to ask a question about the traditional server products business, which one again had a pretty
strong growth rate at 5 percent. I think the last three quarters who have been trending at mid-single digits
or even higher. And, Amy, I’d just love your thoughts as we progress through Fiscal ’18, just so we think
about this in the right way. How would you expect that sort of growth rate to trend and should we be sort
of aware of the comps that come up in Q2 and beyond?
SATYA NADELLA: Maybe I can start and at least give you how we think about it technically and product-wise
and then we can go into sort of talking about the future in terms of the results. First of all, we don’t think
of our servers as distinct from our cloud. In other words, this intelligent cloud and the intelligent edge
is the architectural pattern for which we are building, whether it’s SQL Server 2017 or it’s Windows Server, the
container service, everything that we do assumes the distributed computing will actually remain distributed.
And it turns out that it’s helpful to think about it that way, both for customers who are rationalizing their portfolios
of apps that the lift-shift modernizes to what they run in their data centers, or in our data centers, but also
forward looking new workloads. If you look at some of the most exciting things that are happening in the cloud
it is cloud applications that actively require an edge. Azure IoT and Azure Stack are becoming the runtimes
of the edge, where you do need not only the ability to do compute and storage, but to run the AI inference at the
So to me that’s what we are building to. It’s actually a big architectural shift from thinking purely of this as
a migration to some public cloud to really thinking of this as a real future distributed computing infrastructure
and applications that I, quite frankly, feel very, very good about leading and so in that context our server license
revenue will fluctuate, based on what the macro is and these transitions and mix shifts.
But from a forward looking perspective I want us to be very, very clear that we anticipate the edge to be actually
one of the more exciting parts of what’s happening with our infrastructure.
AMY HOOD: And so that leaves why I always tend to say I don’t focus as much on the mix, per se. I
know both of them will matter. I know both of them are important. And so that’s why I tend to focus
on that all-up server KPI combination of the progress in the cloud, Azure, as well as the edge, which is the on-prem.
And so I think we remain confident in that double-digit target that we have for that KPI. And there isn’t really
I don’t think sort of a comparability challenge, per se. But that’s why we try to keep it at that high level
to not get too tied to one or the other, given we know the TAM expansion that’s possible. We know we can grow
I apologize, I didn’t answer Mark’s last component. So let me just go back and I had forgotten, which was,
was there anything unique in the expiry base for Q1. The answer is it’s up a little year-over-year, but certainly
not through the same type of Q4 comparable. When we tend to have these we try to call them out like we did
in Q3 leading into Q4. So Q1 I would say is just up a little, so I wouldn’t expect any material impact.
CHRIS SUH: Thank you, Ross.
We’ll take the next question, please.
RAIMO LENSCHOW, Barclays: Thanks for taking my question. I wanted to drill in on the premium
services in Azure. Satya, you talked a little bit about SharePoint taking off and being a big part. Can
you talk a little bit about the portfolio you have there and I also wanted to contrast it a little bit with one
of your main competitors, who keeps coming up with new products just to kind of get to that premium service and
the advantage that you guys have, given the IP that you’ve built up over the years.
SATYA NADELLA: Yeah, I mean I think we have premium services, whether it’s in Office 365 or in the SaaS
side with Dynamics 365 and that’s where the SharePoint comment came that there’s a lot more in Office 365 adoption
cycle, beyond Exchange or e-mail. On the Azure side my comments, in fact, walk that entire tree, so to speak,
which is there’s the infrastructure there, where, in fact, even in the infrastructure side there is no such thing
as one generic infrastructure, when I look at the diversity of the virtual machines, what’s happening with AI infrastructure,
with GPU compute. So there’s a lot of richness there.
The layer above that for me is the data estate. One of the exciting things is the growth in Azure DB, the growth
in Cosmos DB, our data warehouse product, the Data Lake. So that’s a place where we are seeing significant
attach on top of the data is where the AI services, whether it’s the Bot Framework, the Cognitive Services. So
that’s all the rich services where we are seeing significant customer action.
The other side of it is the edge. So Azure IoT service, both in the cloud and the edge, and Azure Stack now
truly starting this quarter is going to be another way to extend out the rich services of Azure even beyond public
cloud deployment. So that hopefully gives you a flavor for the IP that we have.
And then one lynchpin that we have between, in fact, our SaaS services as well as Azure is Azure Active Directory,
90 percent of all the enterprises use Active Directory and all of them rendezvous with Azure Active Directory, irrespective
of what applications they have in whichever cloud, because that becomes a very key control plane for IT.
RAIMO LENSCHOW: Perfect, thank you.
CHRIS SUH: Thanks, Raimo.
We’ll have time for one more question.
BRAD REBACK, Stifel: Great. Thanks very much.
Amy, as the Azure business continues to gain scale and, to Raimo’s question, the premium mix continues to become
a bigger part of that, is there any reason to think that the gross margin gains shouldn’t accelerate in ’18 versus
where they were in ’17? Thanks.
AMY HOOD: Thanks, Brad.
The way I tend to think about it is within each service you want the gross margin itself to improve, and that includes
in the Azure Services components themselves. The difference between core compute and store versus the premium
layers can be significant. And we’ve had improvement across all of them. So the real question on how
and where should the Azure gross margin be is about sort of the ultimate mix of those. And we saw significant
improvement this year. We expect a lot of improvement again next year on each of those service lines.
Where the actual mix occurs among those lines I think we’ll just have to wait and see. But that’s why I tend
to not focus at that layer. It’s like can you get every service better, can you make material improvement?
And then, of course, can you get usage and consumption going, that leads to premium service usage. And,
of course, over time you’d expect a higher mix of premium versus core.
BRAD REBACK: Great. Thanks very much.
CHRIS SUH: Thanks, Brad.
That wraps up the Q&A portion of today’s earnings call.
As Amy mentioned, Frank and I will be hosting a conference call in early August to discuss the changes under the
new revenue standards. You can find additional details for that on the Microsoft Investor Relations website
Thank you again for joining us today.
SATYA NADELLA: Thank you all. Thanks.
February 26, 2018 8:45 AM - PT
Morgan Stanley Technology, Media & Telecom Conference