Microsoft Fiscal Year 2023 First Quarter Earnings Conference Call
FY23 First Quarter Earnings Conference Call
Brett Iversen, Satya
Nadella, Amy Hood
Tuesday, October 25, 2022
Good afternoon and thank you for joining us
today. On the call with me are Satya Nadella, chairman and chief executive
officer, Amy Hood, chief financial officer, Alice Jolla, 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
the reconciliation of differences between GAAP and non-GAAP financial measures.
On this call we will
discuss certain non-GAAP items. 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 first quarter performance in addition to the impact these items and
events have on the financial results.
All growth comparisons we make on the call
today relate to the corresponding period of last year unless otherwise noted.
We will also provide growth rates in constant currency, when available, as a
framework for assessing how our underlying businesses performed, excluding the
effect of foreign currency rate fluctuations. Where growth rates are the same
in constant currency, we will refer to the growth rate only.
We will post our prepared remarks to our
website immediately following the call until the complete transcript is
available. Today's call is being webcast live and recorded. If you ask a
question, it will be included in our live transmission, in the transcript, and
in any future use of the recording. You can replay the call and view the
transcript on the Microsoft Investor Relations website.
During this call, we will 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.
start, I want to outline the principles that are guiding us through these
changing economic times:
we will invest behind categories that will drive the long-term secular trend,
where digital technology as a percentage of the world’s GDP will continue to
we will prioritize helping our customers get the most value out of their
digital spend, so that they can do more with less.
finally, we will be disciplined in managing our cost structure.
that context, this quarter, the Microsoft Cloud again exceeded $25 billion in
quarterly revenue, up 24 percent and 31 percent in constant currency.
based on current trends continuing, we expect our broader commercial business
to grow at around 20 percent in constant currency this fiscal year, as we
manage through the cyclical trends affecting our consumer business.
that, let me highlight our progress, starting with Azure.
to the cloud is the best way for organizations to do more with less
today. It helps them align their spend with demand and mitigate risk
around increasing energy costs and supply chain constraints.
also seeing more customers turn to us to build and innovate with infrastructure
they already have.
Azure Arc, organizations like Wells Fargo can run Azure services – including
containerized applications – across on-premises, edge, and multi-cloud
now have more than 8,500 Arc customers, more than double the number a year
ago. We are the platform of choice for customers’ SAP workloads in the
cloud. Companies like Chobani, Munich RE, Sodexo, Volvo Cars all run SAP
are the only cloud provider with direct and secure access to Oracle databases
running in Oracle Cloud Infrastructure, making it possible for companies
like FedEx, GE, and Marriott to use capabilities from both
with Azure Confidential Computing, we’re enabling companies in highly regulated
industries, including RBC, to bring their most sensitive applications to the
last week, UBS said it will move more than 50 percent of its applications to
to data and AI.
our Microsoft Intelligent Data Platform, we provide a complete data
fabric, helping customers cut “integration tax” associated with bringing
together siloed solutions.
like Mercedes-Benz are standardizing on our data stack to process and govern
massive amounts of data. Cosmos DB is the go-to database powering the
world’s most-demanding workloads, at limitless scale.
DB now supports PostgreSQL, making Azure the first cloud provider to offer
a database service that supports both relational and NoSQL workloads.
in AI, we are turning the world’s most advanced models into platforms for
this month, we brought the power of Dall-E to Azure OpenAI service,
helping customers like Mattel apply the breakthrough image generation model to
commercial use cases for the first time.
Azure Machine Learning provides industry leading MLOps, helping organizations
like 3M deploy, manage, and govern models.
Azure ML revenue has increased more than 100 percent for four quarters in a
on to developers.
have the most complete platform for developers to build cloud-native
years since our acquisition, GitHub is now at $1 billion in annual recurring
revenue. And GitHub’s developer-first ethos has never been stronger. More
than 90 million people now use the service to build software for any cloud and
any platform, up 3 times.
Advanced Security is helping organizations improve their security posture by
bringing features directly into developers’ workflows.
North America chose the offering this quarter to help its developers build and
secure many of its most critical applications.
on to Power Platform.
helping customers save time and money with our end-to-end suite, spanning low-code/no-code
tools, robotic process automation, virtual agents, and business
BI is the market leader in business intelligence in the cloud and is
growing faster than competition, as companies like Walmart standardize on
the tool for reporting and analytics.
Apps is the market leader in low-code/no-code tools and has nearly 15 million
monthly active users, up more than 50 percent compared to a year ago.
Automate has over 7 million monthly active users, and is being used by
companies like Brown-Forman, Komatsu, Mars, T-Mobile to digitize manual
business processes and save thousands of hours of employee time.
we’re going further, with new AI-powered capabilities in Power Automate
that turn natural language into advanced workflows.
on to Dynamics 365.
customer experience and service, to finance and supply chain, we continue
to take share across all categories we serve. For example, Lufthansa Cargo
chose us to centralize customer information and related shipments.
is optimizing its field service operations, gaining cost
efficiencies. Darden is using our solutions to increase both guest
frequency and spend at its restaurants. And, Tillamook is scaling its
growth and improving supply chain visibility.
more than 400,000 organizations now use our business applications.
on to industry solutions.
seeing increased adoption of our industry and cross-industry clouds.
of Queensland chose our Cloud for Financial Services to deliver new digital
experiences for its customers. Our Cloud for Sustainability is off to a
fast start, as organizations like Telstra use the solution to track
their environmental footprint.
updates provide insights on hard to measure Scope 3 carbon emissions.
we’re seeing record growth in healthcare, driven in part by our Nuance DAX
ambient intelligence solution, which automatically documents patient
encounters at the point of care.
tell us DAX dramatically improves their productivity, and it’s quickly becoming
an on-ramp to our broader healthcare offerings.
on to new systems of work.
365, Teams, and Viva uniquely enable employees to thrive in today’s digitally
connected, distributed world of work.
365 is the cloud-first platform that supports all the ways people work and
every type of worker, reducing cost and complexity for IT.
new Microsoft 365 app brings together our productivity apps with third-party
content, as well as personalized recommendations.
Teams is the de facto standard for collaboration and has become essential to
how hundreds of millions of people meet, call, chat, collaborate, and do
we emerge from the pandemic, we are retaining users we’ve gained and are
seeing increased engagement too.
interact with Teams 1,500 times per month on average.
a typical day, the average commercial user spends more time in Teams chat than
they do in e-mail, and the number of users who use four or more features
within Teams increased over 20 percent year over year.
is becoming a ubiquitous platform for business process.
active enterprise users running third party and custom applications within
Teams increased nearly 60 percent year over year.
over 55 percent of our enterprise customers who use Teams today also buy Teams
Rooms or Teams Phone.
Phone provides the best in class calling. PSTN users have grown by double-digits
for five quarters in a row.
bringing Teams Rooms to a growing hardware ecosystem, including Cisco’s devices
and peripherals, which will now run Teams natively.
we’re creating a new category with Microsoft Places to help organizations
evolve and manage their space for hybrid and in-person work.
like Outlook calendar orchestrates when people can meet and collaborate,
Places will do the same for where.
also announced Teams Premium, addressing enterprise demands for advanced
meeting features, like additional security options and intelligent meeting
this innovation is driving growth across Microsoft 365.
in every industry, from Fannie Mae and Land O’Lakes to Rabobank, continue to
turn to our premium E5 offerings for advanced security, compliance,
voice, and analytics.
also built a completely new suite with our employee experience platform
Microsoft Viva, which now has more than 20 million monthly active users at
companies like Finastra, SES, and Unilever.
we’re extending Viva to meet role-specific needs. Viva Sales is helping
salespeople at companies like Adobe, Crayon, and PwC reclaim their time by
bringing customer interactions across Teams and Outlook directly into their CRM
on to Windows.
the drop in PC shipments during the quarter, Windows continues to see usage
there are nearly 20 percent more monthly active Windows devices than
on average, Windows 10 and Windows 11 users are spending 8.5 percent more
time on their PCs than they were two and a half years ago.
we’re seeing larger commercial deployments of Windows 11.
for example, has deployed Windows 11 to more than 450,000 employee PCs, up
from just 25,000 seven months ago, and L’Oreal has deployed the operating
system to 85,000 employees.
on to security.
continues to be a top priority for every organization.
are the only company with integrated, end-to-end tools spanning security,
compliance, identity, and device management, and privacy across all clouds
than 860,000 organizations across every industry – from BP and
Fujifilm, to ING Bank, iHeart Media, and Lumen Technologies – now use our
security solutions, up 33 percent year over year.
can save up to 60 percent when they consolidate on our security stack, and the
number of customers with more than 4 workloads have increased 50 percent
year over year.
organizations are choosing both our XDR and cloud-native SIEM to
secure their entire digital estate.
number of E5 customers who also purchased Sentinel increased 44 percent year
as threats become more sophisticated, we’re innovating to protect
capabilities in Defender help secure the entire DevOps lifecycle and manage
security posture across clouds.
Entra now provides comprehensive identity governance for both on-premises and
cloud-based user directories.
on to LinkedIn.
again saw record engagement among our more than 875 million members, with
international growth increasing at nearly 2X the pace as in the Unites
are now more than 150 million subscriptions to newsletters on LinkedIn, up 4X
year over year.
integrations between Viva and LinkedIn Learning help companies invest in
their existing employees by providing access to courses directly in the flow of
added 365 million skills to their profiles over the last 12 months, up 43
percent year over year.
with our acquisition of EduBrite, they will also soon be able to earn
professional certificates from trusted partners directly on the platform.
launched the next generation Sales Navigator this quarter, helping sellers
increase win rates and deal size by better understanding and evaluating
LinkedIn Marketing Solutions continues to provide leading
and ROI in B2B digital advertising.
broadly, with Microsoft Advertising, we offer a trusted platform for any
marketer or advertiser looking to innovate.
expanded our geographies we serve by nearly 4X over the past year.
seeing record daily usage of Edge, Start, and Bing, driven by Windows.
is the fastest growing browser on Windows and continues to gain share as people
use built-in coupon and price comparison features to save money.
surfaced more than $2 billion in savings to date, and this quarter, we brought
our shopping tools to 15 new markets.
of our Start personalized content feed are consuming 2X more content, compared
to a year ago.
we’re also expanding our third-party ad inventory.
will launch its first ad-supported subscription plan next month, exclusively
powered by our technology and sales.
with Promote IQ, we offer an omnichannel media platform for retailers like
Otto Group looking to generate additional revenue, while maintaining ownership
of their own data and customer relationships.
on to gaming.
adding new gamers to our ecosystem, as we execute on our ambition to reach
players wherever and whenever they want, on any device.
saw usage growth across all platforms, driven by strength
Game Pass subscriptions increased 159 percent year over year. And with
Cloud Gaming, we’re transforming how games are distributed, played, and
than 20 million people have used the service to stream games to
we’re adding support for new devices, like handhelds from Logitech
Razer, as well as Meta Quest.
as we look towards the holidays, we offer the best value in gaming, with Game
Pass, and Xbox Series S.
half of the Series S buyers are new to our ecosystem.
closing, in a world facing increasing headwinds, digital technology is the
we’re innovating across the entire tech stack to help every organization, while
also focusing intensely on our operational excellence and execution
that, I’ll hand it over to Amy.
Thank you, Satya, and good afternoon everyone. Our first quarter revenue
was $50.1 billion, up 11 percent and 16 percent in constant
currency. Earnings per share was $2.35 – and increased 4 percent and 11 percent
in constant currency, when adjusted for the net tax benefit from the first
quarter of fiscal year 22.
Driven by strong execution in a dynamic environment, we delivered a
solid start to our fiscal year, in line with our expectations, even as we saw
many of the macro trends from the end of the fourth quarter continue to weaken
As you heard from Satya, in our commercial
business, we saw strong overall demand for our Microsoft Cloud offerings, with
growth of 31 percent in constant currency as well as share gains across many
businesses. Commercial bookings declined
3 percent and increased16 percent
in constant currency on a flat expiry base. Excluding the FX impact, growth was driven by
strong renewal execution and we continued to see growth in the number of large,
long-term Azure and Microsoft 365 contracts across all deal sizes. More than
half of the 10-million-dollar-plus Microsoft 365 bookings came from E5.
performance obligation increased 31 percent and 34 percent in constant currency
to $180 billion. Roughly 45 percent will be recognized in revenue in the next
12 months, up 23 percent year-over-year. The remaining portion, which will be
recognized beyond the next 12 months, increased 38 percent year-over-year. And
our annuity mix increased 1 point year-over-year to 96 percent.
impacted company results in line with expectations. With the stronger US
dollar, FX decreased total company revenue by 5 points. And at a segment level,
FX decreased Productivity and Business Processes and Intelligent Cloud revenue
growth by 6 points, and More Personal Computing revenue growth by 3 points.
Additionally, FX decreased COGS and operating expense growth by 3 points.
Microsoft Cloud gross
margin percentage increased roughly 2 points year-over-year to 73 percent.
Excluding the impact of the change in accounting estimate for useful lives,
Microsoft Cloud gross margin percentage decreased roughly 1 point driven by
sales mix shift to Azure and lower Azure margin, primarily due to higher energy
Company gross margin
dollars increased 9 percent and 16 percent in constant currency and gross
margin percentage decreased slightly year-over-year to 69 percent. Excluding
the impact of the latest change in accounting estimate, gross margin percentage
decreased roughly 3 points driven by sales mix shift to cloud, the lower Azure
margin noted earlier, and Nuance.
Operating income increased
6 percent and 15 percent in constant currency. And operating margins decreased
roughly 2 points year-over-year to 43 percent. Excluding the impact of the
change in accounting estimate, operating margins declined roughly 4 points
year-over-year driven by sales mix shift to cloud, unfavorable FX impact,
Nuance, and the lower Azure margin noted earlier.
Now to our segment results.
Revenue from Productivity
and Business Processes was $16.5 billion and grew 9 percent and 15 percent in
constant currency, ahead of expectations with better-than-expected results in
Office commercial and LinkedIn.
Office commercial revenue
grew 7 percent and 13 percent in constant currency. Office 365 commercial
revenue increased 11 percent and 17 percent in constant currency, slightly
better than expected with the strong renewal execution noted earlier. Growth
was driven by installed base expansion across all workloads and customer
segments, as well as higher ARPU from E5. Demand for security, compliance, and
voice value in Microsoft 365 drove strong E5 momentum again this quarter. Paid
Office 365 commercial seats grew 14 percent year-over-year, driven by our small
and medium business and frontline worker offerings – although we saw continued
impact of new deal moderation outside of E5.
Office consumer revenue
grew 7 percent and 11 percent in constant currency driven by continued momentum
in Microsoft 365 subscriptions, which grew 13 percent to 61.3 million.
Dynamics revenue grew 15
percent and 22 percent in constant currency driven by Dynamics 365, which grew
24 percent and 32 percent in constant currency.
revenue increased 17 percent and 21 percent in constant currency, ahead of
expectations driven by better-than-expected growth in
Talent Solutions partially offset by weakness in Marketing Solutions from the
advertising trends noted earlier.
our on-premises server business, revenue was flat and increased 4 percent in constant
currency, slightly ahead of expectations – driven by
hybrid demand including better-than-expected annuity purchasing ahead of the
SQL Server 2022 launch.
Devices revenue grew 2 percent and 8 percent
in constant currency, in line with expectations, driven by the impact of a
large HoloLens deal, partially offset by low double-digit declines in consumer
gross margin dollars declined 9 percent and 4 percent in constant
currency and gross margin percentage decreased roughly
5 points year-over-year driven by sales mix shift to lower margin businesses.
Operating expenses increased 2 percent and 5 percent in constant currency,
driven by the Xandr acquisition, and operating income decreased 15 percent and
9 percent in constant currency.
flow from operations was $23.2 billion, down 5 percent year-over-year
driven by strong cloud billings and collections which were more than offset by
a tax payment related to the transfer of intangible property completed in Q1
cash flow was $16.9 billion, down 10 percent year-over-year. Excluding
the impact of this tax payment, cash flow from operations grew 2 percent and
free cash flow was relatively unchanged year-over-year.
Our effective tax rate was approximately 19 percent.
And finally, we returned $9.7 billion to shareholders through share
repurchases and dividends.
Now, moving to our Q2
outlook, which unless
specifically noted otherwise, is on a US dollar basis.
My commentary, for both the full year and next quarter, does not include
any impact from Activision, which we still expect to close by the end of the
First, FX. With the stronger US dollar and based on current rates, we
now expect FX to decrease total revenue growth by approximately 5
points and to decrease total COGS and operating expense growth by approximately
3 points. Within the segments, we anticipate roughly 7 points of negative FX
impact on revenue growth in Productivity and Business Processes, 6 points in
Intelligent Cloud and 3 points in More
Our outlook has many of the
trends we saw at the end of Q1 continue into Q2. In our consumer business,
materially weaker PC demand from September will continue and impact both
Windows OEM and Surface device results even as the Windows installed base and
usage grows, as you heard from Satya. Additionally, customers focusing their
advertising spend will impact LinkedIn and Search and news advertising revenue.
In our commercial business
demand for our differentiated hybrid and cloud offerings together with
consistent execution should drive healthy growth across the Microsoft Cloud.
In commercial bookings,
continued strong execution across core annuity sales motions and commitments to
our platform should drive solid growth on a moderately growing expiry base,
against a strong prior year comparable which included a significant volume of
large, long-term Azure contracts. As a reminder, the growing mix of larger
long-term Azure contracts, which are more unpredictable in their timing, always
drives increased quarterly volatility in our bookings growth rate.
Microsoft Cloud gross
margin percentage should be up roughly 1 point year-over-year driven by the
latest accounting estimate change noted earlier. Excluding that impact, Q2
gross margin percentage will decrease roughly 2 points driven by lower Azure
margin primarily due to higher energy costs, revenue mix shift to Azure, and
the impact from Nuance.
In capital expenditures, we
expect a sequential increase on a dollar basis with normal quarterly spend
variability in the timing of our cloud infrastructure buildout.
Next to segment guidance.
In Productivity and
Business Processes, we expect revenue to grow between 11 and 13 percent in
constant currency or $16.6 to $16.9 billion US dollars.
In Office Commercial,
revenue growth will again be driven by Office 365 with seat growth across
customer segments and ARPU growth thru E5. We expect Office 365 revenue growth
to be similar to last quarter on a constant currency basis. In our on-premises
business we expect revenue to decline in the low-to-mid 30s.
In Office consumer, we
expect revenue to decline low to mid-single digits, as Microsoft 365
subscription growth will be more than offset by unfavorable FX impact.
For LinkedIn, we expect
continued strong engagement on the platform although results will be impacted
by a slowdown in advertising spend and hiring resulting in mid-to-
high-single-digits revenue growth or low to mid-teens growth in constant
And in Dynamics, we expect
revenue growth in the low-double-digits or the low 20s in constant currency
driven by continued share gains in Dynamics 365.
Intelligent Cloud we expect revenue to grow between 22 and 24 percent in
constant currency or $21.25 to $21.55 billion US dollars.
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.
expect Azure revenue growth to be sequentially lower by roughly 5 points on a
constant currency basis. Azure revenue will continue to be driven by strong
growth in consumption with some impact from the Q1 trends noted earlier. And
our per-user business should continue to benefit from Microsoft 365 suite
momentum, though we expect moderation in growth rates given the size of the
our on-premises server business, we expect revenue to decline low-single digits
as demand for our hybrid solutions including strong annuity purchasing from the
SQL Server 2022 launch, will be more than offset by unfavorable FX impact.
And in Enterprise Services,
we expect revenue growth to be in the low-single digits driven by Enterprise
In More Personal Computing,
we expect revenue of $14.5 to $14.9 billion US dollars.
In Windows OEM we expect
revenue to decline in the high 30s. Excluding the impact from the Windows 11
revenue deferral last year, revenue would decline mid-30s reflecting both PC
market demand and a strong prior year comparable, particularly in the commercial
In Devices, revenue should
decline approximately 30 percent, again roughly in line with the PC market.
In Windows commercial
products and cloud services, customer demand for Microsoft 365 and our advanced
security solutions should drive growth in the mid-single digits or low double
digits in constant currency.
Search and news advertising
ex-TAC should grow in the low-to-mid teens, roughly 6 points faster than
overall Search and news advertising revenue, driven by growing first party
revenue and the inclusion of Xandr.
And in Gaming, we expect
revenue to decline in the low-to-mid teens against a strong prior year
comparable that included several first-party title launches, partially offset
by growth in Xbox Game Pass subscribers. We expect Xbox content and services
revenue to decline in the low-to-mid-teens.
Now back to company
We expect COGS to grow
between 6 and 7 percent in constant currency or to be between $17.4 and $17.6
billion US dollars and operating expense to grow between 17 and 18 percent in
constant currency or to be between $14.3 and $14.4 billion US dollars. As we
continue to focus our investment in key growth areas, total headcount growth
sequentially should be minimal.
Other income and expense
should be roughly $100 million as interest income is expected to more than
offset interest expense. Further FX and equity movements thru Q2 are not
reflected in this number. And as a reminder, we are required to recognize
mark-to-market gains or losses on our equity portfolio, which can increase
And we expect our Q2
effective tax rate to be between 19 and 20 percent.
And finally, as a reminder
for Q2 cash flow, we expect to make a 2.4-billion-dollar cash tax payment
related to the capitalization of R&D provision enacted in the 2017 TCJA and
effective as of July 1, 2022.
Now some thoughts on the
full fiscal year.
First, FX. Based on current
rates, we now expect a roughly 5-point headwind to full year revenue growth.
And FX should decrease COGS and operating expense growth by approximately 3
At the total company level,
we continue to expect double-digit revenue and operating income growth on a
constant currency basis. Revenue will be driven by around 20 percent constant
currency growth in our commercial business driven by strong demand for our
Microsoft Cloud offerings. That growth will be partially offset by the
increased declines we now see in the PC market.
With the high margins in
our Windows OEM business and the cyclical nature of the PC market, we take a
long-term approach to investing in our core strategic growth areas and maintain
these investment levels regardless of PC market conditions. Therefore, with our
first quarter results and lower expected OEM revenue for the remainder of the
year as well as over $800 million of greater than expected energy costs, we now
expect operating margins in US dollars to be down roughly a point
year-over-year. On a constant currency basis, excluding the incremental impact
of the lower Windows OEM revenue and the favorable impact from the latest
accounting change, we continue to expect FY23 operating margins to be roughly
In closing, in this
environment it is more critical than ever to continue to invest in our
strategic growth markets such as Cloud, security, Teams, Dynamics 365, and
LinkedIn where we have opportunities to continue to gain share as we provide
problem-solving innovations to our customers.
And while we continue to
help our customers do more with less, we will do the same internally, and you
should expect to see our operating expense growth moderate materially thru the
year while we focus on growing productivity of the significant headcount
investments we’ve made over the last year.
With that, let’s go to Q&A
Thanks, Amy. We’ll now move over to Q&A. Out of respect for others on the
call, we request that participants please ask only one question. Jessi, can you
please repeat your instructions?
KEITH WEISS, Morgan
Stanley: Excellent. Thank you, guys for taking the question, and
impressive results in what is obviously a very difficult environment. A
question for Amy, and it pains me to ask a question about a percentage point,
but I think this is what’s on a lot of investors’ minds, is this is two
quarters in a row now where Azure constant currency growth came in a little bit
below your guidance. And I think what investors are worrying about or sort of
wondering about is there an inherent volatility in that business that’s just
harder to forecast?
And on a go-forward basis,
how should we think about that forecast? Have you applied more conservatism in
it? And how should we think about Azure growth, like the glide path for the
full year? If you could address those, I think it would put a lot of investor
minds at ease.
Thanks, Keith, and I do appreciate you asking about that one point, because I
do know it is a point of focus every quarter. And what I would say is there is
some inherent volatility to that number. A point here or there, and you’ve
heard me say it when we’ve been a point better, and you’ve heard me say it when
we’ve been a point worse.
And I want to focus mostly
on what and how we see the number, which is that it is still a very large
growth rate with growth across all segments and with growth across all geos.
That was, to the question, generally in line with where we expected. And what
we did see through the quarter is a real focus both by customers, but also by
our sales and customer success teams on going proactively to customers and
making sure we are helping them optimize their workloads.
And as we went through the
quarter and as, of course, the macroeconomic environment got more complicated,
we continued to focus on that, because ultimately, those optimizations bring
value even as budgets are still growing and budgeted spend is still growing.
And so, it’s this nuance of you’re still seeing digitization. This is still the
tailwind that helps customers solve problems. This is still the way to build
growth and leverage in your business. And yet, you still want to optimize your
workloads. You still want to run them the most efficiently so that you can then
make room for new workload growth.
We saw that across all
segments. If there was one segment where I may have seen it a bit more, I would
say, in the small or mid-sized segment of the market, that tends to be more
through partner. We rely on partners to help customers do those same
optimizations and prepare workloads. But it is that one point I know that
people are focused on.
But if you step back and
say, this is how you drive ultimate share gains, and build customer loyalty and
help customers grow, I think that needs to be the focus of our teams inside the
company, and also the partners that we rely on to help customers do that as
And so, as I look forward,
there is some inherent volatility to this number. And here, I think you will
hear us talk about continuing to invest to make that happen, whether it’s in
customer success, whether it’s in optimizations, whether it’s, frankly, in
engineering to help people be able to even have better solutions to optimize
against. I do think that will remain top of mind for us, even as this remains
probably the most exciting opportunity and TAM across infra, data and AI that
exist in tech and technology.
I don’t know, Satya, if you
Yeah. I mean, I think that that’s the only thing I would add, Amy, to your
point, is that obviously, our investment profile here is that this is the
largest TAM where we, on a large number, have good growth rates with the kind
of volatility you’re seeing. So, we’re going to stay focused on it. And in this
particular period, I think we are going to optimize for long-term customer
loyalty by proactively helping them optimize this spend, which I think is the
right thing for us to be doing, as a company on behalf of our shareholders,
KEITH WEISS, Morgan
Stanley: Outstanding. Thank you, guys.
BRETT IVERSEN: Thanks,
Keith. Jessi, next question, please.
MARK MOERDLER, Bernstein:
Thank you. I’d like to follow up on the last question on Azure specifically. So
next quarter, you’re guiding to sequential, further slowing in the business. Is
that the factor of optimization? Is it something else that’s going on in here?
How should we think about that, that specific component of the guidance, given
the fact that you’ve got good bookings, strong RPO grow, etcetera?
Thanks, Mark. You’re right and let me go ahead and reiterate part of that,
which is that this quarter, as you saw, we did have very good bookings growth.
And within the RPO number that you’re referring to, we had good what we would
call long dated growth, which means we’re having and seeing customers continue
to sign commitments to the platform.
And that goes really to
what Satya mentioned, is that the plans to invest here remain intact. And so,
it’s about both the optimization that you’re talking about, and we are seeing,
and the guide includes that, and it also includes new workflows starting. And
those also may not be matched up, one to one, to see sort of a consistent
pattern. And that does result in some volatility.
The other piece of it,
Mark, that we didn’t talk on before because I was really focused on
consumption, is that there per-user headwinds as well, right, because we’re
getting, seeing some of these laws of large numbers, in terms of the per-seat
So, there’s a couple of
things going on here, Mark, against, as you said, a very large base. It’s not
just the optimization to new workloads. It’s also some per-user work as well.
MARK MOERDLER, Bernstein:
Okay. Thank you. I appreciate it.
Thanks, Mark. Jessi, next question, please.
BRENT THILL, Jefferies:
Amy, last quarter you called out for the first time SMB weakness. It sounds
like that continued. I think many are questioning, did that get worse this
quarter? And did you see it filter now into the enterprise? Can you talk about
what you’re seeing higher up above SMB?
Thanks, Brent. Maybe this is a chance to talk a little bit about Microsoft 365.
I think that’s a place where we can talk specifically about the SMB market,
because we did see continued impact there in Q1, although it was not different
than what we saw, frankly, in Q4.
In Microsoft 365, what you
saw was very good renewal execution. And it speaks to, I think, the value
people are seeing in Microsoft. 365. We had on-time renewals that were,
frankly, better in Q1, based on expirations, than we’d seen a year ago. So
deals are both getting done and I think getting done on time but getting done
within a discount range that we feel good about, that’s consistent. And we saw
good upsell to E5. So if you think about that as sort of forming the basis of
what are we seeing above SMB, that’s a good summary.
Where we in fact saw – I
think we talked about it – new deal moderation, I’d referred to that, frankly,
in Q4 as well, it tended to be in, to your point, the smaller end of the
market, small-to-midsize companies, and it also tended to be through partner,
which we had talked about before, Brent, a little bit and I’d refer to. And it
tended to be around selling what is, in fact, some new value that we’ve put
This is a place where there
is some macro impact, but there’s also, I think, a better job we can do in our
E3 SKU, which is really a core value proposition. We added a lot of value to
that SKU in Q4 in terms of security and auto patching for Windows. It’s a great
value in the same way E5 is. We land the E5 really well. We’ve got some work to
do on landing E3.
So, there is some macro. It
seems pretty consistent, frankly, more than inconsistent with what we saw. And
there is some execution that I think, frankly, we can get better at as well.
BRENT THILL, Jefferies:
Thanks, Brent. Jessi, next question, please.
MARK MURPHY, JP Morgan:
Yes, Thank you very much. Satya, this quarter, we’re seeing an inflection in
many of your AI breakthroughs. I’m thinking of GitHub Copilot and the image
generation in your designer product. What is it that’s enabling you to innovate
so rapidly and essentially to be first to market? I’m wondering if it’s the
OpenAI relationship or maybe some of your inferencing capabilities, or
And then as a quick follow-up,
Amy, you did mention the lower margins in Azure due to the higher energy costs.
Are you inferring that we can kind of dimensionalize that incremental impact at
something like 200 million per quarter? And then is there anything you can do
to try to manage that through this period?
Thanks for the question. First, yes, the OpenAI partnership is a very critical
partnership for us. Perhaps it’s sort of important to call out that we build
the supercomputing capability inside of Azure, which is highly differentiated
the way compute and the network, in particular, come along, come together in
order to support these largescale training of these platform models or
foundation models has been very critical. That’s what’s driven, in fact, the
progress OpenAI has been making.
And of course, we then
productize it as part of Azure OpenAI Services. And that’s what we’re seeing
both be used by our own first-party applications, whether it’s the GitHub
Copilot or designer even inside Edge, and then of course the third party, like
And so, we’re very excited
about it. We have a lot, sort of more to talk about when it comes to GitHub
universe. I think you’ll see more advances on GitHub Copilot, which is off to a
fantastic start. But overall, this is an area of huge investment. The AI moment
clearly has arrived and it’s going to be part of every product, whether it’s –
in fact, you mentioned our Power Platform, because that’s another area where we’re
innovating in terms of incorporating all of these AI models.
Yeah, so I think AI is a
place where I think we have differentiated capability at an infrastructure
layer for training and inference. And the model themselves are platforms for
third parties. And our first-party applications are getting better because of
the use of those AI models.
And to your question on energy costs, let me try to provide a little bit of
help there. We did not see as big of that. As I said, it’s over 800 for the
year. Some of that was in Q1, but the majority of it will be in Q2 through 4.
And I think if you want to think about it as somewhere, 250-ish a quarter. It’s
not exact, but that would be a decent assumption for the remainder of the year.
MARK MURPHY, JP Morgan:
Thanks, Mark. Jessi, next question, please.
KARL KEIRSTEAD, UBS:
Okay, great. Amy, I’ve love to just ask you around margins. Clearly, you’re
experiencing a little bit more sales mix, given the weakness on the Windows
side. It looks like you’ve elected not to throttle back OpEx to enable you to
meet the three-months-ago guidance for flat margins, so they’ll now drift a
little bit lower. Do you mind talking through that decisions? Why not throttle
back OpEx as a counter to that Windows pressure?
Thanks, Karl, and I shared a little bit on the call, but let me share a little
more because I think it’s important in terms of how we think about investment
and continuing to invest where we’re seeing substantial opportunity and growth.
The PC market is cyclical,
and we had some great benefits for a couple of years during the pandemic. And
we chose not to spend against that favorability over the past couple of years,
and it fell to the bottom line. And you saw substantially increased margins
over that time period. And we did that intentionally because it is a cyclical
And so, in the same way I
see it now, is that PCs are going to be a tough headwind for us for the year.
But overall, the Windows app install base, our ability to grow usage, it’s
still higher than it was. And that’s a good opportunity for us. And so, in the
same way that we let it fall to the bottom line when we saw a surge, it’s
important to stay consistent in this down market, because when you have a type
of opportunity that we have specifically in the commercial business and the
TAMs that Satya talked about as being some of our most exciting, and you have
the opportunity with your customers to gain share, to gain confidence, right?
And I think it’s important to have a steady hand.
Now, let me also say it is
not as though we are not responding to the macro environment around cost. As I
commented, our sequential headcount growth from Q1 to Q2 will be minimal. It’ll
be about investing where we said we would invest, which is in focused areas.
It’s about moving headcount to make sure, inside the company, we’ve got it on
the highest and most important things. We’ve added a lot of headcount over the
past 12 months, and we want to make sure we use those headcount in the most
productive way possible. And we’re going to do that.
And also, we’re going to,
frankly, lap some investments that we’ve made at the end of H2, Karl. We closed
Nuance at the end of Q3. We closed Xander in Q4. When we come and lap those,
you will see a material decline in OpEx investment. You will also see us start
to lap some of the headcount surges that we made last year in key areas. And by
then, I feel good that we’ll see productivity improvements from the headcount
we have and our focus.
And so, it’s the ability to
say, absolutely, I want to stay consistent, and we’re responding to the macro.
It’s possible to do both those things, and I think that’s what we’re doing.
KARL KEIRSTEAD, UBS:
Got it. Thank you.
Thanks, Karl. Jessi, next question, please.
BRAD SILLS, Bank of
America: Oh, wonderful. Thanks for taking my question. I wanted
to ask a question about Office Commercial. A lot of the growth here is driven
by subscriber growth, this quarter, for example, 17% constant currency,
subscriber growth of 14. Could you remind us where the incremental subscribers
coming from? Could we see that mix of growth shift away from subscribers
towards ASP potentially over time? I think you’re already over 300 million
subscribers, so just any color on just the runway from here. Where is the
incremental coming from?
And with all the work that
you’re doing with E3, E5 and collaboration security analytics, might we see
more of the growth coming from ASP versus subscriber growth over time? Thank
you so much.
Thanks, Brad. It’s a good question because you’ve continued to see the seat
growth, I think, for actually much longer than many of the investors had
expected. And it really should continue in some ways, because we’re focusing on
frontline workers scenarios. We’re continuing to focus on small and midsize
business growth, and we’re adding new things to which you can grow, whether
that’s Viva, whether it’s Teams. There’s new things that enable us to add
relevancy, frankly, and then to add value, and then to add seats.
And so, I don’t want to say
it has to be, again, this vision of “or.” So, I think you’ll continue to see
lower end seat growth, which is what we’ve been seeing. And you will see us
continue to focus on the value of E5 and the E3 SKU, where we’ve added some
value, making sure we can still move people to that suite as well.
And so, you will see,
right, over time, long term, the seat growth move a little bit, and then you’ll
see ASP show up. And it depends a little bit on mix, frankly, each quarter. You
saw a little more RPU in Q4. You saw a little less in Q1. That had to do with
some E3 execution in Q1. But I actually think there’s room to do both those
things, and I’ve felt that way now for a couple of years.
BRAD SILLS, Bank of
America: Great to hear. Thanks, Amy.
Thanks, Brad. Jessi, next question, please.
GREGG MOSKOWITZ, Mizuho:
Okay, thank you. Satya or Amy, as a follow up on Azure, I’m curious how you
foresee the magnitude of two different variables on cloud computing demand over
that near to medium term, the first being economic pressures on the willingness
of some customers to spend, and the second being the impact of the spiking
energy cost perhaps as a facilitator for some to do more in the cloud. Do you
see these as largely offsetting factors, or are you expecting the former
variable to be a lot more prominent than the latter? Thank you.
Yeah. I mean, the way we see it is overall macro will mean that everybody’s
going to optimize their build. In fact, as Amy said, our job number one for
large swaths of our sort of even customer-facing organizations is to
proactively help them optimize. In fact, our incentives in our customer success
teams are lined up with them helping customers, quote/unquote, do more with
less. So, that’s sort of one side.
The thing, though, from a
customer perspective, the best way for them to align their spend with what is
uncertain demand is to move to the cloud. So, we see the value prop of the
cloud. The big winner in all of this will be public cloud, because public cloud
helps businesses offset the risk of taking demand risk.
The other side, as you
described it, is the risk around supply chain or energy costs. And so, that’s
another one. The best way to hedge against taking energy cost and be, in fact,
more energy efficient is to move to the cloud.
That’s where I think a
little bit of, as you all think about what happens to cloud, for us, we look at
this and say, this is a period where cloud’s going to gain share, because we’re
still in the early innings of adoption. And so, we just want to invest going
into it with that mindset and build long-term customer loyalty.
GREGG MOSKOWITZ, Mizuho:
Very helpful. Thank you.
Thanks, Gregg. Jessi, we have time for one last question.
BRENT BRACELIN, Piper
Sandler: Hi, good afternoon. Thanks for taking the question
here. Helpful color on cloud. I wanted to pivot to advertising. This was a
segment that crossed over $10 billion, I think, earlier this year; Netflix
rolling out ad-supported model next year, powered by Microsoft. What is the
broader Microsoft advertising ambitions maybe three-to-five years here, given
these are very large and very profitable segments that Microsoft has not
historically focused on? Thanks.
No, thanks for the question. Our core advertising business has got two elements
to it. One is, I’ll call it LinkedIn B2B advertising, where we clearly have a
leadership position around both reach, quality of our ROI, and we’ll continue.
Of course, it will be cyclically impacted, but we feel that the LinkedIn
engagement continues to grow. And that is that market comes back. Our premium
position with LinkedIn owned and operated, I feel very well positioned and
we’ll continue to invest in that space.
The second one is the place
where we are, again very, very focused on, first starting with our own owned
and operated. So when we talk about the overall active devices of Windows
having grown by 20% over the pandemic, one of the big opportunities it opens up
is for us to take our own owned-and-operated inventory, right, whether it is Bing
and Search, whether it’s the feed. And those are things that you see some of
the growth. We are share takers in the browser. We are share takers in terms of
the engagement of the feed. And those are things that we are high leverage on
top of the installed base that’s now structurally changed in terms of grow.
And then the third party
with Netflix, we’re really excited about that. And we’re going to look to grow
at first and make Netflix a successful partner. But we’re going to continue to
grow our third-party business on the ad platform.
So, those would be the
three areas, LinkedIn, our owned-and-operated advertising, both Search and
Feed, as well as third-party ad network.
Thanks, Brent. That wraps up the Q&A portion of today’s earnings call.
Thank you for joining us today, and we look forward to speaking with all of you