マイクロソフト(MSFT)の決算カンファレンスコール - 2018年第4四半期 (Microsoft (MSFT) Earnings Conference Call - Q4 2018)

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Greetings, and welcome to the Microsoft Fiscal Year 2018 Fourth Quarter Earnings Conference
Call.
(Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Michael Spencer, General Manager of Investor
Relations.
Thank you, sir.
You may begin.
Good afternoon and thank you for joining us today.
On the call with me are Satya Nadella, CEO; Amy Hood, CFO; Frank Brod, CAO; and Carolyn
Frantz, Deputy General Counsel and Corporate Secretary.
On the Microsoft IR 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 reconciliation of differences between the GAAP and non-GAAP financial measures.
Unless otherwise specified, we 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 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 refer to 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 IR website.
(Forward-Looking Cautionary Statements) And with that I'll turn the call over to Satya.
Thank you, Mike and thanks to everyone on the phone for joining.
I'm proud of our strong results this quarter and even more proud of what we've accomplished
over the last 12 months.
We delivered more than $110 billion in revenue for the full-year with double-digit top line
and bottom line growth.
And our commercial cloud business surpassed more than $23 billion in revenue for the year
with gross margin expanding to 57%.
The strength of our results reflects accelerating innovation and the trust customers are placing
in us to power their digital transformation.
I shared our vision for the intelligent cloud and the intelligent edge a little over a year
ago, a vision that is now quickly becoming reality, and impacting every customer in every
industry.
Everything we've accomplished this year has been about accelerating our lead in this new
era and the tremendous opportunity ahead.
We focus on the right secular technology trends and growing markets and follow that up with
solid roadmap execution.
We reorganized our engineering teams to break free of the categories of the past and better
align with the emerging tech stack from Silicon to AI to experiences, to better serve the
needs of our customers today and long into the future.
We reoriented our sales and marketing teams adding industry and technical expertise to
partner more deeply with our customers on their digital transformation journeys.
And most importantly, we drove innovation to deliver differentiated value across the
cloud and the edge.
Now I'll briefly highlight some of our innovation in momentum.
We introduced Microsoft 365 to empower employees in the modern workplace.
Microsoft 365 is now a multi-billion dollar business that gives our customers the path
to the cloud and broadens our reach with new and under penetrated markets, including more
than 2 billion first line workers and industry-specific workflows.
Across Microsoft 365, we are helping people be more productive, collaborate and stay secure
on any device with AI infused experiences they use every day, and it's driving usage.
We have more than 135 million users of Office 365 commercial, Outlook Mobile is being used
on more than 100 million iOS and android devices, and more than 200,000 organizations are using
Microsoft Teams as the hub for team work.
We invested to make Windows 10 the most modern, secure always up-to-date operating system.
Windows 10 is now active on nearly 700 million devices and the growth of the enterprise deployment
this year exceeded our expectations.
It was a record year for LinkedIn.
Now with more than 575 million members, and revenue growth of 37% in Q4, the fifth consecutive
quarter of revenue acceleration.
We saw record levels of engagement in job postings again this quarter with sessions
growth up 41% YoverY.
The strong engagement is driven by the quality of the feed, video messaging and acceleration
of mobile usage with mobile sessions up more than 55% YoverY.
We will continue to reinvest to make LinkedIn the essential platform to connect the world's
professionals and help them achieve more with experiences followed by LinkedIn and Microsoft
Graphs.
Dynamics 365 gives organizations an alternative to monolithic style of suites of business
location with modular modern extensible and AI driven apps that unlock insights across
every part of the organization, from sales to HR.
It gained traction as our third commercial cloud growth engine with revenue up 61% YoverY.
Our investments in Power BI, PowerApps and Flow, as the new analytics and application
platform are gaining significant momentum with ISVs and enterprise customers.
Azure is the only hyper-scale cloud that extends to the edge across identity, data, application
platform, security and management.
And our differentiated architectural approach drove another strong quarter of growth.
We are investing aggressively to build Azure as the world's computer.
We expanded our global data center footprint to 54 regions, more than any other cloud provider
and with the most comprehensive compliance coverage in the industry.
We added nearly 500 new Azure capabilities in the last year alone focused on both existing
workloads and new workloads such as IoT and AI at the edge.
We introduced Azure Stack and Azure Sphere, two first of their kind cloud to edge solutions
that are already seeing strong customer demand.
We're democratizing data science and AI with Azure Cognitive Services, Azure ML and data
services such as Azure Cosmos DB to help organizations of all sizes convert their data into insights
and experiences for competitive advantage.
The world's leading companies are running on Azure and I'm especially proud that Walmart
chose Azure and Microsoft 365 to accelerate its digital transformation for their associates
and customers.
In gaming, we are pursuing our expansive opportunity from the way games are created and distributed
to how they're played and viewed, surpassing $10 billion in revenue this year for the first
time.
We are investing aggressively in content, community and cloud services across every
end point to expand usage and deepening engagement with gamers.
The combination of XBox Live, Game Pass subscriptions and (inaudible) are driving record levels
of growth and engagement.
Not only are we investing to grow organically, but we're also investing inorganically in
opportunities that expand our total addressable market and accrue value to our platforms and
our customers.
Take LinkedIn, we have united the world's leading professional cloud with the world's
leading professional network and proved that we have an integration model that works, enabling
LinkedIn to accelerate growth while retaining its member-first ethos.
With Get Help, we recognized the increasingly vital role the developers play in value creation
and growth in the era of the intelligent cloud and intelligent edge.
Our pending acquisition will enable us to bring our tools and services to new audiences,
while enabling Get Help to grow and retain its independence and developer-first ethos
in community.
PlayFab accelerates our vision to build a world class cloud platform for the gaming
industry across mobile, PC and console and the addition of five new gaming studios bolsters
our first body content development to support our fast-growing gaming services.
Microsoft has always been a partner-led company, and partners increasingly see more opportunity
on our platforms inspiring leading companies like SAP, Adobe and GE as well as fast-growing
start-ups like in Mobi to play an even larger role in our vibrant and growing partner ecosystems,
an asset that gives us scale in this new era.
In closing, our opportunity has never been greater.
We will continue to innovate and invest across our solution areas in serving our customers
and their unmet and un-articulated needs.
With this tremendous opportunity comes great responsibility.
We're relentlessly working to instill trust in technology across everything we do, it's
why we will continue to lead the industry dialogue on trust, advocate for customer privacy,
drive industry-wide cybersecurity initiative and champion ethical AI.
Our investments in business model are fundamentally aligned with our customer's long-term interests
and success.
This opportunity and responsibility grounds up in our mission to empower every person
and every organization on the planet to achieve more.
I'm proud of our progress and I'm proud of the more than 100,000 Microsoft employees
around the world, who are focused on our customer success in this new era.
Now I'll hand over to Amy, who will cover our financial results in detail and share
our outlook and I look forward to rejoin you for the questions.
Thank you, Satya and good afternoon, everyone.
This quarter, revenue was $30.1 billion, up 17% and 15% in constant currency.
Gross margin dollars increased 19% and 16% in constant currency.
Operating income increased 30% and 24% in constant currency.
Earnings per share was $1.13, increasing 7% and 3% at constant currency.
As a reminder, FY17 included a $1.8 billion tax benefit related to previously non-deductible
losses.
In our largest quarter of the year, our sales teams and partners delivered exceptional commercial
results.
We saw strong performance in most of our geographic regions against the backdrop of favorable
macroeconomic conditions and positive IT spending trends.
Customer commitment to our top platform continues to increase.
In F Y18, we closed a record number of multi-million dollar commercial cloud agreement and more
than doubled the number of $10 million plus Azure agreements.
Our annuity mix increased 3 points year-over-year to 89%.
As a result, commercial bookings increased 18% even with a strong prior year comparable.
Commercial unearned revenue was $29 billion, growing 23% and 21% in constant currency,
significantly higher than anticipated due to stronger than expected cloud billings.
Our commercial cloud revenue was $6.9 billion, growing 53% and 50% in constant currency with
strong performance across the US, Western Europe and the UK.
Commercial cloud gross margin percentage increased 6 points to 58%.
In line with our commitment at the beginning of the year, we improved the gross margin
percentage in each cloud service with Azure seeing the most significant improvement.
Our company gross margin percentage was 68%, ahead of our expectation and up 1 point year-over-year
from improvement on personal computing segment driven by Surface.
FX increased revenue growth by 2 points, 1 point lower than anticipated due to a stronger
US dollar.
At the segment level, FX had a positive impact of 3 points on productivity and business process
within intelligent cloud and 1 point on more personal computing revenue.
The FX impact was immaterial.
This quarter, operating expenses were 9% and 8% in constant currency, above our expectations
due to revenue driven expense, such as sales compensation given the strength of the quarter
and severance expense primarily in our sales organizations, offset by FX favourability.
Strong revenue growth improved device gross margin percentage and continued to targeted
investment in cloud engineering, cloud sales capacity and LinkedIn created operating income
leverage.
This quarter, operating income increased again up 3 points year-over-year.
Now to our segment results.
Revenue from productivity and business processes was $9.7 billion, increasing 13% and 10% in
constant currency, in line with our expectations even with the headwinds from a stronger dollar
and a higher-than-anticipated mix of cloud billings in our Office Commercial and Dynamics
businesses during the quarter.
As a reminder, under ASC 606, cloud revenue is ratably recognized, while annuity on-premises
revenue has a component of upfront recognition.
A higher mix of cloud billings is reflected in more on our revenue and less in period
recognition in a quarter.
Office Commercial revenue increased 10% and 8% in constant currency.
Office 365 Commercial revenue grew 38% and 35% in constant currency and Office 365 Commercial
Seats grew 29%.
We continue to see healthy installed base growth and ARPU expansion from customer adoption
of premium workloads in E3 and E5.
Office consumer revenue increased 8% and 6% in constant currency, driven by recurring
subscription revenue and growth in the subscriber base, now at 31.4 million.
Our Dynamics business grew 11% and 8% in constant currency, with double digit billings growth.
Dynamic 365 grew 61% and 56% in constant currency.
LinkedIn revenue grew 37% and 34% in constant currency with strong execution across all
businesses.
As Satya highlighted, engagement continue to accelerate and we also saw record levels
of job postings, benefiting from a robust US job market.
Segment gross margin dollars grew 13% and 10% in constant currency.
Gross margin percentage was relatively unchanged year-over-year, even as cloud mix increased,
driven by margin expansion in Office 365 and LinkedIn.
Operating expenses increased 7% as we continue to invest in LinkedIn, cloud engineering and
commercial sales capacity.
Operating income increased 20% and 13% in constant currency.
Revenue from the intelligent cloud segment was $9.6 billion, increasing 23% and 20% in
constant currency, with better than expected results in both our on-premise and Azure businesses.
Server products and cloud services revenue increased 26% and 24% in constant currency,
driven by continued strong Azure revenue growth of 89% and 85% in constant currency.
Azure producer services have performed ahead of expectations with our enterprise and mobility
installed base growing 55% year-over-year to over $82 million.
Our on-premises server business grew 8% and 6% in constant currency with double-digit
growth in premium server products revenue and healthy renewals benefiting from a significant
value customers seek in our hybrid solutions.
Enterprise Services revenue grew 8% and 7% in constant currency, as growth in Premier
Support Services and Microsoft Consulting Services was partially offset by declining
customer support agreements for Windows Server 2003.
Segment gross margin dollars increased 23% and 20% in constant currency.
Gross margin percentage was relatively unchanged as material improvement in the Azure gross
margin percentage was offset by a growing mix of Azure IaaS and PaaS revenues.
Operating expenses increased 11% with ongoing investments in cloud engineering and sales
capacity to support top line growth.
Operating income grew 34%, up 30% in constant currency.
Finally, More Personal Computing.
Revenue was $10.8 billion, up 17% and 16% in constant currency, with better than expected
results in Windows Commercial, OEM Pro and Surface.
In the commercial space, we saw an accelerating pace of Windows 10 Enterprise deployment this
quarter.
Customer demand for modern and secure hardware and stronger than expected PC growth in geographies
were (inaudible) high contributed to OEM revenue growth of 14%, ahead of the overall commercial
market.
Windows Commercial Products and Clouds Services grew 23% and 19% in constant currency, driven
by double-digit billings growth as well as the higher mix in quarter recognition for
multi-year agreements.
In Consumer, OEM non-pro revenue declined 3%, slightly below the consumer PC market
driven by continued pressure in the entry level price category, even as we continued
to take share in the premium category.
Inventory levels were within the normal range.
Search revenue ex TAC increased 17% and 16% in constant currency driven by enhancements
to our advertising platform and Bing volume growth across both US and international markets.
Surface revenue increased 25% and 21% in constant currency, driven by strong performance at
the latest editions in the portfolio against the low prior-year comparable.
In gaming, revenue grew 39% and 38% in constant currency.
Xbox software and services grew 36% and 35% in constant currency, mainly from a third-party
title.
Xbox Live monthly active users increased 8% to 57 million.
Segment gross margin dollars grew 21% and 18% in constant currency.
Gross margin percentage increased driven by new Surface additions offset by sales mix
to lower margin businesses.
Operating expenses grew 9% and 8% in constant currency, driven by seasonality changes and
advertising spend versus the prior year and investments in engineering across search and
AI.
Operating income grew 38% and 32% in constant currency.
Now back to total company results.
Capital expenditures, including finance leases were $4.1 billion and increased on a sequential
basis, in line with expectations.
Cash paid for property, plant and equipment was $4 billion, reflecting investments to
support growth in our cloud business as well as the $250 million real estate acquisition.
Free cash flow was $7.4 billion and down 15% year-over-year, reflecting higher capital
expenditures in support of our cloud business.
Cash flow from operations grew 4% year-over-year and included tax payments related to the adoption
of ASC 606 and TCJA as well as an earlier start to the hardware inventory build for
holiday than in the prior year.
Excluding the impact of these items, operating cash flow grew approximately 13%, driven by
strong cloud billings and collections.
Other income and expense is approximately $300 million lower than expected due to FX
re-measurement.
Our non-GAAP effective tax rate was 18%, higher than anticipated due to the geographic mix
of our revenue.
And finally, we returned $5.3 billion to shareholders through dividends and share repurchases, an
increase of 16%.
Our Q4 share repurchase was $2.1 billion, up 31% year-over-year, but down sequentially,
given the suspension of share repurchase activity in advance of the announced Get Help acquisition.
Now let's move to the outlook.
My commentary for both the full year and next quarter does not include any impact from Get
Help, which we still expect to close by the end of the calendar year.
Overall, the key drivers and trends of our business through the next fiscal year remain
largely unchanged from April and assume a consistent macro environment.
First on FX, assuming that rates remain stable, we expect no impact to full-year revenue growth
with any FX benefits in H1 offset in H2 (inaudible) to decrease cogs and operating expense growth
by 1 point.
Second, our commercial business.
Given corporate IT spend optimism and increasing demand for cloud services, our strong competitive
product position and consistent sales execution, we expect another year of strong revenue growth
and higher annuity mix across Commercial business.
As customer commitment to our cloud increases, we are seeing larger and longer-term agreements.
As a result, we may see increased quarterly volatility in commercial bookings growth and
commercial unearned revenue.
Productivity and Business Processes should continue to grow double-digits, driven by
Office 365, Dynamic 365 and LinkedIn.
Customer demand for our hybrid offering should drive high-teens growth in our server products
and cloud services KPI.
And now just specifically, we expect an increasing mix of Iaas and PaaS consumption based revenues.
In Windows, we expect strong business fundamentals in our OEM Pro and Windows Commercial businesses,
though the rates of revenue growth was slow through the year against the strong FY18 comparable.
Third, commercial cloud gross margin percentage.
We expect continued improvement in each commercial cloud service as well as in the overall commercial
cloud gross margin percentage.
The rate of improvement will moderate relative to FY18 as revenue mix continues to shift
Azure IaaS and PaaS consumption-based services and we have realized less year-over-year improvement
in our per user services.
We will continue to increase our investments in CapEx to meet growing demand for cloud
services, although we do expect the growth rate for the year to moderate.
Next, operating expenses.
Given our strong execution, we will continue to invest in the trends and growing markets
we believe are fundamental to long-term shareholder value creation.
Investment in commercial cloud, LinkedIn, Gaming and AI should result in operating expense
growth of roughly 7%.
Even with these strategic investments and the continued shift to our cloud businesses,
we expect operating margin to be up slightly year-over-year.
Other income expense should be slightly negative, in line with prior guidance and with quarterly
variability, primarily due to changes in FX re-measurement, interest rates, and valuation
changes with the adoption of the new accounting rules, financial investments.
And finally tax rate.
We have refined our estimates of the impact from TCJA, the mix of service versus license
revenue and the geographic mix of revenue, and now expect our FY19 effective tax rate
to be roughly 17% with quarterly variability.
Now, to the outlook for first quarter.
First, FX.
Assuming current rates remains stable, we expect FX to increase revenue growth by approximately
1 point and decrease COGS and operating expenses by 1 point.
Second, our commercial business.
We expect another healthy quarter with commercial unearned revenue down approximately 10 percent
sequentially, in line with historical seasonality.
Commercial cloud gross margin percentage will improve slightly on a sequential basis.
Third, we expect another quarter of sequential growth in capital expenditures as we continue
to support growing, global customer demand.
Now to the segment guidance.
In Productivity and Business Processes, we expect revenue between $9.25 and $9.45 billion
driven by double digit growth in Office Commercial and Dynamics.
LinkedIn revenue growth should remain high on a stronger prior year comparable.
In Intelligent Cloud, we expect revenue between $8.15 and $8.35 billion.
Azure revenue growth should reflect a balance of continued strength in our IaaS and PaaS
consumption-based services and a moderating growth -- rate of growth in our per user services.
In More Personal Computing, we expect revenue between $9.95 billion and $10.25 billion.
In OEM Pro, we expect revenue growth in line with the commercial PC market, in OEM non-pro,
we expect similar dynamics we've seen in Q4.
In Surface, we continue to expect strong performance from our latest additions, including the new
Surface Go to drive growth similar to Q1 of the prior year, Search ex TAC to see another
quarter of mid-teens growth with consistent execution against rate and volume growth opportunities.
In Gaming, we expect mid-teens revenue growth with continued strong user engagement on our
platform.
The Software & Services growth rate will moderate due to strong third-party titles launched
a year ago.
We expect COGS of $9.5 billion to $9.7 billion and operating expenses at $9.2 billion to
$9.3 billion.
Other income and expenses expected to be approximately negative $100 million.
And finally, we expect our Q1 effective tax rate to be slightly lower than our full year
rate due to the (inaudible) equity vests that take place during our first quarter.
Mike, let's go to Q&A.
Thanks, Amy.
We'll now move up to Q&A.
Operator, can you please repeat your instructions?
(Operator Instructions) Keith Weiss, Morgan Stanley.
I wanted to dig into Azure a little bit.
I think growth overall in Azure this quarter is probably ahead of most people's expectations
and it sounds like the type of business that's being done on Azure is becoming more strategic
and changing all of it, so Satya, I was hoping you can talk to us a little bit about the
types of workloads, the type of sort of services that are being used on Azure, how that evolved
over the past year?
And Amy for you, maybe there is a new KPI, I believe you gave us sort of the growth in
the enterprise mobility of 55%, was that in line with your expectations, because I knew
you were sort of tempering our expectations on growth in that part of the business, is
that growing in line with kind of the slowdown you were expecting or is that better than
you had imagined?
Yes, so let me first of all thank Keith for the questions.
So, let me start, overall in terms of the workload mix, it's been fairly stable, which
is our hybrid value proposition really has continued to resonate so that means there
is a bunch of workloads that are migrating to the cloud, people use both Azure Stack
plus Azure, so that continues to drive a lot of IaaS growth for us as people are sort of
looking basically to lift and shift a lot of their current data center workloads.
Then on top of it, we even have modernization of app that is accelerating.
And that drives a lot of the higher level services in particular, our data services
as well as our AI services, but when AI services, they are essentially compute but what happens
is all those compute then requires storage and data and that's another place where we
see increasing acceleration.
The one thing that I would say that I'm increasingly seeing is Tier 1 workloads.
In some sense, when you think about some of the commitments being made back on the biggest
brands in the world in terms of what they're doing, one, it's very core to their operation
and two, they're running it in the cloud.
And so that's one thing that definitely is a market defense for us.
And to your question on the per user services, specifically Enterprise Mobility, Keith, it
was a bit better than I had anticipated in Q4 and really the driver of these per user
services such as EMF, actually is the value proposition that Satya refers to and we refer
to as Microsoft 365 and we saw strength broadly.
And if you think about that it's the Windows Commercial, it's Office 365 Commercial and
EMF and really that I think what we've heard a lot was the value of the security and management
continuing to add more supportive end point, offer really tremendous value to customers
and we did see a bit more strength than I was anticipating in Q4.
Amy, the commercial unearned revenue and bookings were again super-strong and evidently Microsoft
is benefiting from fairly strong EA renewal activity.
So, when you look out into fiscal 2019, how would you compare the degree of renewal activity
versus fiscal 2018 and fiscal 2017, it sounds like you're still constructive but I'd love
to hear some color whether it feels as good as the fiscal year you just ended.
Thank you.
Thanks Karl.
Let me break up that question a little bit because you actually asked a couple of things
that are important.
Number one, the unearned strength that we saw at the end of Q4, you're right, was very
good execution on renewals, reasonably large renewal base.
But there was also very good execution of adding new workloads, adding new opportunity
in Q4, things such as Azure as an example or Dynamics 365 as an example.
So really Q4 wasn't just renewal activity, it was also new workflows and new value.
So when you look into 2019, I'm optimistic on both of those fronts, good execution continuing
on renewal as well as adding new value and new opportunity.
And the third component of the question was really how do they renewal base correlates
FY 2018, and the answer is, it's a little bigger, but it actually has the same amount
of volatility, quarter-to-quarter.
So Q1's renewal base is actually almost equivalent to last year.
I was wondering -- if you could help us think about how Azure hybrid benefit has changed
the type of net expansion rate, you're experiencing on your ELAs, come up for renewal and I know
you're kind of -- a little bit touching on that with Karl, but is there any way to help
think about how that in particular might be helping the expansion rates of those accounts
and can you help us think about how this might be -- how that might be helping drive growth
in your existing contracts?
And then the other question would be, you mentioned that you're moving from per user
consumption that you're going to see more growth in consumption-based services versus
per user, as your workload grows, and I'm just kind of wondering if you could share
with us, is there any gross margin impact there does one have higher gross margins than
the other?
Or is there anything that we should be taking from how you're parsing those comments about
how we think of Azure's gross margin progression going forward?
So on the first one, I actually think that these hybrid use benefits have been sort of
the best kept secrets.
So I'm actually hoping that going into this next fiscal year, we do a much better job
and customers do a much better job for their own benefit because the advantage Azure has
because of the hybrid use benefits across the entire workloads, a pretty phenomenal
and we had a good set of sessions at our partner meetings this week, just really making sure
everybody understand those benefits.
So I don't think that has really played out, if its meeting all the growth we've seen,
is in spite of that not being broadly, really driving growth.
But to your second question, I'll even say the following which is that I think that there
is clearly a difference in GN between the per user and consumption.
But the key is even the Consumption Services come in different forms.
There is the IaaS services, there is the data services and some of the higher level services,
some of these IoT services now even have SaaS components to it.
So, therefore I think that the mix will be different by quarter-by-quarter, but increasingly
our strategy is in many times to get customers to get going with what is core storage or
core compute but then they scale into these higher level services.
And I would say, Heather, on the two components just to add, the Azure had the benefit -- I
think we're starting, as Satya said, we started to see some impact from that in my opinion
in Q4 in the on-prem KPI.
But it really was more in Windows and the value, as we continue to see, in sequel next
year, I do think there's some opportunity for customers to realize real value from these
hybrid benefits and so it adds confidence to my high-teens KPI growth for the year,
is that this is a very customer value-oriented offer.
To your question on GN, Satya is obviously correct on that one and I would say the way
we think about it is actually more -- we have Azure per user, it really does move more with
M-365 per user.
It's almost better to put that in your mind as behaving more and having margin structures
more like Office 365 and behave quite similarly, tend to have good quarters when we do good
execution of Office 365, until my comments were more and continue to be around having
people understand that sales motion and that it tends to move in that direction.
So, I have two related questions and the first is, if you look at this quarter, intelligent
cloud revenue grew 23% and the gross margin dollars grew at same 23%.
Given the fast growing lower margin Azure business, we're not seeing any longer negative
margin impact, have you reached the point where the incremental dollar of Azure revenue
is close to the overall intelligent cloud gross margin?
And then a second, I apologize, slightly long question, CapEx spending in the quarter and
the full year were both strong, you could argue its possibilities here, it's driven
by all the capacity demand or you having to spend a lot of it on replacing equipment as
they are aging out, how should we think about the mix in CapEx between building demand and
replacing what's there?
Let me take both of those.
On the first one, in terms of the G, I misquoted it, right.
The improvements, particularly in the IaaS and PaaS gross margin of Azure did offset
the cloud mix to Azure within the segment.
Going forward, continuing to see that, I think we'll see more pressure on gross margin just
because the amount of Azure in the mix at the rate it's growing, we're still not at
that point where a dollar of gross margin in the cloud is equivalent to a dollar of
on-prem.
That being said, we have a lot as you saw this quarter, we're going to grow gross margin
dollars in that -- even within that frame going into FY 2019.
On your second question, in terms of capital spend, if you think about it at a high level,
our capital expenditures are growing at a lower rate than our overall cloud revenue
was growing and that's why you're starting to see leverage, right, flow through the P&L.
And I think that the rate of CapEx growth as I said in FY 2019 will moderate, that happens
because of course we're doing some replacement, but we're also adding regions and seeing a
lot of global demand and so -- actually -- and improving margins.
So, I think that -- when I put it at a very high level, as you asked the question, I tend
to think revenues growing faster than my capital, you're seeing leverage through the P&L and
we will see a moderating rate in FY 2019, even if Q1 is a big quarter, it's just going
to be volatile as CapEx tend to be quarter-to-quarter based on both supply chain and demand.
Hi Amy, wondering on the Office product and services on the commercial side, you had I
think 8% growth, the lowest you've seen, I know 606 drive some volatility in that business,
could you help us understand what drove that in the quarter and I know you're making some
changes like to support and so forth as you get into the out years, is there any impact
that you expect to the growth rate in that business as we look forward from those changes?
Thanks Walter.
The entire impact in that KPI actually feel that very good about that number because if
you think about the $1 billion plus beat we had to be unearned, it was partially due to
the fact we had very good mix shift Office 365 in terms of billings in the quarter.
Almost very little of that gets recognized in quarter, and almost all goes to the balance
sheet.
So, my confidence for FY 2019 in that number being the double-digits we talked about in
the full year guide, only gets raised by seeing that execution.
So it is really 606 related, it's the way to think about it plus the mix of billings
and billing strength.
So I don't really think about that is being negative.
And you saw the exact same behavior in Dynamic, so it is a pretty similar in-period, in-quarter
impact.
Amy, question for you, you commented upon the positive spread that you're seeing in
the Windows OEM business, both overall but particularly on the commercial side, when
you start to think forward, call it a couple of quarters, you obviously told us what the
positive drivers were but how do you see those were playing out and can we maintain that
positive spread and if so why and if it does maybe narrow, sort of how do you think about
the narrowing?
So, let me frame it first as the things that I -- and we are seeing really customer-driven,
which is if you start with Windows 10, and value the customer (inaudible) and what we're
seeing is accelerating enterprise deployment of Windows 10.
When that happens, it does create demand for new devices and modern devices that improved
security so that then in turn results in a better and stronger overall OEM PC commercial
market.
In addition, because of the macroeconomic conditions are actually quite good on this
front and it was some business optimism creating some wind at our back, I also think people
look and say, security and value are important.
This is a great time to invest in modern PCs and particularly in markets where pro mix
has been strong, I continue to expect to see all of those things happen through the course
of next year.
Now what you will see, however, those things even do remain true, which I expect them to,
if the economic environment stays the same, H2 where we've had really strong revenue growth
and a really strong market, well, I think moderate growth wise just because the base
it was coming off of in '17 was just a lot lower.
So even if I see all the good things and good trends happening that I feel really create
great opportunity for us to sell Microsoft 365, you will see growth rates moderate (inaudible).
Amy, can I go back to the Server products, you partly answered it with the -- when Heather
ask, and I believe hybrid cloud will be a factor here, but the growth was the best we
have seen for a long time.
Can you just talk about the drivers that kind of were at play here?
Thank you.
You're right, the first one was the benefit that we saw from hybrid in particular with
an outsized impact on Windows Server.
The second has been a trend we also talked about a little bit before, we saw strong double-digit
growth in premium.
So, with those mixed shift as well as I think strength in the hybrid benefits as a value
prop to customers, those two are the ones I would actually call out as drivers for the
quarter.
Good, I mean they should be relatively sustainable, if I listen to them -- to you.
I believe the one I think really important thing for us is continuing to focus on creating
customer value, the concept of adding a lot of value but having and giving comfort to
a customer that as they make a commitment to the Microsoft platform that they can move
between a commitment to on-prem to the cloud in a high value way, I do believe is a unique
thing that we offer at this time.
Satya, this is more of a big picture question, but over a longer-term period, I'm curious
how large you think edge computing will become relative to centralized cloud computing?
Yes, I mean, I think the vision that we have always had is that distributed computing in
some sense will remain distributed.
So, we don't split this into, there's an edge computing, there's a cloud computing, the
need for computing is on a secular basis going to increase and as you need to reason over
large amounts of data, you need not only storage and compute to be co-located all over as the
world gets embedded with computing, that's what we're building for.
So, if you think about our real competitive advantage in differentiation is, we have one
programming model, one identity model, security, management so that modern developers as well
as IT can use the compute available from Azure Sphere to Azure, and the reality is these
modern workloads in fact use it all.
So, it's not like I just build an Azure Sphere application, I build an application that's
fundamentally distributed that also happens to run some compute on Azure CS, that's I
think the future which is distributed computing going back to what needs to be truly distributed,
event-driven server less even versus this thing about let's just -- how one-time migration
to something new.
Satya, I want to direct this to you, if I could.
I'd like to understand how you view Dynamics' current positioning compared to the market
opportunities and the context of the question is Dynamics remains a fairly small part of
Microsoft revenues as well if you look at the market share of where Dynamics serve,
it's a fairly small part of the market served.
So, what do you think Microsoft needs to do to have a larger impact against the market
opportunities?
Yes, we are very committed and very bullish about the opportunity in Dynamics, with Dynamic
365, for example, what (inaudible) seen in the last fiscal year, which has been the first
full fiscal year where we have this modern, modular approach to business applications,
I think it's very disruptive in the marketplace because it brings a very different value proposition,
it has a price advantage and a value advantage for customers and what is fundamentally a
fragmented market this is not business applications never was and never will be a winner take
all, I know folks think about it that way, but it's not it's about one small category
in one segment called Enterprise, there is a share, high-share is considered 20%, 35%
or what have you.
So, in some sense this one has always been about being able to serve customers, especially
in an increasing digitization world, which is the need for more Business Process Automation
is increasing, take an IoT project, translates into a preventive maintenance in Azure and
then ends up as field service in Dynamics, that's being one pattern we've seen a ton
of traction with.
So to me, us going in fact to be a new secular growth opportunities while being disruptive
to the status quo of anyone who has high margin and very high priced monolithic products today
is basically our strategy going forward.
So, Amy we keep expecting the Office 365 commercial seat growth to decelerate materially at some
point.
Based upon the penetration level, but this quarter, that seat growth actually accelerated
about 1 point to 29%, and when we look back on it, the trajectory really isn't too different
than where it was even a year ago.
So, I'm just curious, is there some underlying driver there that would keep that deceleration
relatively manageable going forward or would you continue to see that slowing in a way
that that overtime would exert a little drag on Azure through those per user Azure services?
This is when we're -- over time, there certainly is going to be a deceleration, just this is
a per user business and 365 has that characteristic and Office has it EMF has it.
And so this quarter actually what we saw was actually some strength in education was added
a good amount of seats this quarter as well as good execution across our other segments
so we did see a bit of growth that we -- we're excited to see (inaudible) segment we've been
working hard to make additional progress and add value, the team was actually doing a nice
job in that segment, creating some really modern offers to get that into the hands of
that market as well.
But over the long term, and as we continue to move aggressively, we will continue to
see seat growth dissipate.
But I would also say this is going to take longer than I think may be people would have
thought, there are a lot of users as we continue to redefine what Office is that you add to
the day, whether that's first line workers, whether that's an increasing number of small
businesses who finally have access and value that we're creating for them across things
(inaudible) from scheduling all the way to being able to work through minor business
process adjustments like Satya has talked about.
So, really we continue to redefine what Office means from something that people always associated
with Word, Excel and PowerPoint to things that mean mobile or video with stream or collaboration
with Teams, I think we have opportunity to continue to add those new users, new types
of users that we haven't been accessed before, new capabilities, even to users we have.
Great.
Thanks, Mark.
That wraps up the Q&A portion of today's earnings call.
Thank you for joining us today, and we look forward to speaking with all of you soon.
You can find additional details at the Microsoft Investor Relations website.
Ladies and gentlemen, this does conclude today's teleconference.
Again, we thank you for your participation, and you may disconnect your lines at this
time.