Microsoft (MSFT) 24 Apr 192019 Q3 Earnings call transcript

Greetings. Welcome to the Microsoft Fiscal Year 2019 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. is conference this note being recorded. Please now Mike Spencer, will turn Relations. the host your to over General conference I Manager Investor of Mr. Spencer, you may begin.

thank us and for afternoon, Good you today. joining

Executive me Chief Brod, Officer; and General with the Officer; Deputy Accounting On Dolliver, Amy Chief Financial Officer; Satya call Hood, Counsel. Nadella, Keith are Frank Chief

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on current because materially be this to earnings uncertainties. filings or other future are that These call, expectations projections, discussed Securities based subject we other results section XX-K, the the the to any factor factors risk making in which and statements Commission. risks and in call, Form and undertake differ events. that, and reports any could this Forms statements of with do Exchange comments statements about and today's turn to will assumptions are in conference over During release, forward-looking and are predictions, with press I’ll XX-Q, of duty statement. not forward-looking made during the update Satya. call And our We Actual

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our are we the platform Azure and warehousing data best to AI. this make and place the fast-growing affirm in best cloud AI third-party are stream investing both Data we their partnering building Azure cloud for to bringing chose new the in BMW MCU-powered car more industrial Our devices, us acquisition with more and billion connected manufacturing, speed of to IoT, Alliance customers Volkswagen organization’s experiences. Group estates Daimler for to build of and to analytics, performance is as foundation Azure and secure is capability, lead and goal, our from Renault-Nissan-Mitsubishi enables both analytics. our connected And to automotive data furthers and data the build, advanced investing analytics real-time Azure Azure than broadly to their new make an Logic in its announced chose analysts and and recently for IoT comprehensive adoption X big our Express fuel to price endpoints. platform manage space.

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Live we to the Android Xbox time. gamers these XX are enabling reach for to and on is now key developers million Our iOS and first community highly approach engaged strong our

trials In And pipeline our incredibly game Our our to new to it closing, now later all our about will financial our fast-growing and who public this first-party businesses, subscription by our categories differentiated be of service energized results creating Project content. new and share your we are gaming growing customers service, Across progress bolstered by that, over reach, in expanding year. of Game And the streaming xCloud, opportunity our future. rejoining that ahead. is optimistic With Pass, I’m I of for position us I’ll delivering our forward well value growth will Amy questions. outlook. hand for and cover detail the look in for

and Thank good everyone. you, Satya, afternoon

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move Now quarter’s outlook. next let’s to

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FX expect point. by Assuming the and current expenses revenue by growth operating X approximately and points remain to rates decrease stable, we X COGS approximately growth

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overall to company back Now, guidance.

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feel Now, like about Overall, FYXX. we made forward very in some look we’ve progress to thus thoughts closing good provide the FYXX. to we as I’d far

ambition high significant with coupled areas stronger execution key revenue material and many at invest markets. to decision position in resulted in growth in has a Our growth scale with strong

again FYXX opportunity growth. sustained see As to approaches, we tremendous long-term drive

revenue At and well in let’s operating Surface operating future while Microsoft Teams, drive stable strategic to we strong will XXX growth invest LinkedIn, Q&A. Business GitHub, as will performance in growth and same delivering will aggressively scales. like Security, to our Gaming. as Cloud areas go Power FYXX Platform through with time, improvement and through continue double-digit Applications We in and of the income With approach in AI operating margins. efficiency as that, consistent and business Mike, investing result This through

to instructions? We'll can over Q&A. move repeat your please you Thanks, Operator, Amy. now

[Operator Instructions].

Heather question with proceed comes of your Bellini first the Sachs. Our question. from Goldman Please from line

Amy, a looks currency if year-over-year go back through high through was growth I bookings at been least look this in your has I basis, KPIs, constant never it able to 'XX. back go on commercial and fiscal like the

then Or this. You there is in more a color as of any of contracts their long-term could the mean if everything even kind Azure continuing to industries share? you a this centers? and of coming that move from where data done in have are of room a left changing? cloud just really slow have follow gross How that see obviously I is up job And to this would been and go a this their the remarkable has margins the number be down variable where that shutting mentioned much guys the of driver some trend, all just starting an you of handful just snowball? you COGS to of Azure is the guys are based increase Is outsourcing you do versus efficiency Azure there. driving which you larger how in customers? ratio about percentage and fixed to been to the like But think increase do is to broad

Heather. Great,

commercial question, bookings before your easier take ways. I about it to in try one-time both growth of the larger answer question questions. find I two those bookings to me On think commercial Let about

what we The very I revenue how talked capture. first does good think we and had that's and matter in of and quarter here absolutely is as the expiration base we about of renewals a it, terms actually

in years and able contributed versus contributed has absolutely over We’re the contracts, and commercial base. revenue to grow past existing consistent, bookings to do that couple the the been so believe what reasonably has expiration of strength I

some put tend talked balance we I show-up based strength about in term their way, some are these it does and the to billings comes two There of not customers as and volatility large but Azure this co-collaborating on-prem and not of what some would upfront. up to the see quarter and in same this already in in successful will help bucket we shows not and it there. now contracts that see quarter customers but these have base to traditionally again we're show up in The in the ways. what in it of longer be so is bookings, unearned way by be did second more it you relationships it go larger the movement dated And it that they the in digital longer now had quarter, and starting as your we where have on which a you new good have does are partnership really we means forward low the new was commitments we’ve as P&L, are a as doesn’t of in tend this what number, That up future. bookings think to business to unearned Whether also component just you show build is saw expiration just which we point business.

to on job continue our on on to And premium software bit this little of On has in but improvement supply-chain also importantly as question with side, see start in gross of improvement. to number innovation benefits progress second working and core will fronts, gross to margin done you those a team the GM hardware also to have and contracts use contributed that land. Azure increasing margin make strong both type as continued nice the services contracts see a and we of is Azure of so volatility see number continue and innovation also of Azure to a have your

as ton think of about variable still a base, terms I the low versus to in of more platform. in and utilization it's the of So see efficiency deployments terms so [ph] a getting and and while usage, out what's premium we usage think fixed most range are Azure for the us the hardware it is the the In depreciation I final continue remain of upsell, hasn’t in to what been also that general changed their software component important variable. versus focused of customers premium on workload [XX%]

first Stanley. proceed Our comes from line your Please with Keith Weiss the question. from of next Morgan

going quarter. A [indiscernible] a Heather’s speak impressive get but question try similar level to I'm very a to to answer. higher

of what there from digitalization and and like sounds than In are up matches more hearing exceeding during like in on This quarters. this going CIO to an have in surveys we terms it is prior talk of adoption talking prior it Amy inflection heard have effort. point plan cloud just customers, more in me I -- exceeding we expectations and sounds we quarters in quarter, than to about

inflection up And then you is, question and starting a investment this see hold? that are guys seeing take to follow for are made to So you have you Amy. terms behind the adoption you these really of the to perhaps starting that, in point an trends

expectations, really much margin and operating talk of this and our go forward So kind on with see operating drove little as basis consistent exceeded what expectations terms a think we as wouldn’t that that in a I of quarter margins bit about of can kind expansion? why you

the Yes, thanks Keith for question.

So start. let me

is continued seeing about our think an what to view our if you I a needs. grounded momentum, approach has customers’ even of we're think that been overall have in overall, is architecture

you believe an cloud need in So and we a distributed computing, edge. always that

consistency stream. talking cloud hybrid much become need in You hybrid has and of said more about what, XXXX, and things guess be even But ago. main today also matter will productivity. we will transition the five years in were to that this They this sort

digital we up developer is we've at also one data it's And showing as dimension, had and business developers stack, our productivity their bring not and and applications. need This whether infrastructure, And unique as any application you an building. pretty and and strength. or productivity IT cloud again, in traditional example, capability drive again. look together you collaboration, That's to place IT AI, productivity, to where that's agility a So organization for the in well if have marketplace. it’s

in success. most is But and differentiation momentum what you not about as think, the that. see see what importantly, customer the innovation showing is up think in what position and our I with it I you and the at competitive world that's, scale uniquely what So numbers. technology that's to of rest the doing is about It is in enable companies technology Microsoft innovation. Digital is is doing tech today believe I customer

question I this point couple your And would margin would areas, a a particular, operating things places had on say that. and especially out quarter in I three. were the of we outperformance high of where there's In margin Keith, lot

high chip is The as margin in QX The obviously high is market. first very improvement the bottom. is Japan geography the obviously and that a for also and transactional a OEM supply. in us

margin margin. also good the very down is strong, of high this one hybrid line. it And which so to with number very on-premises the is Japan a in tends be is And quarter the when other bottom landing to terms server high demand

you at a do that help -- margin happens, quarter operating a when line. it's almost in recognition, the because see of of lot So XXX% lot

see Now, the right revenue the more sustainable secular on the have operating significant pick to conversation I in markets right think we to continue growth. our trends, margin is secular you ability

margin operating creates investment creates finally, And of year focus I time. do see keep over improving focused general that formula. that think the through We that individual area, continue And on to each and expense which leverage. continue gross in leverage product we you as and to obviously the

Please from the question. Our comes proceed of from the next with line Research. Moerdler Mark Bernstein question

Congratulations that serving can is in some why reported Satya on really think on tools? revenue which tools, growth Is strong can on I Azure's hybrid because is of more of what Azure of impact meaningful Amy, this into well And you it’s revenues, well offering benefits customers, so really quarter the serving Satya color impact on hearing? give understood. this Amy, some resonating specific we're renewals, you don’t added fact a the apparent -- everyone. is delve it with Azure having us

well for on Yes, And our and becoming is maybe become so say both in terms can set increasingly heterogeneous, computing. Mark some the it's what the to more second is hybrid going benefits become is regulated is as thing that's of but -- the question. architectural supporting basically needs there of is then of hybrid differentiated both customers but hybrid in going part one flexibility. world people always to then be I adopt the is close AI is I've its the important as and mention, cases, are they're main in in there the this clearer modernize, thing with I shift need one model which training are to in first hybrid can additional very technology the very workloads and model with doing -- computing margin new would business edge. flexibility sovereignty a that And that with can motion. the to that want actually -- and load is start the up in to fact and model enables help not shows important, operational job cloud business so we leads said think the and I’d And will distributed I many characteristic offering which to the as as characterized deploy provide building the in the be computing lift, is requirements cases us flexibility maximum which the The needs. the

And customers that determination flexibility though meeting almost products it then when and should to benefit high about value how and is you the server they say I where are growth, how consumed a little benefits. of that about fundamentally me all choice. this revenue bit Azure and over up about make up time services will think so think use talk a hybrid the and that that’s show the in let that today In about would eventually shows make in benefit can so KPI, they a and of from to on-premise what question general as Mark

it of on-prem most time used that of tends it hybrid KPI is from architected to it be number. your a But in of where the because lot value more and as it's to of like and number the in can shows people where questions today cloud. you strength best the the customer consumed commitment gets ACR all beginning over up so specific representation it it's see will show And on Azure back our focusing the and up usage

Deutsche if like you wondering or Karl it particular in up proceed I'm upside Karl Intelligent the could the Please the you slightly Our your be just material that XXXX, about Keirstead flat KPI to contribution - described Cloud big XXXX question next that comes it addressed the were? question. Keirstead lift I'd the the revenue And of Amy, with of of to despite X%. calendar beat the drove that just ask from Bank. keep segment how that assuming the in Q even you the from throughout was coming KPI quarters the can server much line that up upgrades tougher Version and on-prem continue two frame in enough comps? could product

was that got benefit things continue as think we it to expect that support, I of things to in into do value question. When When think one-time. really premium it's and I And Mark’s about support see. I this Karl. just End seen think obviously and benefit two have about I Windows in Those the The quarter. of but mix. more primary then we benefit talked just on the we divide I really value things durable trends some SQL that say the the Thanks, we've on-prem of I about. been durable have July number think saw last two the would January. primary about end and prop of was I the see hybrid not it I then talked

expect big. QX saw in some some see and for in QX. do impact, very I particularly we SQL comparable to that of on-prem so is think the And do I But

trends, some end in that more durable I number expect of plus even of a do support, that with I of of temporal in see And benefit one to a QX. the so think deceleration

question comes like next with of Please your proceed question. Our Lowe Jennifer from UBS. from

bit. you. quarter. the and two related Great, to But wanted this consistent been strong Commercial was I again XXX just there. questions thank turn for a to you And business very maybe that's performer Office on

Office like Commercial I that there said there lot First, thought seems you, on of think a which customers ago. the years XXX was be a you users Satya I right, couple million heard you're XXX hitting you if of might now

of it equally in cycle. if a sort sort contributors how are then your the or sort And mixing in is on along you see EX’s pretty more view in Amy terms was a Thank of balancing, there's bit and in front seeing Are kind where opportunity lot in the played related, you. just the expansion curious EX to And shifting far still just you quarter. year? there increasing get on of to we of big well? EX curious adoption out EX upcoming mentioned both of I So that as are the get ASP relevance is in

Sure.

of we reach opportunity Office continue to see multiple overall of on significant forward terms dimensions. XXX, In going

call as So small markets, of sophisticated workloads. for in the medium with businesses I'd never non-developed much it we participated all example, and

So, opportunity. one now that reach all customers with business much world, of can a base SaaS the broader is approach, over a you

a opportunity lot if now example, at look workers. first-line an second of The is, we reaching are you as Teams,

So retail, just business messaging process this in where as is whether in now solutions, manufacturing, it's it's well in healthcare, integrated. workflows as have workers, not knowledge but it's you whether whether

way combination think businesses to levels So to going socket reach knowledge and ability it's what's growth EX to workers is there to growth. the first-line of all because going mention look a is an think, use customers all applications, SaaS increase in course, to more then is of security other I overall And Office have I’d these the they burden. us very want from spans help thing the of their I architectural the is seat And value. to or all that to going things significant having sizes one big customer value out dimension, don't the in or our XXX security of continue which exposure exponential of more compliance advantage a that the is be also proving compliance tools, proposition with

Office And approach there. resonates even XXX’s so therefore,

and maybe which up Jen is that growth Office your of about drivers XXX as to a little seat growth fundamentally question, ARPU And Commercial the number. all

we that's keep having in EX, ARPU some are are just reach little academic, mentioned EX improvement on the important to growth not us. and that's little of we the edu, it’s seat been opportunity we've some I does actually EX and seen, ARPU of Satya What for XX% that growth it whether masked seat absolutely of quarter at growth. I seats that for although mean some at if see a of and some This and ARPU to level that trends ever really could that it's ARPU starting bit in even think seats lower us But same starting by increase level those in that's to include new that both, has net mask the last in in to before workers number. still that front-line tend a is is not there’s seat ARPU impact any the opportunity the

Our from J.P. of next proceed line the question Mark Murphy comes Morgan. with Please from question. your

the the a Microsoft many years? XXX commitments I greater mentioned long-term Azure for revenue Amy largest Commercial for surpass you Satya, recently. given formula Azure of few to Office the would Do And couple enterprise of thus you the just do that share the trajectory and and pass enterprise winning now majority you there, indications become it you we've say of IT the stream then for see that in workloads right next workloads win seen have found to Azure in think world? of the

we better face than past. seeing we did different these we much to essentially era grown in previous we in where Microsoft, infrastructure Mark up client well having well I'll of tough the and era are again competition face eras and never X did Sure, would a server our of the in previous in of we competitors, are in we tier saw era, the business are which doing even the in in well compared set the this I that say start doing and at workloads because

we build done past, are the their RX they is have server like or digital in they were infrastructure deployment, XXs digital wins, businesses. with healthcare If kind out some manufacturing era you think or about it's retail we SAP design we ISVs server when SQL we coming and how many, financial the transformational we never about or coming in many, or it the and core with worked when participated in consumption, of with businesses of in with with were in out the what the digital many would and doing of the we out absolutely perhaps what services now think in client as

of own that' new space. for Microsoft’s of So terms what's characterizes in you perhaps this sort growth in

businesses you were you or think a is when $X.X at the leading per is said the cloud show total commercial but to long growing the we which have talked higher how different think bit asked and a way where type quite would evolving the for what we or had the just the participating I just that of in question about about era but frankly we about Azure in ability was do really about up XX% billion Satya what question talked per bit seat think is about see have time Mark that what user next which and is scenario I our little Satya over to expand addressable the And with Microsoft you a in than both have last concept era. share is market an really people

doing. or don’t you so businesses area at in look as our or and any in ability for want of if the of period per to it grow fact particularly compliance, continue well. seat over our Satya lot but be larger that time ARPU could And work to per that a the Azure then room to really diminish growth there the to and platform LinkedIn, would user of a us that room seat then businesses is is across certainly be we're lot add I mentioned there value identity, for security, us Power

proceed with Markets. of question. RBC Ross Please next from from your like Our Capital question comes MacMillan

well. Thanks so as much my and congratulations

out gross margin pieces. Azure and to nice the really the progression commercial this you gross some improvements. continue that We there's within margin moving see in called And cloud

got and Azure. think of I efficiency better utilization core you’ve

got then in of and services, you've this, premium Satya. force got growth one versus consumption questions Two this on You've the different counter for base. prevailing user

as are or premium break the into QX, are margin? cloud that meaningful point? And not see I'm or continue growth which ‘XX we'll this at secondly we overall most think as the Amy, just largest just you the about and or but convinced progression fiscal to consistent gross and in On trend, for fiscal fastest, three grow Thanks. commercial beyond to, curious which out this become are maybe one for the you seeing services, then two

infrastructure a getting first services, even the are example, business there as Ross mean, on our is of increasing Essentially, services. application like need the for Sure. for developed as on is side, in development. like just that there their application those question I new far compute, people set things IoT services your complex plane IoT many IoT contain app security a devices, so of help for example devices, of to That's have Central many, control need many that you when that complexity management. a application manage you good deployment, example. the you premium is one of connected

aid data course of And the of of the other both databases data. one The needs is required, of that growing processing close sophistication is required is the in to data. the terms the exponentially,

products the where Even never most past, So which DB it very place another data in in, got of competitive unique the traction. Cosmos we service is which warehousing, data definitely the one the that's marketplace another comes to whereas that's is which in another like this in is at around something real are now participated capability benchmarking when scale we market warehousing.

about that services those So talking Azure, applications counting applications that. not all are are SaaS would say being just all I new on premium that things the about of built

margin question. And to your overall commercial progress

XXX, service look is to is Azure You're whether that offset Office is to right, when into really a see what will per IaaS or this year, in right, or just gross and margin Azure year PaaS, LinkedIn but forward IaaS revenue expect I driver fundamental improvement, next the service it like that Dynamics user I shift, Azure you'll each or that PaaS. see mix did

of percentage that even services, of generally Azure GM will a do, headwind you'll what continue to all gross total be a the the across improvement revenue. continued improvement as so increase the amount And and will see see individual you'll though to

the line question. Our next Please Zelnick from Suisse. question with Brad the of proceed comes from Credit

on Amy products help with onto us how I move us end but the offerings on of that database cloud. Karl's perhaps and Azure database can the customers July, database And look economics what Server expansion for like? can contextualize want in with you traditional to to question coming support and follow-up conversations to workloads sparking you moving Satya, opportunity generally on SQL [XXXX] the more tell help Azure about workloads the

at One and around latest at Yes, the we what's just lot things compute increasing that’s a and the driving Brad. data with can of conversations you of have so have on the SQL needed the greatest what the database to sort of the enough, compute databases need is is, really is get Interesting a of conversation. on overall Server. lot because need what edge can even, couple technology is for one that that you requirements have edge devices so edge, a

The migration SQL see we the DB, other managed to one is of is which cloud essentially service they but are cases, services Server, people have. is Server in it's variety different terms SQL a of SQL compatibility there of used complete a want using which around we PaaS

that do Dynamics in uses and least as that on every the so see built again SaaS warehouse cloud. can now rewritten vendor A even the a base whole data. the fact the the Server rewrite to are those it of beauty the that's business architecture bunch out support Dynamics. And on this possible -- of micro of about for as what completely revamp That side eyes of feel that on of we of the Because is or think on to in been approach XXX both close do is you at want a all both is would for good number so that new type my there thing is technology, but say because were complete its whether example in side, it's the well parallel. SQL well. architectural of happening on applications can services they SaaS and data data an database edge, is of application I architecture I functions as of number AI you what

based. primary the that it's opportunity, is vast, our of contextualizing the the driver business I on of server said majority And is annuity because reason not vast

frame. based annuity no from really in so as And it's support is it when end see QX upside there an opportunity to of

still as annuity customers For the of does earlier not it’s now of talked that it’s provide just far about but the non-annuity transactional, our I commitment more of because smaller opportunity type. is it portion nature business the large per the some our

from your with comes Our question. Raimo next Lenschow of from Barclays. proceed line question the Please

does of done of in you do we Intel what terms people and coming up? side? thinking talk there pent-up the see on OEM Can bit. of end that for situation kind the demand Are Windows a of some to mentioned as little there side about XX You from kind moving coming easing the fully that with create you life the the Windows are chipset quarters is over

Thanks, Raimo.

of our I of as it good we don't think revenue as I segment, indicate would which the Consumer Commercial sort our in where think of feel pent said heading vast the demand does what is believe we And that, about supply is not QX up the happen. the a will Premium and in I situation guide certainly segment QX, I what majority think say QX actually is that in unfulfilled the and met and is so I we QX there into OEM.

think in feel those for QX. I we fine so segments, And

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

Thank you.

Thank you all.

may This your you this lines concludes today's disconnect your at conference. participation. you And Thank time. for