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Morgan Stanley Technology, Media & Telecom Conference
Who: Amy Hood, EVP and CFO, Microsoft
Event: Morgan Stanley TMT Conference
Date: March 8, 2022
Keith Weiss : Excellent. Thank you everyone for joining us. My name is Keith Weiss. I run the U.S. software research group here at Morgan Stanley. And very pleased to have with us this morning Amy Hood, CFO, from Microsoft. So, Amy, thank you for joining us.
Before we begin, I do have to read a brief disclosure. For important disclosures, please see the Morgan Stanley website, at www.morganstanley.com\\researchdisclosures.
Excellent. So, Amy, thank you so much for joining us. Always an interesting conversation with Microsoft. Between the commercial side of the equation, the consumer side of the equation, you cover such a broad swath of what's going on in software and technology.
I want to dig in on the macro side of the equation first, and we'll take it in two parts. Absent sort of the Ukraine-Russian conflict, what was the Microsoft view heading into 2022 in terms of the overall spending environment, particularly on the commercial side of the equation?
Amy Hood : I think it's not dissimilar to what we shared really in January, which in some ways was very consistent with how we talked about the demand environment for the past couple of years.
The reality that customers around the world have been modernizing business process at a fundamental level to enable growth and to enable competitiveness has been underlying demand, I think, on a consistent basis. Those pressures to modernize and be competitive maybe come from different places depending on what industry you're in or where you are around the world, but the process that we called digital transformation, for lack of a better term for it, I think sits at the bottom of the demand curve.
And we feel good about the signals. The conversations with customers remain very consistent on that front, maybe taking on different levels of urgency depending on what industry you're in, where you feel like you are in that competitiveness curve. And competitiveness is defined – I think oftentimes we say and use and think about costs or cost-per or how to do something more efficiently or effectively. I think it's also about growing faster. What new markets can you be in? Can you quick up? Can you quicken the pace of innovation? Can you launch new products faster? Can you do simulations faster? Like, what is the goal?
And so, I think that probably sits maybe in a consistent way for me and for the company. You'll always have ebbs and flows from other things that impact demand, but I think overall it feels pretty consistent.
Keith Weiss : Got it. So, right now there's a big other thing hanging over us, the Ukraine-Russian conflict. Can you first talk about the immediate Microsoft response? You guys put out a press release about operations in Russia and Ukraine. What is it actually that you disclosed? And any kind of sort of sizing of the impact you could talk to us about what that would mean in terms of how much of Microsoft's business is in Ukraine and Russia?
Amy Hood : Sure. Maybe we should start with the most important thing, which is the war in the Ukraine and the unjust and unjustifiable and illegal invasion is the most important point that we released in our statement. We've been entirely focused on a couple of things. Number one is life safety of our employees in the Ukraine and being able to provide cybersecurity services, which are part of our ability to provide help, where help is needed.
I think, ultimately, our ability to contribute to what will be and is a humanitarian crisis remains something that both us and our industry and every industry can contribute to helping alleviate.
We did announce that, of course, we're complying with government sanctions.
And then, secondly, we've stopped new sales to customers inside Russia through our Russian subsidiary.
In terms of impact, I assume for this audience you mean revenue. I tend to start with everything else, and revenue is probably the least important concept you talk about when it comes to this topic. But Russia represents less than 1% of our revenue. And I assume that there will be an impact to that less than 1% of our revenue. But frankly, it would not be a focus.
Keith Weiss : Okay. Got it. Got it. There's also a broader concern amongst investors of contagion. Resource prices are going higher. Consumers could get scared out of spending. In your view – we talked about these digital transformation initiatives. We've seen your bookings do really well on the back of these digital transformation initiatives, which tend to be multiyear endeavors by these enterprises. How do you feel about the durability of those digital transformation projects, even in a more disrupted sort of macro environment or even with the threat of potential recession in Europe?
Amy Hood : I think, in general – we've talked about this. Whenever there are – and I think the question generally has been asked about labor, was the first input cost that we got asked would it impact digital transformation. I think other inflationary pressures, such as I think in this instance probably energy pricing tends to be the first one people talk about.
The best way we know to help customers talk through how to control cost, how to be more effective, how to make every dollar you spend be spent in the right place with the most impact is, in fact, technology. It's always been a way to address fundamental challenges. In some ways, I think that's true across many topics, being able to speed the pace of addressing those challenges.
And so, I think for us the conversations tend to still be around that. It's about, how do I get the most out of my workforce? How do I get the most out of the unit of input? How do I get the most out of my COGS pricing? How do I find a way to make sure I'm running the most impactful programs, whether those programs are a marketing program, a sales program, an engineering program, a pricing change? And I think that tends to be the conversations we do, in fact, still have.
And so, in many ways, it's hard to put what's happening into the bucket of – "disruption" is not the right word. But I do believe in the durability of a transition that says, as we've talked about, tech will be a larger percentage of GDP, a significantly larger percentage of GDP, tech-enabled change will continue to be a tailwind for those that are well positioned across segments and industries and across the globe to deliver that to customers.
And so, because I believe that is a durable trend, it keeps me pretty grounded and I think keeps the customer – our employees focused on the right things amongst other distractions, whether that's a question around, "Gosh, how can I help a customer?" That's the right question. "How can I help a customer address their biggest challenge?" And while you may have a labor challenge, the right question is, "Let me make the most of what you have. Let me show you tools that don't require advanced engineering degrees or computer science degrees to be effective." And so, I feel really good about those underlying trends for us.
Keith Weiss : Got it. It sounds like you're talking a lot about – you said to get the most out of, get more out of. It's productivity-enhancing type of technologies. And it reminds me of what Satya has been saying about software being a deflationary technology in an inflationary environment.
Amy Hood : I think that's – yes, he's – I think that is, in a summary, how he thinks about it. And then when you think about deflationary pressure – and I think productivity is a way of saying it. I think in our world when people say productivity, they think about the Microsoft 365 suite. And really what it is, it's so much broader than that. It's, like, "Wait, if you can cut the time to develop a new product..." – I guess that's productivity. It's not the standard definition of productivity that people have used when they apply it to Microsoft. Or maybe you can do business process work with non-CS degree employees to change a process and take out some steps and have it be done in half the time. That's productivity. It's not productivity in the way I think that people think about us. So, like a productivity suite. It's fundamental enhancement to productivity, maybe which is the curve everybody's been trying to actually improve for decades.
Keith Weiss : Got it. So, I want to shift gears a little bit and really dig into some of the biggest opportunities ahead for Microsoft. We recently did a big-picture report on Microsoft, looking out kind of over the next five years and our view of kind of what the big growth opportunities are.
And we cut the report into kind of two segments. One was leveraging the broad user base of Microsoft. I think you guys have quoted over 400 million commercial Office users out there within your base. And there's a lot of your initiatives that are about sort of the user and sort of more solutions you could drive into that user. The second bucket we put it into is the platform, and that's sort of building larger solutions on top of Azure.
Starting on the user base side of the equation, I think one of the key focal points for investors is obviously Office 365 and where we are in the transition. And can you talk to us about kind of where are we in terms of sort of moving over to Office 365? The seat growth in the overall Office commercial base, I think, has surprised people to the upside. Is there sort of more room to go on there? Maybe we'll start on the "Q" side of the equation. How are those seats growing?
Amy Hood : Keith, your questions are sometimes so long, I need to bring a notebook. But I think we – I got through most of it and then I just, even with my real focus on your speech, I got a little distracted.
I think what you asked me about was the "Q." That part, I remember. And I'm guessing since that was the key, it's about seat growth. And really – and then we'll get to, I'm guessing, price. The P * Q. See, you could have just asked me...
Keith Weiss : Let me rephrase it. Let's talk about...
Amy Hood : You should have just asked me that. I could have really killed it. Equations are how I work. I'm going to have you do it in Excel next time, just to be easier for me.
So, back to users. There's really – I think, in some ways, if I look back a decade almost to how long we've been talking about Office 365 or Microsoft 365 and our ability to land solutions, I think we probably underestimated the number of people for which this was applicable and our ability to build new solutions to address them.
So, what you've heard us talk about recently – and you've seen it in our seat growth, especially over the past, I would say, two years, where people have been surprised with this durability – is that the ability of that solution set to reach into two places more directly. First would be small and mid-sized businesses, which for us tends to be – a definition of that would be entities with less than 300-ish seats. So, they're still pretty big, but we would call that small to mid-sized in our language that we use.
And then, secondly, frontline worker. And there's about two billion of those around the world that you can address with different types of solutions that really make a difference to that fundamental productivity we've been talking about.
So, when you're seeing the seat growth and is it durable and how far are we along the journey, we just have a long way to go with solutions that can, I think, really add fundamental value to their productivity, to the joy of doing your job, being able to complete that job easier, feeling empowered in your job.
And so, I'm excited about the progress there. And so, that's the "Q." I don't want to guess. If you're going to ask about the "P" next, I'm ready.
Keith Weiss : All right. Next question. What's the "P" look like? I'll just keep it shorter now.
Amy Hood : You know what we call that, Keith, at work? We call that the growth mindset. Because when you get feedback, you take it in and you learn. And I get feedback a lot at work on this topic, and I just want to say you did great.
So, on the "P," which in this instance I'll talk about as both pricing, which I know we get asked about, and price changes; and then, secondarily, our ability to have users adopt more of the suite or more solutions to raise price over time.
So, first, I feel really – I feel good about where we are in pricing. We have some price changes go into effect beginning this month, beginning of next month – I lose track of March – this month. Great. It's March. And so, the ability to realize that price I feel strongly about. There's a ton of value in the SKU. We continue to add value. And so, I think that's being well executed.
The more exciting part has always been the ability to add new value to a SKU for users and companies around the world to feel and get more value. In some ways, I think we've talked a lot about security. So, people always kind of start and stop with security as the value. And because we've given more, I think, revenue points on that, people have an understanding of how big that opportunity is for us.
Beyond that, I think compliance. And there's a lot of room, I think, to continue to move people, as we've said, to E5.
So, Security. Compliance. Analytics value. Power BI is really the default tool for analytics, and it's become that. We've seen great growth. I feel really good about our progress on that.
And then, finally, one we've been talking about a little more lately, Teams Phone, which we talk about as voice and telephony. We've seen really strong growth there, as well.
And those pillars, I think, add a lot of opportunity for us to both cut costs for customers and let them have a better and more integrated experience. And so, we've got some room for sure on ARPU, as well, and the job there is to continue to make sure people understand the full value of the suite.
All four legs of that E5 stool have a ton of utility to them, and they're quite competitive on their own. And then if you think about them as a suite, certainly offer very compelling value. So, we've got some good room there, as well.
Keith Weiss : Got it. Is there ever a time when we'll see an E7 SKU, that more functionality comes into the suite?
Amy Hood : It's interesting. I get asked that a lot. And I can see why. In Excel, if you go 1, 3, 5, there's a decent question on 7. And so, I will tell you, though, right now I've been a lot more focused on whether or not – and we continue to think through this and you've seen us move a little bit down this path – whether you're better off offering some standalone solutions that you would sell in addition to E5 and maybe not call it a suite.
I'd say things like that. Viva is a terrific example. Viva will be monetized mostly outside of the suite. That experience is resonating incredibly well with customers around the world, that we've just really started talking about it and releasing very early components. The desire for employers to be able to have a real pulse in terms of employee engagement, employee learning and skilling, that's the type of, I think, example where I would say, "Gosh, I'm not sure that's the right move is to put it in a suite." It's got great standalone value. People should adopt it and deploy it directly. Having that be a direct sale makes a ton of sense to me.
The other thing to think about is a lot of the new, what I would call, productivity tools may, in fact, look a little bit more like consumption that you would normally associate with Azure. Maybe you would have on the back end limits, and that would be deploy it and the more you use, the more you would pay. Otherwise, I guess it's value pricing.
But it's – I think I tend not to limit the scope of Microsoft 365 or Office 365 to a concept that says it has to be in a suite and it must be for a user. It's pretty narrow. It's actually – I wouldn't say "pretty narrow." I now believe it to be narrow and too narrow for what that cloud opportunity and footprint can be.
Keith Weiss : Got it. What came into my head, not necessarily an E7 offering but, like, the natural extension of what we've seen. Power BI is kind of in the E5 suite. The Power Platform, more broadly, there's two other legs of that stool that we're hearing good indications on, that there's a lot of customer demand for better automating those processes. Can you dig in a little bit in terms of sort of the opportunity around Power Platform and where you guys are seeing the initial traction with that?
Amy Hood : I think it is – if you were to ask me, Keith, in terms of proactive conversations with customers where they bring tools up, this would be near the top of the list. I think for a very good reason. We just talked about if you define the desire for deflationary pressure as the ability to adjust business process effectively with a quick time to value using labor that is closer to the problem as the subject matter expert. Let's say you look at that problem set and say, gosh, what would be a good tool? Well, it would be Power Platform. Being able to take far broader parts of your organization, no matter what organization or industry you're in, apply that work and those workers who are closest to the workflow to the problem solving. Being able to have them deploy tools – I think which people like to call low-code, no-code – it makes people like me be able to deploy business process adjustments.
If I can do it, it means – trust me – that many, many people can do it. In our finance organization, we see it every day. Our finance team was able to capture those business changes without needing – although I love our core engineering and IT organization – if we're capable, we should do it. And if you get compliance and security by default through those processes, there's really no better people to be adjusting and making those decisions.
So, I think what we see in our own organization or in my own organization is certainly what customers are seeing. And I think it's a great opportunity for us as a company, especially in a place where labor and labor constraint is a real challenge, to be able to have a product that is in the right place.
Keith Weiss : Great. Is that where you're seeing the initial traction? Like, when we think about sort of RPA tooling, robotic process automation, and low code, oftentimes it's starting in the finance department and the accounting organizations. Does that hold true for Power Platform, as well?
Amy Hood : I'm not sure I could narrow it in that direction. We've seen it in marketing departments. We've seen it in supply chain. We've seen it in finance. I think there's a lot of places. I think it more – I have always felt like it's not necessarily about the certain processes are easier to apply it to; it's more about the desire of an organization to effect change. So, I might answer that with more of a culture comment than necessarily certain products or industries are more – it's easier or not. It's just more, I think, a world view.
Keith Weiss : Got it. I want to touch on two other of the more kind of user base products. One is LinkedIn, which I think has surprised a lot of guys to the upside in terms of...
Amy Hood : A lot of people.
Keith Weiss : A lot of people to the upside. A lot of people to the upside in terms of the durability of growth and that solution really hitting the right notes in terms of sales enablement, but also kind of recruiting, particularly in this labor market. Can you give us a little bit of an update on kind of where we are with, like, the software side of the equation when it comes to LinkedIn?
Amy Hood : It's interesting. It may not surprise people – I would say it probably didn't surprise us as much. LinkedIn is an indispensable tool for millions and millions of people around the world to find their economic opportunities. So, if you boil down the purpose of an entity to allow people to better themselves, better their families, and better their security by finding the right job opportunities for them, by gaining the right skills, the application of that tool then is quite broad and the utility is quite needed.
And so, if you think about really – and I think what Ryan and the team has done there is quite extraordinary in terms of their execution and relentless focus on a mission that matters, which is to deliver that experience in a better and better way every day.
And so, I think what you've seen is real growth in users, but also real growth in engagement. Those fundamental things then provide – as long as you're providing and you keep at your core that mission, it then has utility for recruiters and HR organizations around the world. It has utility for marketing teams around the world in terms of business-to-business connections. And you've seen that in some of the ad growth numbers we've released.
We now have the four businesses at LinkedIn all reaching that billion dollar threshold and the organization itself still growing at a very healthy clip given its scale. And I think it derives from a relentless focus on the member. And as long as – and I think the team is focused on that and adding value. And whether that's through mobile capabilities or whether it's investing in really critical things when you have a pretty remarkable labor market. Maybe it's skills-based hiring, which I think people are going to hear more and more about, adding tools to address that to make sure people can find the exact right talent, regardless maybe of some of the other more historic ways to find talent.
And so, I'm pretty optimistic about the LinkedIn business.
Keith Weiss : Excellent. I wanted to talk about Dynamics 365. And I think it's an underappreciated part of the story. I mapped sort of the growth trajectory of Dynamics 365 versus the other sort of big SaaS companies that we think about: ServiceNow, Salesforce, and Workday. Dynamics 365 has ramped right along with the leader, ServiceNow, within that. And the path to $4 billion in kind of annualized run rate has been as good as anything we've seen in SaaS. What's working on that side of the equation? You replatformed a couple of years ago. How were you guys able to scale like that? And what's the potential on a go-forward basis?
Amy Hood : I think in – and I feel like we're taking a journey down the P&L, which is interesting. And so, next, literally, visually in the P&L is Dynamics. So, it makes sense in my Excel spreadsheet.
So, this team has done a nice job. Five years ago, as you said, we did a replatforming. But more importantly, I think what we realized is that we needed to make Dynamics 365, in addition to the most modern business process reinvention application set, it needed to be – I can't ever say this word – modularized. I'm not even sure that's a word, now that I've said it. The point being, we needed to make smaller, more consumable pieces, easier to deploy, quicker time to value, more applicable to your industry or solution set.
When the team has done that, both has a great tool and a more focused go to market, then you'd say, well, what really can make Dynamics 365 different? Those two things make a lot of difference. But of course, it's also its applicability to the Microsoft cloud and what problem are you really trying to solve. And you start by saying, number one, you need to focus on data problem. These are generally – you need access to the right data to make good business process decisions. Secondly, you want to apply AI where you can to that problem, to make decision making more effective and more efficient. And finally, you want to make the tool accessible.
And I think Dynamics is focused on those things, enabled by the fact that the Microsoft Cloud has a lot of ability sitting at the platform layer to help the Dynamics team achieve those goals and I think in a really innovative way.
It also took, frankly, some investment on the sales side. The sales process is a little different for business applications. It takes some time. But more importantly, you sell to different people. We've got a lot of people in the buying community inside an organization. But there's members of – people who have budgets inside orgs that we didn't spend as much time with, by the nature of the businesses we were in. And really, when you think about where is Dynamics applicable, Judson, our head of sales, often says it's applicable in every room of your house. And I think that's a good way of thinking about it. Meaning, it's applicable at every component of a business, every budget.
And so, the ability for us to address those needs to really focus on customer solutions, focus on customer problems, it's been a focusing point for the cloud story even beyond just the Dynamics story. And so, I think you've seen that in our results. I think this is a place where there continues to be very – there's a lot of opportunity for us to continue that growth. I think you'll see us talk a lot about more industry-level applicability, helping people understand exactly what problem it can solve in their industry, not necessarily by adding technology, but by adding context, which matters a lot.
So, I think it's one of the places – you started with Power Platform. I was excited about that. Then I'm excited about LinkedIn. So, now I'm excited about Dynamics. I'm excited what you will ask about next. Because you're on a good streak.
Keith Weiss : One more question on Dynamics. The target customer for there, I think a lot of investors think of it more as a mid-market story.
Amy Hood : I know. It's not.
Keith Weiss : I've been scolded for saying that.
Amy Hood : It's not about scolding. This, for me, is 100%. The only proof is in who's adopting it. So, as I said, I'm a data person. So, we developed products maybe historically – as you know, that team was developed through acquisitions done a long time ago. And the acquisitions we did were more focused in the mid-market, I would say. I'm not sure how to define it exactly, but mid-market is a fair term.
But really what this does is these are about – they often are department deployments, maybe organization deployments. They run alongside other business applications. They maybe run next to or around, or maybe it's a...And so, I think now it's safe to say we've seen some of the largest organizations in the world adopting Dynamics to solve a problem.
So, I think it's absolutely fair for people to have thought that's the market, and we actually even told people that was the market. I think at this point the market is if there's a problem that can be solved by a module that this best does, then that's a good customer for us and we should help them do that.
Keith Weiss : Got it. Got it. I want to shift gears to the more platform side of the equation. And talking about sort of the big growth driver, in our model at least, which is Azure and the market opportunity ahead for Azure. Jason Zander, the VP of Azure, he talked about a top-down market for Azure, the TAM being as high as $4 trillion – $1 trillion if you look at it just from an IT specific. These are massive numbers. Can you help us understand where do the budget dollars come from?
Amy Hood : It's interesting. I think if we go back – and I think Satya and I have both talked about this relatively consistently – every time we've thought the market was size "x," it's usually been bigger on this topic. And it's almost as if you took every line item – literally, every one; not like the P&L – I mean, literally every PO, purchase order opened, every process run inside any company around the world and said, can this be run more effectively, more efficiently, and the answer likely is yes. And the tool to do that is likely technology.
And so, then when you ask somebody, how do you define how big that market is, the answer is it's very big. And then you ask, okay, are there businesses that are possible because you can now run a distributed system with real-time data enabled by AI? Are there businesses that are possible? Absolutely.
And so, I think it's why you see I think most people feel incredibly optimistic over any period of time about the size of the market. I don't think anyone feels constrained by market TAM. You'd pick other constraints, not that one.
Keith Weiss : So, when you're talking to a customer about Azure – and then I know customers are thinking about it in terms of sort of where does the budget come from, traditionally, we've said it comes from servers and storage, you're not buying anymore. But then it expanded to the software stack, you're not buying the databases anymore and that's coming through Azure. But I'd imagine it also extends to telco and networking and human costs and administration. Do the customers see it that way? Or do they understand sort of the full value replacement that comes with Azure?
Amy Hood : It's interesting. I would tell you most of the conversations do not start with where does the budget come from. I'm not trying to be dismissive of budgets. I love a budget, trust me. Really take great pride in budgeting.
But customer conversations tend to start with, "I'd like to grow faster. I'd like to win more. I'd like to better serve a customer. I'd like to improve customer stat. I'd like to reduce churn. I'd like to grow price. I'd like to retain margin." It's just not about cost in the way that the question is phrased. It's much more about, like, the problem to be solved, and the problem to be solved tends to take that language to it. The implementation is generally and can be Azure or Dynamics or Office 365 or security. It can be a bucket of goods to that problem. But it tends to not start there.
And so, when people say, okay, well, how does it get paid for, it may be, to your point, replacement dollars, moving your budget priorities around. It may be that you say, gosh – if you can lower churn by half a point, that's a lot of top line growth to afford costs. And so, you get room. You get room in the system.
So, I feel like I would – I don't know that I've been in many conversations where that's been the energy of the room I'm in, but I'm sure that it lands somewhere ultimately. But it's much easier, I always say, to find money in your budget when the passion of the team is around growth. You can find the money, even if it's hard.
Keith Weiss : To me, it sounds like over the past four or five years, the conversations that Microsoft is having – and I'm assuming, like, the contracting behind that is shifting from being a technology provider to a more strategic relationship you're forming with these companies, like an Albertson's or a Ford, who are looking to really drive change in their business. Is the structure of the contract or the structure of that relationship today different than it was five years ago or 10 years ago when Microsoft was more of a technology provider?
Amy Hood : Interesting, Keith, I want to say yes to that. The reason I'd say it's different, but maybe not materially different, we've always tried to have contracting reflect customer desire for that structure. That being said, as you all know, because you can see it in sort of the rhythm of our expiration base I get to drone on about on the quarterly call, there is a reality to the three-year contract, especially on the Office side or on-premise part of the business or the Office 365 business.
What we are seeing – and I think that's what you're alluding to – is maybe on the Azure side of the business, are those contracts taking a very different flair and do we try to make them look like the old? The answer is you try really hard not to make them look like the old because it's not the right answer for the customer. So, you may actually – and we've talked about it – you may get these big long contracts, and you'll hear us talk about the remaining RPO was longer than a year, less than a year. And all of that is just the nature of that transition.
So, yes, you've got some big ones with commitments made up front. Maybe you do it for price reasons. Or maybe you do it because you want to work and have laid out specific workloads, and that made the contracting a better tool. Or maybe, frankly, you're a really large customer and you just prefer pay-go, pay as you go. Maybe that's just your preferred method. That's okay, too.
I remind people that Azure is unique in that regard. You've got to use it for it to show up on the P&L. So, whether you've contracted it and it's sitting in the RPO, it only really, really counts if it gets deployed, used, loved, and adds value, which is revenue. And so, the contracting language, far more important to just make sure you're getting workloads deployed and the customer is getting value – far, far more than is it two years, three years, five years, seven years, two weeks.
Keith Weiss : Got it. Got it. How should investors think about the Azure growth equation evolving, in terms of is it workload growth or the mix between sort of what's workload growth, how much of it is moving from sort of more core services, like infrastructure service, up to the platform services, like in database or machine learning service on top of it? And I guess it comes back to the P's and Q's. Is it more of a Q equation still on a go-forward basis? Or now are we getting higher-value services becoming a bigger part of the mix and that's increasing the P?
Amy Hood : I think if you go back to TAM, if you assume you have a market this large, I don't generally feel like there's a Q challenge. Q, in this instance, on a consumption model, is just literally growing usage of workloads and adoption and the workloads you've picked and are they expanding. And I think that tends to not be the constraint would be.
I think what you're asking is pricing and margin actually tend to be the bigger nuances. When you've got Q growth, it does depend where it lands in order to how really gross margin looks.
I still feel good about what I think you would call core infra growth. But you are seeing and we have seen, obviously, very good growth in our data platform layers and, increasingly, other what we would call premium service layers.
And it's not just workload shifting. I think Q feels constrained to people who feel like it's left-hand, right-hand. Take on-prem workloads that exist, shift them. Like, shift right. That is not what's being seen today. It's new workloads, new things that, frankly, weren't being considered before. And so, you don't see just a shift of spend; it's a shift plus new. And it looks quite different. So, I think – and when you see those shifts and new, it's a combination of data, generally, and core platform over time.
Sometimes people ask me which one would be bigger. I don't know that I have an answer to that. I expect Q to grow in both. Growth may look better on the data side, just because it's off a smaller relative base given when the transitions happen. But I'd have to think more about that one.
Keith Weiss : We’ve been getting an education on how consumption models work. This is definitely different from – we've gone through professional licenses to subscription, now consumption. I think we're doing a lot of learning. How should we think of that – how do you think about price performance? How much price performance are you looking to push back to the end customer so they consistently see sort of increasing value from the platform? How much sort of price performance and efficiencies that you garner from Azure become better gross margins?
Amy Hood : Let me think. I'm trying to think which of your questions I'll start with. I think, number one, we – this is a competitive market where prices are set by the market. So, I don't tend to think of it as, hey, wait, we have all these efficiencies we've gained, where do they fit?
A better way to think about it is consumption, it's a marketplace like any other, in some ways. It's a competitive market with lots of big players competing aggressively. It means prices move down with time. And new prices, with new workloads, new capabilities where there's higher differentiation tend to have more margin, and others have less.
And then I separately believe in a competitive market that you should and do spend a lot of time making sure your fundamentals are terrific, which means you focus on cost per unit of work. You've seen that in the gross margin improvements. The team has done a great job, frankly, on that front and continues to do a great job on that front.
The reason you focus on that is because ultimately in a competitive market cost is price. You want to make sure you continue to grasp fundamentals: great service, great quality, easy deployment, low cost to deploy. And differentiation lets you have leverage in margin.
So, we'll stay focused on gross margin. We'll stay focused on winning. We'll stay focused on taking share. And we'll stay focused on the fact this is a very large market that can have, I think, a lot of good tailwinds. And we're well positioned in it. So, sort of you have gives and takes in that on margin side. But in general, we focus on, I think, where it's controllable.
Keith Weiss : Right. One last question on the commercial side, and I want to touch on a couple of consumer and more corporate strategy questions. Within server and tools, that's been a much more durable grower than a lot of people imagined. Hybrid Cloud Advantage has been a great program for Microsoft, unlocked a lot of sort of, I would say, latent demand, CIOs and sort of your customers not getting locked into one side of the equation or the other. Does there come a point where the customer takes advantage of that Hybrid Cloud Advantage and starts shifting more to Azure versus on-premise and that starts to become a headwind?
Amy Hood : I don't know that I would call that happening a headwind. The way we've always thought about the hybrid program was really a customer need, a customer need and desire to run the workloads in the most effective place to run the workload and where, frankly, they want to run it. The enablement of that flexibility is what we call the hybrid program.
And so, for us – and I really do believe this; it's why I focus on the overall KPI, even though everybody really just doesn't want to do that – it's because that's how customers purchase. And so, if you want to – so, I'm always saying, like, listen, it's about flexibility. If you don't know when you want to move workloads, if you don't know but you're committed to Windows and you're committed to SQL, then this is a great and flexible option to give customers the absolute most control.
Now, over time, if I guess they move more to Azure, I would, quote-unquote, have a headwind to on-prem revenue. I don't know in my worldview that's a headwind strategically. That's just customers continuing to use our products and services in the best way that worked for them. It would likely show up as Azure revenue, and it would then not show up as on-prem revenue. I don't feel badly about that, and I don't lose a lot of sleep over it. If the reason that you see slowing on-prem growth is you're seeing faster shifts to Azure, I view that as a good thing.
Keith Weiss : Right. Got it. Moving to More Personal Computing.
Amy Hood : We got there, with three minutes left, my friend. I mean, you almost made it through the P&L. We're going to get there.
Keith Weiss : I need to shorten my questions even more.
I would say over the last two conference calls the tone from you and Satya on PCs has been surprisingly strong, about sort of the changing nature of PCs on a go-forward basis. And probably a question I get a lot from investors is, like, "What are they seeing that we're not?" So, can you talk to us a little bit about that more positive tone on PCs?
Amy Hood : I think in some ways the bigger issue in you just hearing a positive tone on PCs is, frankly, the deliverer, which is me. I should have been talking about Windows. Absolutely, the role of large-screen devices to your productivity and your ability to do your job every day. What we saw in the past two years was proof that that's true and has been true. The utility of that device and my inability to accurately explain it may, in fact, be the issue people are just now realizing. "Wow, she just figured out Windows matters." No, I just figured out how to talk about it.
And so, the reality is a large-screen device over the past couple of years, we've all been reminded of the role it plays. There are more PCs per household and more time being spent on PCs. We're continuing to see that even with hybrid. And so, there are just jobs to be done, and it plays a great role in many jobs to be done.
Windows 11, I think is a great investment in having a modern, beautiful user experience for Windows. We're seeing good response to it. But people love Windows 10, too, and that's great. I'm thrilled, in fact, that what you're seeing is a more holistic version of what Windows and the experience should be for a user. The difference that that worldview has made is evident, I think, in many places. It's evident in the strength of the Microsoft 365 consumer subscription. It's evident in browser share grant gains. It's evident in the search numbers.
It's the centricity of having Windows work for you as a user and it being a meaningful, positive experience that makes your day better. I've said Excel brings me joy, but other things bring other people joy that they do on a PC. Gaming is a terrific example. Windows has always been the place people game, always. And bringing that spirit back, integrating it into a user experience. I don't know.
I find it – I think in some ways this is one where whatever review form I get this year should say, "She forgot to talk about Windows for a long time, and now we're going to remedy that." Because you're seeing it in users, you're seeing it in usage, you're seeing it in the market. We've had eight quarters of demand that's never been seen before. People talk about supply constraint. There absolutely is supply constraints in the system. This is the eight highest quarters of PC demand we've seen ever of shipments. The market is stepping up, partners are stepping up. But there's more demand than there is supply, even with record shipments.
And so, I feel good about – I am optimistic, but I'm more optimistic about what Windows can mean to a user and how we can continue to make it better, more integrated, make it easier to do the things you like to do. For me, that's Excel. For others, maybe something else is fun.
Keith Weiss : Got it. I want to sneak in one last question on OpEx. I think people have been very impressed by your ability to both kind of fund the growth within Microsoft but also continually find efficiencies within the business to grow operating margins. Is there still kind of room on the efficiency side of the equation just to fund that equation on a go-forward basis?
Amy Hood : Well, we added 16% headcount growth last quarter. So, in many ways, I'm excited to be able to do that. We spent, I don't know, 40 minutes talking about our optimism over any long period of time on revenue and the opportunity that exists. In order to capture that, ultimately, you need people. You need people who are excited to work on it, people who want to sell, people who want to help customers deploy. And so, I actually feel really good about that investment.
Even more so, I also still believe you can spend dollars better. A team, I don't know, I just always think if you're not reinventing yourself, if you're not moving your dollars around, if you're not asking yourself every single day can you do it better, can we move things around, can you make – maybe we don't have all the right bets on the table. And if you don't, move it. Ask yourself. I love that. That's, like, okay, second to Excel, I love headcount budgets. Because that's about asking yourself everyday can you do better. Can you do better for customers? Can you do better for the engineering team? Can you make their process work differently? Can you change your customer acquisition cost? If I moved this team, would they get something shipped faster?
Like, it's just – I don't know. So, yes, nobody's off the hook yet, Keith. I can still find ways to be more efficient. We can still do things better. And yes, we still need to grow. All those things can happen and still have good operating leverage. But the best thing to do is top line growth makes everything else easier. So, if we execute at the top, then it makes a lot of moving around far, far easier day to day.
Keith Weiss : Outstanding. Well, Amy, unfortunately, that takes us to the end of our allotted time slot. But thank you so much for joining us. Again, a fascinating conversation.
Amy Hood : Well, Keith, thank you. I'm sorry I changed your questions a little bit. And thanks, everybody. Good to see everybody.
Keith Weiss : Thank you.
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