Q&A（Question-and-Answer Session）is a session after the company's prepared remarks where institutional investors and analysts ask management questions. In this dialogue, you may find some valuable information that might affect the stock price in the following weeks.
Now let's look at some key points from $Microsoft(MSFT)$ FY2023 Q1 Q&A Session Transcript
Q:I'd like to follow-up on the last question on Azure specifically. So next quarter, you're guiding to sequential further slowing in the business. Is that the factor of optimization? Is it something else that's going on in here? How should we think about that specific component of the guidance, given the fact that you've got good bookings, strong RPO growth, et cetera?
A:I'll – you're right. Let me go ahead and reiterate part of that, which is that this quarter, as you saw, we did have very good bookings growth. And within the RPO number that you're referring to, we had what we would call long-dated growth, which means we're having and seeing customers continue to sign commitments to the platform, and that goes really to what Satya mentioned is that the plans to invest here remain intact. And so it's about both the optimization that you're talking about, and we are seeing and the guide includes that, and it also includes new workload starting. And those also may not be matched up one-to-one to see sort of a consistent pattern. And that does result in some volatility.
The other piece of it, Mark that we didn't talk on before because I was really focused on consumption is that there is per user headwinds as well, right, because we're getting and seeing some of these loss of large numbers in terms of the per seat business. So there's a couple of things going on here Mark again, as you said, a very large base. So it's not just the optimization to new workloads. It's also some per user work as well.
Q:Amy, last quarter, you called out, for the first time, SMB weakness. It sounds like that continued. I think many are questioning if did that get worse this quarter? And did you see it filter now into the enterprise? Can you talk about what you're seeing higher up above SMB?
A:Maybe this is a chance to talk a little bit about Microsoft 365. I think that's a place where we can talk specifically about the SMB market because we did see continued impact there in Q1, although it was not different than what we saw, frankly, in Q4. In Microsoft 365, what you saw was very good renewal execution. And it speaks to, I think, the value people are seeing in Microsoft 365. We had on-time renewals that were frankly better in Q1 based on expirations than we've seen a year ago. So deals are both getting done and I think getting done on time. They're getting done within a discount range that we feel good about. That's consistent. And we saw a good upsell to E5.
So if you think about that as sort of forming the basis of what are we seeing above SMB, that's a good summary. Where we, in fact, saw -- I think we've talked about it, new deal moderation, and I referred to that, frankly, in Q4 as well -- it tended to be in, to your point, the smaller end of the market, small to midsized companies. And it also tended to be through partner, which we had talked about before, Brent a little bit, and I referred to. And it tended to be around selling what is, in fact, some new value that we put into E3.
So this is a place where there is some macro impact, but there's also, I think, a better job we can do in our E3 SKU, which is really a core value proposition. We added a lot of value to that SKU in Q4 in terms of security and auto packaging for Windows. It's a great value in the same way E5 is. We landed E5 really well. We've got some work to do on landing E3. So there is some macro, seems pretty consistent, frankly, more than inconsistent with what we saw. And there is some execution that, I think, frankly, we can get better at as well.
Q:Clearly, you're experiencing a little bit more sales mix given the weakness on the Windows side. It looks like you've elected not to throttle back OpEx to enable you to meet the three months ago guidance for flat margins, so they'll now drift a little bit lower. Do you mind talking through that decisions? Why not throttle back OpEx as a counter to that Windows pressure?
A:And I shared a little bit on the call, but let me share a little more, because I think it's important in terms of how we think about investment and continuing to invest where we're seeing substantial opportunity and growth.
The PC market is cyclical. And we had some great benefits for a couple of years during the pandemic, and we chose not to spend against that favorability over the past couple of years, and it fell to the bottom line, and you saw substantially increased margins over that time period. And we did that potentially because it is a cyclical market. And so in the same way I see it now is that PCs are going to be a tough headwind for us for the year. But overall, the Windows back to the installed base, our ability to grow usage, it's still higher than it was. And that's a good opportunity for us. And so in the same way that we let it fall to the bottom line when we saw a surge, it's important to stay consistent in this down market because when you have type of opportunity that we have specifically in the commercial business and the TAMs that Satya talked about has been some of our most exciting. And you have the opportunity with your customers to gain share, to gain confidence, right? And I think it's important to have a steady hand.
Now, let me also say it is not as though we are not responding to the macro environment around cost. As I commented, our sequential headcount growth from Q1 to Q2 will be minimal. It will be about investing where we said we would invest, which is in focused areas. It's about moving headcount to make sure inside the company, we've got it on the highest and most important things. We've added a lot of headcount over the past 12 months. And we want to make sure we use those head count in the most productive way possible, and we're going to do that.
And also, we're going to, frankly, lap some investments that we've made at the end of H2, Karl. We closed Nuance at the end of Q3. We closed Xandr in Q4. When we come and lap those, you will see a material decline in OpEx investment. You will also see us start to lap some of the headcount surges that we made last year in key areas. And by then, I feel good that we'll see productivity improvements from the headcount have and our focus. And so it's an ability to say, absolutely, I want to stay consistent, and we'll respond to the macro. It's possible to do both those things, and I think that's what we're doing.
The above Q&A are highlights that are edited for brevity.Click here for the full Microsoft FY2023 Q1Earnings Call Transcript.
If you want to know more details, you can click here to re-watch the Microsoft FY2023Q1 Earnings Conference Call
Comments