Microsoft CEO Satya Nadella On ‘The New Growth Engines,’ Teams Innovations And Recession Concerns

‘I don’t hear of businesses looking to their IT budgets or digital transformation projects as the place for cuts,’ Microsoft CEO Satya Nadella said Tuesday on the company’s earnings call.

Microsoft reported a better-than-expected third fiscal quarter this week, with CEO Satya Nadella calling several products “new growth engines” for the company and predicting that IT budgets and digital transformation projects withstand a potential recession this year.

“If there is any macro headwind where you have more value for less price means you win,” Nadella said on the company’s earnings call Tuesday for the quarter that ended March 31. “And in our case, when it comes to our commercial cloud offerings, we have significant advantages on that across the stack.”

Nadella continued: “In the conversations we’re having with our customers, the interesting thing I find from perhaps even past challenges – whether macro or micro – is I don’t hear of businesses looking to their IT budgets or digital transformation projects as the place for cuts. If anything, some of these projects are the way they’re going to accelerate their transformation or, for that matter – automation, for example. I have not seen this level of demand for automation technology to improve productivity, because in an inflationary environment, the only deflationary force is software.”

Multiple investment banks issued reports Wednesday praising the Redmond, Wash.-based company’s performance during the quarter.

“Looking forward, the core secular growth drivers sustaining Microsoft’s growth remain firmly in place,” according to a report Wednesday by New York-based investment bank Morgan Stanley.

However, the Morgan Stanley report also said to keep an eye on an issue with Open Licensing raised by Microsoft during the Tuesday earnings call.

Morgan Stanley said to watch for issues in transitioning partners and customers from Open Licensing or even a possible weakening in on-premises transactional licensing revenue.

The report said to also watch for effects on Microsoft from COVID-19 shutdowns in China and the war in Ukraine, among other possible headwinds.

On the Tuesday call, Microsoft executives identified a $130 million hit to operating income due to stopping sales in Russia over the country’s invasion of Ukraine.

Microsoft Chief Financial Officer Amy Hood expects the war in Ukraine to have a $110 million hit on revenue in the current quarter.

Here’s what else Nadella had to say about the quarter.

On How Digital Technology ‘Powers The World’s Economic Output’

It was a record third quarter driven by the continued strength of the Microsoft Cloud, which surpassed $23 billion in revenue, up 32 percent year over year.

Going forward, digital technology will be the key input that powers the world’s economic output. Across the tech stack, we’re expanding our opportunity and taking share as we help customers differentiate, build resilience and do more with less.

Now I’ll highlight examples starting with Azure. We’re building a distributed computing fabric across the cloud and the edge to help every organization build, run and manage mission critical workloads anywhere.

This quarter, we helped more customers than ever simplifying and accelerating their cloud migrations. And it’s still early days. We are winning tier-one infrastructure workloads. Leaders in every industry – from BlackRock to Bridgestone to Lufthansa – are all moving mission critical workloads to Azure.

And we are the market leader for customers’ SAP workloads in the cloud. Atos, Chevron, Fujitsu and Woolworths all migrated their SAP applications to Azure in recent months.

Overall, we’re seeing larger, more strategic Azure commitments from industry leaders including Boeing, Kraft Heinz, U.S. Bank and Westpac, who all chose our cloud to accelerate their digital transformations.

The number of $100 million-plus Azure deals more than doubled year over year. And we are seeing consumption growth across every industry, customer segment and geography.

Now to data and AI. Our data stack is unique in bringing best-in-class operational databases, analytics and governance into one integrated data fabric.

Cosmos DB transactions and data volume increased over 100 percent year over year for the third quarter in a row. Synapse data volume more than doubled year over year.

And we are seeing strong adoption of Purview as we help organizations govern, protect and manage their data estate across platforms and clouds.

From Deutsche Börse to EY, customers in every industry are using our end-to-end data platform.

On AI, GitHub, Power Platform

In AI, we continue to see strong usage of Azure Machine Learning. The number of monthly inference requests increased 86 percent year over year with companies like PepsiCo using the service to predict which products are most likely to sell.

And our Azure OpenAI service brings together advanced language models with the enterprise capabilities of Azure, helping companies like CarMax turn customer reviews into customized content for shoppers.

Now to developer tools. From Azure DevOps and GitHub to Visual Studio, we have the most comprehensive and loved developer SaaS (software-as-a-service) service.

Increasingly, every new developer project starts with our tools. Visual Studio has more than 31 million monthly active users, including most of the Fortune 500.

And GitHub usage is increasing among both independent developers and startups, as well as the world’s most established enterprises. Ninety percent of the Fortune 100 use GitHub.

In fact, Mercedes-Benz, for example, is using GitHub Enterprise to provide a unified development platform for more than 20,000 employees to build, ship and maintain software.

Now on to Power Platform. Power Platform has become the leading business process automation and productivity suite for domain experts in every industry.

Power Platform surpassed $2 billion in revenue over the past 12 months, up 72 percent year over year, making it one of the fastest growing businesses at scale.

Power Apps is the market leader in low-code, no-code app development. And Power BI has more than 200,000 customers.

And our acquisition of Minit adds new process mining capabilities helping organizations identify bottlenecks and opportunities for operational efficiency.

On Dynamics 365, Industry Clouds

Now to Dynamics 365. Dynamics 365 is growing faster than the business applications market overall. For example, in a world of supply chain constraints, we’re helping companies like Cracker Barrel and Unilever predict disruptions before they happen.

Businesses like Heineken and Siemens are turning to Dynamics 365 to drive and deliver more consistent and personalized customer engagement and service.

We are leading innovation in new industrial metaverse to help companies optimize their operations using technologies such as IoT, digital twins, connected spaces and mixed reality applications.

And we are further differentiating the Microsoft Cloud by bringing together Dynamics 365, Teams and Synapse to usher in a new era of collaborative applications that transform every business function and process.

When it comes to industry, our six industry clouds are helping customers speed time to value.

Our Cloud for Healthcare was front and center at HIMSS (an event by The Healthcare Information and Management Systems Society) last month where we introduced Azure Health Data Services to unify disparate clinical imaging and medtech data.

Cleveland Clinic will use the solution to normalize data from different systems and integrate insights into the clinician workflow.

And with our acquisition of Nuance, I’m excited about our opportunity to apply the company’s deep enterprise AI expertise to accelerate the growth of both Nuance’s business and our industry clouds.

On Microsoft 365, Teams

Now on to Microsoft 365 and Teams. The last two years have proven that every organization needs a digital fabric that connects the entire organization from the boardroom to the frontline to customers and partners. No company is better positioned to meet this need than Microsoft with Microsoft 365 and Teams.

Teams is the most used and the most advanced platform for work and the only solution with meetings, calls, chat, collaboration and business process automation.

And organizations – from enterprises to SMBs – are relying on Teams to run their business. Our comprehensive approach reduces complexity and costs. Microsoft 365 customers can save as much as 60 percent compared to a patchwork of single-point identity, productivity, collaboration and meeting solutions.

Teams usage has never been higher. We are seeing growth in every segment including very small businesses with Teams Essentials.

Teams is the leading platform for collaborative apps. From Asana to Zendesk, there are over 1,000 third-party apps available (in) the Teams App Store.

And companies in every industry – including CBRE, CVS Health and the National Health Service in the United Kingdom – have built custom line-of-business apps within Teams, bringing business process directly into flow of work.

And we’re adding new growth engines to meet the demands of hybrid work with Teams Rooms, Teams Phones and Microsoft Viva.

Teams Rooms is bridging the gap between people working remotely and those in the office with innovations like “front row.”

Teams Phone with Operator Connect enables organizations to easily bring their existing calling service to Teams.

Total Operator Connect minutes increased 8x quarter over quarter.

On Viva, Windows 11, Windows 365

Viva has more than 10 million monthly active users at companies like Blum, Cerner, Marks & Spencer.

This quarter, we added LinkedIn’s Glint employee engagement tool to Viva, ensuring leaders can more easily solicit employee feedback and receive actionable insights.

All this innovation is driving growth across Microsoft 365. Organizations across the private and public sector – including American Family Insurance, the Queensland government and Telefonica – are increasingly choosing our premium E5 offerings for advanced security compliance, voice and analytics.

Now on to Windows. The PC has never been more relevant to work, life and play. The number of use cases is increasing as is the amount of time spent on PCs.

More than 100 million PCs have shipped in each of the last eight quarters, and Windows continues to take share.

With Windows 11, we continue to see the highest quality scores of any version of the operating system. The enterprises are adopting Windows 11 at a faster pace than any previous release.

With Windows 365, we’re bringing the power of Azure computing to Windows computers, enabling businesses like Lands’ End, SES and Xerox to stream the full Windows experience to any employee device.

New integrations between Windows 11 and Windows 365 will make it possible to switch between Cloud PC and the local PC with a single click.

And we continue to help organizations like AIG, Grant Thornton and Sage shift their on-premises virtualization services to the cloud with Azure Virtual Desktop.

In (the) consumer (segment), Windows is key to curating our content and services to help every person with their everyday tasks – from browsing and searching to learning and gaming and shopping. All with security and privacy built in.

We are seeing strong engagement with nearly 500 million monthly active users of our personalized content feed, Microsoft Start.

As usage continues to grow, we are seeing a flywheel emerge between content consumption and commerce as we generate new opportunities for content creators as well as advertisers.

And our browser, Microsoft Edge, continues to gain share as we help people save money and shop securely.

On Security

Now to security. Security is a top priority for every organization undergoing a digital transformation.

To keep our customers secure, we build security by design into every product we sell. And we deliver end-to-end solutions spanning security, compliance, identity, device management and privacy across clouds and platforms informed by 24 trillion threat signals each day.

This comprehensive capability has been critical during the recent world events. And we continue to disrupt cyberattacks and share threat intelligence with the Ukrainian government as well as other public sector agencies.

Multi-cloud, multi-platform support is central to our approach. In security, we’re the only cloud provider with native multi-cloud protection for the industry’s top three cloud platforms.

In identity, we now provide permissions management across all clouds. Azure Active Directory is the undisputed market leader with more than 550 million monthly active users. In management, the number of Windows, Android and iOS devices protected by Intune grew over 60 percent year over year.

And we are expanding to new market segments with Microsoft Defender for Business, which will help keep small businesses secure.

This innovation and differentiation is driving our overall growth. All up, the number of customers who trust our security solutions grew nearly 50 percent year over year to 785,000 – including Citrix, Domino’s Pizza, Fujitsu, Heineken, Petronas – who rely on us to protect their multi-cloud infrastructure.

And we have over 15,000 partners in our security ecosystem more than anyone else in the industry. … We are entering a new era where every company will become a digital company. Our portfolio of durable digital businesses and diverse business models built on a common tech stack position us well to capture the massive opportunities ahead.

On His Confidence In Microsoft’s Growth Ahead

I’ll start maybe at three levels. … One is just the competitiveness of our tech stack, all up, from infrastructure all the way to the SaaS applications when it comes to the commercial cloud and as well as how we’re able to monetize, for example, the install base of our consumer franchises, as well.

So both of these places, we feel we are competitive, and increasingly so coming out of the pandemic, to gain share.

I’d also say that in many of these places, we have price leadership. Take the one point I made, which is, if there is any macro headwind where you have more value for less price means you win.

And in our case, when it comes to our commercial cloud offerings, we have significant advantages on that across the stack.

The second thing is in the conversations we’re having with our customers, the interesting thing I find from perhaps even past challenges – whether macro or micro – is I don’t hear of businesses looking to their IT budgets or digital transformation projects as the place for cuts.

If anything, some of these projects are the way they’re going to accelerate their transformation or, for that matter – automation, for example. I have not seen this level of demand for automation technology to improve productivity, because in an inflationary environment, the only deflationary force is software.

So that’s the second micro thing, the tone thing, that’s different.

At the end of the day, though, none of us here are trying to forecast macro. So all we think of is the TAMs (total addressable market) that we are competing in are large, as a percentage of GDP tech spend is on a secular basis by the end of the decade going to double.

We just want to keep driving usage, driving share and be competitive. So that’s how we view what we’re doing. And that’s where our confidence comes from in terms of our outlays, whether it’s OpEx (operational expenditures) or CapEx (capital expenditures).

On The Upsell Opportunity From E3 To E5 And Whether Frontline Users Are Driving Growth.

The fundamentals are pretty strong here, still, whether it’s E5 growth, SMB (small-to-midsize business) growth, frontline worker.

I’d also add emerging markets. This is the first time I feel that we have products that fit just emerging markets, like Teams Essentials where we can even really penetrate markets (where) we’ve never sold anything in the past.

And then the new growth engines … Teams Phones, Teams Rooms, Viva and even Windows 365 are all things that we can, again, drive growth from.

And the point about our value is probably very, very strong in a time like this in particular. And we see it. The one thing also I’d say is the usage data that we are seeing is peak everywhere.

And so that’s the other thing is we definitely will optimize for driving usage and deployment. And that’s going to be our priority.

On Azure’s Growth Compared To Other Software Vendors

What I’d say in our call is that what we’re seeing is a classic ‘what happens’ with consumption meters, right? Which is they grow and then they get optimized and they grow again, both existing and new.

We’ll always have some amount of volatility that even Amy (Hood, Microsoft chief financial officer) referenced, quarter over quarter.

The one thing that we look at is growth coming from all segments, right? So small business and enterprise. Is it coming from all regions? And it is.

We also look at the type of workloads it’s coming from. And so it looks healthy in all of those. … We are seeing some big tier-one workloads, and I had many comments on SAP and other workloads moving.

The second thing I’ll say is on PaaS services and our dev(eloper) SaaS – that’s an another area where we have differentiated value. So we see good growth there. Data and AI, for sure.

The thing that I find really to be something that I think in the long run is going to probably be one of the bigger drivers of our growth and differentiation is our data fabric because we’re the only guys who have a complete data fabric from the operational store that’s fully integrated into an analytics engine, that’s fully integrated into governance.

And that increasingly is going to become more and more important, right? I mean, you can’t be dealing with a new regulation coming on privacy and governance on one end, and your operational store being divorced from that. So we have a very differentiated offer and I talked about some of the growth numbers there.

The AI inference is also finally kicking. They’re very small today. But even when I look at the total – that’s just essentially a compute meter. There’s growth there.

So overall, I think we will see quarter over quarter some cyclicality depending on which customers – in fact we pay people at Microsoft to reduce customer bills, which we should.

So given that, we may see cyclicality in terms of how optimizations happen. But overall, we’re still very early on as the world migrates to the cloud and uses essentially cloud infrastructure and compute to drive their operational efficiencies and product.

On Underrepresented Parts Of The Microsoft Tech Stack

All enterprise value, at least as far as I can tell, gets created at three layers of the tech stack – what happens with infrastructure whenever something can be 10x better.

So for example, when we talk about the next generation of multi-edge, multi-cloud, infrastructure remaining one of the leaders – that’s going to be a massive EV (extended validation) creation as a percentage of GDP, tech spend doubles.

So that’s where everything from Azure or Azure Arc, our database, all of that’s super important.

The other one is – this is the age of AI. In other words, the core business logic is not being written. It’s being written by software.

So when I look at when I use GitHub Copilot, therein lies the future of how all business logic gets written.

And so to me, the AI layer, both the training supercomputers as well as the inference layer, that’s a place where you will see us integrate what today you all consider to be two different businesses, whether it’s Azure and Windows. They’re just one business to me because, to me, wherein training happens, where inference happens, will be written once by developers and then it’ll light up across this distributed fabric.

So that’s another place where I think there’s tons of enterprise value that will get created over time.

And then, of course, the UI layer always is the biggest one and the next inflection point, whether it’s what happens with Metaverse or what happens with, even on the industrial side with IoT and digital twins. Those are all things that I think will be the ones that we will be focused on.

So these three things translated into workloads and what we call our customer solution areas are the ways that, at least, we are investing in.

On Large Strategic Commitments And Nuance

On the strategic commitments that are being made – we’re working at them workload at a time.

And so we feel very good about both the type of workloads. In fact, there is a migration of a bunch of workloads that we may have won in the client server era that are migrating.

But the most exciting thing is the type of tier-one workloads that we’ve never seen run on any Microsoft infrastructure that’s running on Azure today and being optimized on Azure. So that’s the thing that we see as we win these large strategic deals.

On nuance, for me the thing that’s exciting is Nuance is a platform layer for these AI-driven applications that are getting deployed, whether it’s in health care or even in the enterprise contact center.

So we’re very excited about Nuance now being part of the Microsoft family. You will see us pretty aggressively go innovate there and grow the impact of these solutions in both, sort of the large percentages of our GDP, like health care, where I think things like tackling issues like physician burdens with new innovative solutions is much needed.

And we are really looking forward to exercising that.

On The Strength Of PCs And Windows

On the commercial side, I think it’s well understood that Windows is the socket for Microsoft 365.

We have tremendous value, Amy (Hood, Microsoft chief financial officer) referenced this earlier.

In fact, we just launched Windows 11 and pro value with Windows 365. That’s resonating super well. The customer sat(isfaction) adoption rates, when it comes – whether it’s security, whether it’s productivity – we feel good about the commercial business. So we’ll stay focused on it on the commercial side.

On the consumer side, coming out of, again, the pandemic, the intensity of usage has gone up.

So one of the areas of focus for us is some of the stuff that I talked about in my remarks is just the usage, right?

So when you think about 5 million users engaging with Microsoft Start, that’s not the type of engagement we had. And so with the large install base now, we have significant room there, the browser share growth, we have significant room there.

And then, of course, the subscription attaches, whether it’s gaming or whether it’s productivity or suites. So that’s kind of how I look at what we’re going to do, at least in the immediate future.

PC remains a pretty important category in people’s lives is what we’ve discovered during the pandemic. And if anything, the intensity of usage has increased. And there will be cyclical demand that we will go through. But the number of use cases is definitely structurally increased.