Analysis: Microsoft Post-Earnings Conference Call (Premium)

Microsoft has historically cherry-picked the data it chooses to share with the public at each earnings announcement, and this past quarter was no different. But the software giant also hosts a post-earnings conference call with analysts and press each quarter, and it usually reveals a bit more data during that call. Here’s what I learned and inferred from this quarter’s post-earnings conference call, which mostly consisted of “highlights” from Microsoft CEO and chairman Satya Nadella and CFO Amy Hood.

Nadella started off praising Microsoft Azure, which he described as a “distributed computing fabric—across the cloud and the edge—to help every organization build, run, and manage mission-critical workloads anywhere.” Analysts seem stuck on the fact that Azure—now a mature, 13-year-old offering—can no longer maintain its once-heady 70 percent growth rates. But Azure grew at 40 percent this past quarter and is the primary driver behind Microsoft’s biggest business, by far, Intelligent Cloud.

This growth is an astonishing achievement that Nadella credited to “leaders in every industry—from Blackrock, to Bridgestone, to Lufthansa— all moving mission-critical workloads to Azure.” Azure is now the market leader for customers’ SAP workloads in the cloud, and Atos, Chevron, Fujitsu, and Woolworths all migrated their SAP applications to Azure in recent months, Nadella noted.

Given his background, it is perhaps not surprising that Nadella is fond of Microsoft’s AI- and developer-based offerings despite the fact that neither is a particularly strong money maker. But that’s fine because it means Nadella can open the kimono a bit and reveal details like the fact that Visual Studio, Microsoft’s integrated developer environment (IDE), now has over 31 million monthly active users, including most of the fortune 500. That’s a fascinating number when you consider that the latest figure that we have for .NET developers is just 6 million.

Nadella also noted that GitHub, the Microsoft code repository, is now used by 90 percent of the Fortune 100. And that its Power Platform surpassed $2 billion in revenues over the previous 12 months for the first time, up 72 percent. “Power Platform [is] one of our fastest-growing businesses, at scale,” Nadella said.

Nadella had fewer specifics for Microsoft Dynamics, which is part of its Productivity and Business Processes business and provides customer relations management functionality. Dynamics 365 is “growing faster than the business applications market overall,” which I assume means it’s growing share. But that was the only real data we got in the call. (In its press release, Microsoft noted that Dynamics products and cloud services revenues were up 22 percent in the quarter.

LinkedIn saw “record engagement” in the quarter, Nadella noted, with over 830 million professionals using the platform: this makes sense, given that many workers are using the pandemic as an excuse to find a better—or at least different—job. But he also said that “creators” were using LinkedIn tools like Newsletters to share content, targeting the 28 million members who now subscribe to at least one such newsletter, up 51 percent over the past quarter alone.

Of course, the star of Productivity and Business Processes is Microsoft 365, the home to Microsoft Teams, and the past two years have been very kind to this business. Nadella made the specious claim that using Teams somehow saves organizations up to 60 percent of … something … by reducing costs when compared to that “patchwork of single-point identity, productivity, collaboration, and meetings solutions” that non-Teams users must deal with. But there were no hard numbers, no new usage milestones to betray the fact that Teams growth has clearly slowed dramatically. “Teams usage has never been higher,” is all we got. This simply means that Teams usage hasn’t fallen, which is a low bar.

He did note, however, that there are now over 100,000 Teams apps available from third parties. And he stepped through just a handful of new Teams capabilities that debuted in the quarter. I suspect the rate of new features is likewise slowly, but that’s expected given the maturity of the product, which celebrated its 5th anniversary in the quarter (a milestone Nadella did not mention, curiously).

Microsoft Viva, Microsoft’s new employee onboarding and engagement platform, now has 10 million monthly active users. But that was the only hard number for Viva, and I don’t believe it was even mentioned in the release materials.

With regards to this part of the business, Hood noted that almost 45 percent of Microsoft’s Office 365 commercial seats were purchased through Microsoft 365, and that Office commercial licensing was lower than expected, and was in fact down 28 percent. There were 345 million paid Office 365 commercial subscriptions in the quarter, compared to 48.4 million consumer Microsoft 365 subscribers.

I was most interested in what Nadella had to say about Windows, of course. And for two reasons. First, Nadella, Hood, and other Microsoft decision-makers seemed to suddenly rediscover that Windows mattered during the pandemic, which I find astonishing. And second, the release materials about the quarter were quite vague with regards to Windows, with most (if not all) of the successes coming from commercial (enterprise) growth in PCs (up 11 percent) and products and services (up 14 percent). Did the consumer market tank?

Nadella noted that over 100 million PCs had shipped in each of the previous 8 quarters and … that can’t actually be true. It’s impossible.

If it were true, we would have seen over 400 million PC sales in the calendar year 2021, and the figure I published, which was averaged between numbers supplied by Gartner (339.8 million) and IDC (348.8 million), was 344.3 million units sold. So what do we make of that? I suspect that Nadella is counting Windows licenses sold to PC makers, and that the difference is reflected in PCs that have yet to sell to actual customers. But that would make a lot more sense if he was talking about just one year. Perhaps the component shortages play a role here. But it’s curious that he was so specific there.

We didn’t get any hard numbers for Windows 11 because those numbers would be embarrassing to Microsoft. Instead, we get this nonsense:

“With Windows 11, we continue to see the highest quality scores of any version of the operating system,” Nadella claimed. “And enterprises are adopting Windows 11 at a faster pace than previous releases.”

There were no hard numbers for Windows 365 either. And no vague claims, actually. Interesting. Maybe troubling.

As for consumers, all we got was that Windows is somehow key to the everyday tasks that people perform each day. And that the Microsoft Start feed—found in the terrible Widgets interface in Windows 10/11 and on MSN—is somehow “seeing strong engagement, with nearly 500 million monthly active users.” I know. It boggles the mind.

Also, Microsoft Edge, which Nadella had to point out was Microsoft’s browser, continues to gain share as it “helps people save money and shop securely.”

And that was it for Windows.

A few months ago, we learned that Microsoft’s security business is now worth $15 billion, but Nadella didn’t call out any revenue numbers. Instead, he noted that Microsoft processes “24 trillion threat signals each day” and that its security capabilities were critical to helping Ukraine protect itself against Russia. “We are the only cloud provider with native multi-cloud protection for the industry’s top three cloud platforms,” he added, the premise here being that if Microsoft can help Ukraine fend off its much more powerful foe, imagine what it can do for your business. I know. Cynical.

Finally, gaming. Here, again, we were looking for hard numbers and didn’t get much along those lines.

“With our Xbox Series S and X consoles, we have taken share globally for two quarters in a row,” Nadella noted. (That’s not the same as beating the PlayStation 5, but it’s obviously still a positive.) “And we are the market leader this quarter among next-gen consoles in the U.S., Canada, U.K., and Western Europe.” (That is the same as beating the PS5.)

Only 10 million people “have streamed games” via Xbox Cloud Gaming, a feature of Xbox Game Pass Ultimate, the highest-end and most expensive tier of Microsoft’s Xbox subscriptions. There are now “hundreds” of titles in Game Pass across console and PC with “more games from third-party publishers than ever before.” (That should always be true.) And while we don’t know how many Xbox Game Pass subscribers there because, here, Microsoft is measuring hours played. Which were in the “billions” and up 45 percent.

The most curious and obvious omission here was Surface: Nadella never mentioned Surface in his highlights, and the quarter’s release materials only noted that Surface revenues were up 13 percent. That’s actually not that great given the year-ago comparable, and Hood noted that it was “lower than expected” and said that this quarter would see similar results.

And … that was that.

The two big things that stick out to me here are the PC sales figures—over 100 million per quarter for two straight years, which is impossible—and the Microsoft Start engagement, which Nadella later said was “not the type of engagement we had” previously. I don’t think it’s “engagement” at all, but rather people clicking on things and that most of the time, that is the last time they’ll ever do so given the low quality of that content. Microsoft has never seen any/much success at forcing Bing/MSN on users in Windows, so this is a real outlier, whatever the truth is.

Or what Mary Jo and I privately agreed was “technically true, so it’s not a lie.” We will discuss this more on Windows Weekly today.