Q1 2020 Earnings Call

October 23, 2019

Okay, because nobody's done it got all they got the run at both.

Welcome to the Microsoft fiscal year, 2020 first quarter earnings conference call. At this time, all participants are in a listen only mode.

Good question and answer session will follow the formal presentation.

If you would like to ask a question. Please press star one on your telephone keypad confirmation total indicate your line is in the question Q Your press star to them to remove your question from the Q for participants using speaker equipment. It may be necessary to pick up your handset prices are pressing the star Keith if anyone to require operator assistance. During the conference. Please press Star Zero as a reminder.

This conference is being recorded.

I will turn the call over to Mike Center General manager of Investor Relations. Thank you. Please proceed.

Good afternoon. Thank you for joining us today on the call with me are such an adult Chief Executive Officer immediate Chief Financial Officer breakthrough Chief Accounting Officer acute dollar Deputy General counsel on.

On the Microsoft Investor Relations website, you can find earnings press release, and financial summary, slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures.

All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted we also provide growth rates in constant currency when available as framework for assessing how our underlying business has performed excluding the effect of foreign currency rate fluctuations growth rates at the same accounts currency, we refer to growth rate only.

We will post our prepared remarks or web site immediately following the call until we complete transcript available today's call is being webcast live recorded if you ask a question will be included in our life transmission in the transcript and in any future use the recording you can replay the call and view the transcript on Microsoft Investor Relations website.

During this call, we will be making forward looking statements, which our predictions projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could materially differ because of factors discussed in today's earnings press release and the comments made during this conference call and then the risk factor sections of our Form 10-K forms 10-Q, and other reports and filings with the Securities Exchange Commission, we do not undertake any duty to update any forward looking statement and with that I'll turn the call over to structure.

Thank you, Mike and thanks to everyone on the phone for joining.

Got off to a strong started fiscal 2020, delivering 33 billion in revenue this quarter.

Commercial cloud business continues to grow at scale as we work alongside the world's leading companies to help them build their own digital capability.

Microsoft provides a differentiated technology stack spanning application infrastructure data in AI developer tools and services security and compliance business process productivity and collaboration.

For each of these areas reference post each of these areas represents secular long term growth opportunity.

Second we are delivering best in class innovation and openness in each layer and could we offer unparalleled integration and architectural coherence across the entire stack to meet the real world needs of our customers.

Now I'll briefly highlight how we are accelerating our progress in innovation starting with Azure.

[noise] organizations today needed distributed computing fabric to meet their real world operational sovereignty and regulatory needs. This quarter, we opened a new take new datacenter regions in Germany and Switzerland.

And in India, we are bringing the power of Microsoft cloud to millions of small businesses through our partnership with Geo one of the largest mobile carriers in the country.

Every fortune 500 customer today is on a cloud migration journey, and we are making it faster and easier just this week, we announced an extensive go to market partnership with S&P, making azure the preferred destination for every sep customer and our partnerships with being bad an Oracle also bring.

These ecosystems to our cloud.

We're extending beyond the cloud to the edge, enabling customers to get real time insights where data is generated while ensuring security and privacy and we're seeing traction in every industry from agiles feel secure orderly connecting Starbucks coffee machines do azure stack, enabling scenarios from smart factories in modern comply and banking do.

Mobile healthcare in remote areas.

Good reminding customers data states for the cloud data with new limitless capabilities agile sequel database brings hyper scale capabilities to relational databases and Azure Kosmos DB, the low latency high availability database for globally distributed applications of any data type.

The quintessential characteristic of every application going forward will be AI and we have the most comprehensive portfolio VI tools infrastructure and services Azure AI now has more than 20000 customers and more than 85% of the fortune 100 companies are using azure AI in it.

In the last 12 months.

In healthcare Novartis chose Azure AI to transform how medicines are discovered developed and commercialized nuanced will rely on our cloud to follow the patient exam room of the future where clinical documentation writes itself and Humana is using azure AI to build personalized healthcare solutions.

For its more than 10 million members.

We're also pushing the bounds about computers in AI can generalize learning be on narrow domains collaborating with open AI on a super computing platform to train Enron AI models I'm excited about our partnership in our collective pursued to democratize AI and its benefits for everyone.

Not a developer tools.

The rise of digital IP creation every organization means developers will increasingly drive an influence every business process in function and get hub is where they go to learn share and collaborate get up has grown to more than 40 million developers up more than 30% since our acquisition a year ago.

And more than 2 million organizations use get help including the majority of the fortune 50.

At Ford Motor Company alone 8000 employees use get up to innovate and collaborate with Avastin ecosystem of third party software developers our acquisition of semantic quote analysis engine Semele this quarter strengthens our security capabilities, enabling developers to more easily find vulnerabilities in large open source.

Third basis.

Now, let's turn to our work flow cloud power platform.

Automating workflows across every function will be key to productivity gains forever reorganization.

Y'all don't think I've been running for.

We are building Paul platform as the extensibility framework for both Microsoft 306, five inclusive of Microsoft teams as well as dynamic 365. It brings together low code no core the App development robotic process automation and self service analytics, enabling everyone an organization to build.

Welcome to the Microsoft Fiscal Year 2020 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset prior to pressing the star key.

An intelligent Apple work flow where non exists.

Power platform already has more than 2.5 million monthly active citizen developers.

If anyone should require operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded. I would like to turn the call over to Mike Spencer, General Manager of Investor Relations. Thank you. Please proceed.

Powerapps helps domain experts dose close this to the business problem to design build and published custom apps fast and 84% to the fortune 500 have already created power applications.

Michael Spencer: Good afternoon. Thank you for joining us today. On the call with me are Sacha Nadella, Chief Executive Officer, Amy Hood, Chief Financial Officer, Frank Broad, Chief Accounting Officer, and Keith Oliver, Deputy General Counsel.

Now, let's talk about security.

Rising sick cyber threats, and increasing regulation mean security and compliance on a strategic priority for every organization.

Michael Spencer: On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures.

We have a comprehensive offering across identity security and compliance spanning people device people devices app developer tools data infrastructure to protect customers in todays zero trusted environment.

Michael Spencer: All growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. We will also provide growth rates and constant currency when available as a framework for assessing how our underlying business is performed, excluding the effect of foreign currency rate fluctuations. Growth rates are the same in constant currency. We will refer to growth rate only.

It starts with Azure active directory premium used by more than 100000 organizations for identity access management, a SaaS application security across heterogeneous environments.

It builds with information protection and cloud security with Microsoft defender advanced threat protection and now with risk based vulnerability management.

Speaker Change: We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript, and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website. During this call, we will be making forward-looking statements, which are predictions, projections, and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. The actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call, and in the risk factor sections over Form 10-K , Forms 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. And with that, I'll turn the call over to Sacha.

And it extends to Azure Sentinel now broadly available Sentinel is a cloud first service that analyze the security signal at massive scale across the entire organization using AI to detect investigate and automatically remediate threats, we'll share more about our expanding opportunity in security at our ignite comp.

Trends in the next few weeks.

Now onto business applications.

Then amsthree six five is the only AI powered business cloud that gives customers a 360 degree view of their business.

From marketing and sales to finance and operations to unified data and unlock insights. It enables every level of organization to move from reactive silo transactional processes to proactive repeatable and predictable business outcomes.

Satya Nadella: Thank you, Mike, and thanks to everyone on the phone for joining.

Satya Nadella: We're off to a strong start in fiscal 2020, delivering $33 billion in revenue this quarter. Our commercial cloud business continues to grow at scale as we work alongside the world's leading companies to help them build their own digital capability.

This quarter, we introduce dynamic 365, commerce, a new omnichannel solution to unify backoffice installed and digital experiences and deliver personalized content wherever shop bizarre.

Satya Nadella: Microsoft provides a differentiated technology stack spanning application infrastructure, data and AI, developer tools and services, security and compliance, business process, productivity, and collaboration.

Then admixture six five AI insights App ingest data from any first party or third party saw screen data from systems of record to power modern systems of engagement and intelligence.

Satya Nadella: For each of these areas, each of these areas represents secular long-term growth opportunities.

New dynamic three six by product insights provides organizations like ecolab real time view of how customers are using their products to maximize customer lifetime value and dynamics 306, five connected store helps retailers like marks and Spencer analyze observational data to optimize.

Satya Nadella: Now, I'll briefly highlight how we're accelerating our progress in innovation, starting with Azure.

Install shopping experience.

We are enabling our customers to bridge, the physical and digital business processes with our mixed reality cloud spanning holo lens to Azure mixed reality services and dynamics 306, five applications pharmaceutical company.

Satya Nadella: organizations today need a distributed computing fabric to meet their real world operational sovereignty and regulatory needs this quarter we opened a new new data center regions in germany and switzerland and in india we are bringing the power of microsoft cloud to millions of small businesses through our partnership with geo one of the largest mobile carriers in the country

Happy on for example is using dynamics 365 guides, along with holo lens due to Reimagine training for its employees.

Now to Lincoln, we saw record levels of engagement again this quarter across the platform marketing solutions remains our fastest growing segment up 44% year over year as marketeers leverage our community based tools to connect with linked pins nearly 660 million members.

Satya Nadella: every fortune 500 customer today is on a cloud migration journey and we are making it faster and easier just this week we announced an extensive go-to-market partnership with sap making azure the preferred destination for every sap customer and our partnerships with vmware and oracle also bring these ecosystems to our cloud

We continue to innovate across our talent portfolio, including talent solutions talent inside blunt linked in learning to help every organization attract retain and develop best talent.

Satya Nadella: We're extending beyond the cloud to the edge, enabling customers to get real-time insights where data is generated while ensuring security and privacy. And we are seeing traction in every industry, from Azure Sphere securely connecting Starbucks coffee machines to Azure Stack enabling scenarios from smart factories and modern compliant banking to mobile healthcare in remote areas.

Linked in skills assessment is a new way for members to showcase showcase that proficiencies and become more discoverable to recruiters.

Now turning to Microsoft 365 and surface.

Earlier this month, we unveiled our broader surface lined up to date, including two new dual screen devices coming next year.

Satya Nadella: We're reimagining customers' data estates for the cloud era with new, limitless capabilities. Azure SQL Database brings hyperscale capabilities to relational databases. And Azure Cosmos DB is a low-latency, high-availability database for globally distributed applications of any data type.

We are re imagining every layer with how we infuse AI from silicon opt to device form factors and the role of operating systems to help people be more productive and creative in a multi sands multi device world. We will continue to invest across form and function to new create categories that benefit our entire OEM ecosystem.

And our expanded partnership with Samsung builds on our promise to help people be more productive on any device anywhere, bringing one drive outlook in your phone and more to new Samsung devices.

Microsoft 365 is the world's productivity cloud and the only comprehensive solution that empowers everyone from the C suite to first line workers with an integrated secure worked secure experience on any device.

Satya Nadella: In healthcare, Novartis chose Azure AI to transform how medicines are discovered, developed, and commercialized. Nuance will rely on our cloud to power the patient exam room of the future where clinical documentation writes itself. And Humana is using Azure AI to build personalized healthcare solutions for its more than 10 million members.

We're infusing AI across Microsoft 365 to help make work more intuitive and natural new presenter Cogent Powerpoint mix anyone a better public speaker new capabilities in word enabled professionals to transcriber record audio files, while staying in the flow video is more such a bowl shareable.

Satya Nadella: We're also pushing the bounds of how computers and AI can generalize learning beyond narrow domains, collaborating with OpenAI on a supercomputing platform to train and run AI models. I'm excited about our partnership and our collective pursuit to democratize AI and its benefits for everyone.

And first class within Microsoft off Microsoft 365 with stream.

A new inking capabilities, let users create and reply to comments from anywhere using pan overseas.

Satya Nadella: Now to developer tools.

Microsoft team continues to gain traction, bringing together everything a team needs chat voice meetings collaboration with the power of office and business process work flow into a single integrated user experience all with the highest security and compliance team keeps all of your work.

Satya Nadella: The rise of digital IP creation in every organization means developers will increasingly drive and influence every business process and function. And GitHub is where they go to learn, share, and collaborate. GitHub has grown to more than 40 million developers, up more than 30% since our acquisition a year ago. And more than 2 million organizations use GitHub, including the majority of the Fortune 50.

Conversations and meetings in context, eliminating the need to bounce back and forth between different app with features like integrated Calendaring, one touch to join meetings from your phone and we're broadening our opportunity with 2 billion first line work as worldwide, adding priority notifications roll specific targeted.

Satya Nadella: At Ford Motor Company alone, 8,000 employees use GitHub to innovate and collaborate with a vast ecosystem of third-party software developers. Our acquisition of semantic code analysis engine SEMLI this quarter strengthens our security capabilities, enabling developers to more easily find vulnerabilities in large open-source codebases.

Messages and the ability to cracking and clock out of a shift.

Our differentiated offering is driving usage, making teams the category leader more than 350 organizations now have more than 10000 users of teams.

Satya Nadella: Now let's turn to our Workflow Cloud Power Platform.

Satya Nadella: automating workflows across every function will be key to productivity gains for every organization we are building power platform as the extensibility framework for both microsoft 365 inclusive of microsoft teams as well as dynamic 365. it brings together low code no code app development robotic process automation and self-service analytics enabling everyone in an organization to build an intelligent app or workflow where none exists

More broadly all this innovation is fueling growth Officethree hundred 65 commercial monthly active users surpassed 200 million this quarter, the leading organizations like Cerner Chevron and the Lego group are choosing our premium Microsoft 300, 655 offerings for advanced security and.

Operator: Thank you for watching! Welcome to the Microsoft Fiscal Year 2020 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.

Activity experiences.

Finally gaming.

In gaming, we are investing in content community and cloud services to expand our opportunity with 2 billion gamers worldwide. We saw record X. box live monthly active users with strength bolt on and off console in mobile and PC and continued growth for game past subscriptions gears five so more than.

Satya Nadella: Power Platform already has more than 2.5 million monthly active citizen developers.

Satya Nadella: PowerApps helps domain experts, those closest to the business problem, to design, build, and publish custom apps fast. And 84% of the Fortune 500 have already created PowerApps applications.

3 million players in its first weekend alone 10 years in mind craft is stronger than ever with record revenue and usage and we are bringing the franchise to new audiences with mine crofter.

Satya Nadella: Now let's talk about security.

Satya Nadella: Rising cyber threats and increasing regulation means security and compliance are a strategic priority for every organization.

Operator: A brief question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue.

Satya Nadella: We have a comprehensive offering across identity, security, and compliance, spanning people, devices, apps, developer tools, data, and infrastructure to protect customers in today's zero trust environment.

Finally, just last week, we started trials of project ex cloud so gamers can play games wherever and whenever they want on any device.

In closing we are accelerating our innovation across the entire technology stack to deliver new value for customers, we're investing aggressively in large markets with significant growth potential and it's still early days without I'll hand over to Amy who will cover our financial results in detail and share our outlook I look forward rejoining for your.

Satya Nadella: It starts with Azure Active Directory Premium used by more than 100,000 organizations for identity, access management, and SaaS application security across heterogeneous environments.

Satya Nadella: It builds with information protection and cloud security with Microsoft Defender Advanced Threat Protection, and now with risk-based vulnerability management.

Questions.

Thank you Satya and good afternoon, everyone.

This quarter revenue was $33.1 billion up 14% and 15% and constant currency gross margin dollars increased 18% and 20% in constant currency operating income increased 27% and 32% in constant currency and earnings per share was a $1.38 increasing.

Satya Nadella: And it extends to Azure Sentinel, now broadly available. Sentinel is a cloud-first service that analyzes security signal at massive scale across the entire organization, using AI to detect, investigate, and automatically remediate threats. We'll share more about our expanding opportunity in security at our Ignite conference in the next few weeks.

21% and 25% in constant currency consistent execution and strong demand for our hybrid cloud offerings drove solid start to the fiscal year with another quarter of double digit top and bottom line growth.

Satya Nadella: Now on to business applications.

Satya Nadella: Dynamics 365 is the only AI-powered business cloud that gives customers a 360-degree view of their business.

From a geographic perspective, we saw broad based strength across all markets.

Satya Nadella: From marketing and sales to finance and operations to unified data and unlock insights, it enables every level of organization to move from reactive siloed transactional processes to proactive, repeatable, and predictable business outcomes.

And our commercial business, we again saw increased customer commitment across our cloud platform in Azure, we had material growth and the number of $10 million plus contracts.

Additionally, Microsoft 365 grow new customer adoption as well as expansion in our existing customer base given the strong value Officethree 65, Windows 10, and enterprise mobility and security provide at a secure intelligent solution.

Satya Nadella: This quarter, we introduced Dynamics 365 Commerce, a new omni-channel solution to unify back-office, in-store, and digital experiences and deliver personalized content wherever shoppers are. Dynamics 365 AI Insights app ingests data from any first-party or third-party source, freeing data from systems of record to power modern systems of engagement and intelligence.

As a result commercial bookings growth was ahead of expectation, increasing 30% and 35% in constant currency with a higher volume of new business and strong renewal execution.

Satya Nadella: New Dynamics 365 Product Insights provides organizations like Ecolab real-time view of how customers are using their products to maximize customer lifetime value. And Dynamics 365 Connected Store helps retailers like Marks & Spencer's analyze observational data to optimize in-store shopping experience.

Commercial annuity mix increased to 91% and commercial unearned revenue was ahead of expectations at $31.1 billion up 14% and 16% and constant currency. Our commercial remaining performance obligation was $86 billion up 26% and 27% in constant currency.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset prior to pressing the star key. If anyone should require operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded. I would like to turn the call over to Mike Spencer, General Manager of Investor Relations. Thank you.

Satya Nadella: We're enabling our customers to bridge the physical and digital business processes with our mixed reality cloud spanning HoloLens 2, Azure Mixed Reality Services, and Dynamics 365 applications. Pharmaceutical company.

Driven by these long term customer commitments.

As a reminder, going forward, we will disclose the commercial remaining performance obligation as a caveat, which better reflects commitments our customers are making across all contract type.

Satya Nadella: Cation, for example, is using Dynamics 365 guides along with HoloLens to reimagine training for its employees.

Commercial cloud revenue was $11.6 billion growing 36% and 39% in constant currency commercial cloud gross margin percentage increased four points year over year to 66% a significant improvement in Azure gross margin offset a sales mix shift to azure.

Satya Nadella: Now to LinkedIn. We saw record levels of engagement again this quarter across the platform. Marketing solutions remains our fastest growing segment, up 44% year over year, as marketeers leverage our community-based tools to connect with LinkedIn's nearly 660 million members. We continue to innovate across our talent portfolio, including talent solutions, talent insights, Glint, LinkedIn Learning, to help every organization attract, retain, and develop best talent.

The company gross margin percentage was 69% up three points year over year and ahead of our expectations driven by sales mix to higher margin businesses.

The U.S. dollar with a bit weaker than expected anticipated, which resulted in slightly less impact our results.

FX reduced revenue growth by less than two points in Cogs and operating expenses growth by approximately one point operating expenses grew 8% to 9% in constant currency slightly lower than expectations, mainly driven by the timing of marketing and project spend and operating margins expanded this quarter driven by the combination of higher gross margins and opera.

Satya Nadella: LinkedIn Skills Assessment is a new way for members to showcase their proficiencies and become more discoverable to recruiters.

Satya Nadella: Now turning to Microsoft 365 and Surface.

Satya Nadella: Earlier this month, we unveiled our broadest surface line up to date, including two new dual-screen devices coming next year. We are reimagining every layer with how we infuse AI from silicon up to device form factors and the role of operating systems to help people be more productive and creative in a multi-sense, multi-device world. We will continue to invest across form and function to new create categories that benefit our entire OEM ecosystem. And our expanded partnership with Samsung builds on our promise to help people be more productive on any device, anywhere, bringing OneDrive outlook in your phone and more to new Samsung devices.

Operating leverage through effective resource allocation.

Now to our segment result.

Revenue from productivity and business process. This was $11.1 billion, increasing 13% and 15% in constant currency ahead of expectations, primarily driven by our on premises office commercial business.

Office commercial revenue grew 13% at 15% in constant currency and benefited approximately two points from the transactional strength in Japan.

After 365 commercial revenue growth, 25% in 28% in constant currency was again driven by installed base growth across all workloads and customer segments as well as higher ARPU Officethree 65, commercial seat increased 21% with a growing mix from our Microsoft Rsixty five Sweet office.

Satya Nadella: Microsoft 365 is the world's productivity cloud and the only comprehensive solution that empowers everyone from the C-suite to first-line workers with an integrated, secure experience on any device.

Michael Spencer: Good afternoon. Thank you for joining us today. On the call with me are Satya Nadella, Chief Executive Officer; Amy Hood, Chief Financial Officer; Frank Broad, Chief Accounting Officer; and Keith Dolliver, Deputy General Counsel. On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures. All growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. We will also provide growth rates in constant currency when available, as a framework for assessing how our underlying business has performed, excluding the effect of foreign currency rate fluctuations. When growth rates are the same in constant currency, we will refer to growth rates only.

Similar revenue grew 5% and 6% in constant currency with roughly seven points that benefit from transactional strength in Japan more than offsetting the strong prior year comparable related to the launch of office 29 team.

Satya Nadella: We're infusing AI across Microsoft 365 to help make work more intuitive and natural. New presenter coach in PowerPoint makes anyone a better public speaker. New capabilities in Word enable professionals to transcribe or record audio files while staying in the flow. Video is more searchable, shareable, and first class within Microsoft 365 with Stream.

Officethree hundred 65 consumer subscribers grew to 35.6 million.

Dynamics revenue grew 14% and 16% in constant currency driven by dynamics 365 revenue growth of 41% and 44% in constant currency.

Satya Nadella: and new inking capabilities let users create and reply to comments from anywhere using pen or voice.

Dan revenue increased 25% in 26% in constant currency with continued strength across all businesses.

Satya Nadella: Microsoft Teams continues to gain traction, bringing together everything a team needs. Chat, voice, meetings, collaboration with the power of office and business process workflow into a single integrated user experience, all with the highest security and compliance.

Linked and shut ins increased 22% as engagement again reached record levels.

Gross margin dollars increased 16% and 19% in constant currency gross margin percentage increased two points year over year as improvements in linked Dan and Officethree hundred 65 margins more than offset an increase in cloud revenue mix.

Satya Nadella: Teams keeps all of your work, conversations, and meetings in context, eliminating the need to bounce back and forth between different apps with features like integrated calendaring, one-touch to join meetings from your phone, and we're broadening our opportunity with 2 billion first-line workers worldwide, adding priority notifications, role-specific targeted messages, and the ability to clock in and clock out of a shift.

Operating expenses increased 8% and 9% in constant currency driven by continued investment and link 10, and cloud engineering operating income increased 23% and 27% in constant currency net.

Next the intelligent cloud segment.

Revenue was $10.8 billion, increasing 27% and 29% in constant currency ahead of expectations driven by our on premise and server business on a significant based.

Satya Nadella: differentiated offering is driving usage making teams the category leader more than 350 organizations now have more than 10,000 users of team

Server products and cloud services revenue increased 30% and 33% and constant currency.

Satya Nadella: more broadly all this innovation is fueling growth office 365 commercial monthly active users surpass 200 million this quarter the leading organizations like cerner chevron and the lego group are choosing our premium microsoft 365 e5 offerings for their advanced security and productivity experiences

Given by continued demand from our hybrid value.

As a revenue increased.

59% and 63% and constant currency with strong growth in our consumption based business across all customer segments, partially offset by further moderation in our per user pets.

Satya Nadella: Finally, gaming.

Our enterprise mobility installed base grew 36% to over 120 million seat.

Satya Nadella: In gaming, we are investing in content, community, and cloud services to expand our opportunity with 2 billion gamers worldwide. We saw record Xbox Live monthly active users with strength both on and off console in mobile and PC, and continued growth for Game Pass subscriptions. Gears 5 saw more than 3 million players in its first weekend alone. Ten years in, Minecraft is stronger than ever with record revenue and usage, and we are bringing the franchise to new audiences with Minecraft Earth.

Benefiting from the Microsoft 365 Sweet momentum.

And our on premise of server business grew 12% and 14% in constant currency driven by continued strength across our hybrid and premium offerings get hub and roughly four points of benefit from the end of support for sequel, and Windows Server 2008.

Enterprise services revenue increased 7%, an 8% in constant currency driven by growth in Premier support services.

Segment gross margin dollars increased 27% and 30% in constant currency gross margin percentage was up slightly as another quarter of material improvement in Azure gross margin was partially offset by a growing mix of Asher I asked on past revenue.

Satya Nadella: Finally, just last week, we started trials of Project xCloud so gamers can play games wherever and whenever they want on any device.

Satya Nadella: in closing we are accelerating our innovation across the entire technology stack to deliver new value for customers we're investing aggressively in large markets with significant growth potential and it's still early days with that i'll hand over to amy who will cover our financial results in detail and share our outlook and i look forward to rejoining for your questions

Operating expenses increased 22% driven by ongoing engineering and sales investments in cloud and AI, including get hub.

Operating income grew 33% and 38% in constant currency.

Now to more personal computing.

Amy E. Hood: Thank you, Satya, and good afternoon, everyone.

Revenue was $11.1 billion, increasing 4% and 5% in constant currency ahead of expectations as better than expected performance in our OEM pro and windows commercial businesses more than offset lower than expected monetization across third party titles within gaming.

Amy E. Hood: This quarter, revenue was $33.1 billion, up 14% and 15% in constant currency. Gross margin dollars increased 18% and 20% in constant currency. Operating income increased 27% and 32% in constant currency. And earnings per share was $1.38, increasing 21% and 25% in constant currency. Consistent execution and strong demand for our hybrid and cloud offerings drove a solid start to the fiscal year, with another quarter of double-digit top- and bottom-line growth.

In Windows OEM Nonprime revenue declined 7% below the consumer PC market, we continued pressure and the entry level category OEM Pro revenue grew 19% ahead of the commercial PC markets driven by strong windows 10 demand and momentum and adapted the windows seven and support inventory level.

Amy E. Hood: From a geographic perspective, we saw broad-based strength across all markets.

We ended the quarter in the normal range.

Windows commercial products and cloud services revenue grew 26% and 29% in constant currency driven by healthy demand for Microsoft 365, which carries higher in quarter revenue recognition.

Amy E. Hood: In our commercial business, we again saw increased customer commitment across our cloud platform. In Azure, we had material growth in the number of $10 million plus contracts. Additionally, Microsoft 365 drove new customer adoption, as well as expansion in our existing customer base, given the strong value Office 365, Windows 10, and Enterprise Mobility and Security provide as a secure, intelligent solution.

Michael Spencer: We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript, and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website. During this call, we will be making forward-looking statements, which are predictions, projections, and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. The actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call, and in the risk factor sections of our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement.

Surface revenue declined 4% and 2% in constant currency driven by the timing of product lifecycle transitions ahead of the recently announced product launches.

Search revenue ex Tac increased 11% and 13% in constant currency driven by being rate growth.

Amy E. Hood: As a result, commercial bookings growth was ahead of expectations, increasing 30% and 35% in constant currency, with a higher volume of new business and strong renewal execution.

In gaming.

Revenue declined 7% and 6% in constant currency driven by lower console sales X. box content and services revenue was relatively unchanged and increased 1% in constant currency with growth from Minecraft gears of were five and gain past subscriptions offset by a strong third party title in the prior year.

Amy E. Hood: Commercial annuity mix increased to 91%, and commercial unearned revenue was ahead of expectations at $31.1 billion, up 14% and 16% in constant currency. Our commercial remaining performance obligation was $86 billion, up 26% and 27% in constant currency, driven by these long-term customer commitments.

Yeah.

Segment gross margin dollars increased 12% and 13% in constant currency and gross margin percentage increased four point due to higher margin sales mix.

Operating expenses declined 7% and 6% in constant currency as redeployment and engineering resources to higher growth opportunities was partially offset by investments in gaming as a result, operating income grew 28% and 31% in constant currency.

Amy E. Hood: As a reminder, going forward, we will disclose the commercial remaining performance obligation as a KPI, which better reflects commitments our customers are making across all contract types.

Amy E. Hood: Commercial cloud revenue was $11.6 billion, growing 36% and 39% in constant currency. Commercial cloud gross margin percentage increased four points year-over-year to 66%. A significant improvement in Azure gross margin offset a sales mix shift to Azure.

Now back to total company result.

Capital expenditures, including finance leases were $4.8 billion up 12% year over year, driven by ongoing investment to meet growing demand for our cloud services and slightly below expectations due to normal quarterly spend variability and the timing of our cloud infrastructure build out.

Amy E. Hood: company gross margin percentage was 69%, up three points year over year, and ahead of our expectations, driven by sales mix to higher margin businesses.

Cash paid for peony was $3.4 billion.

Cash flow from operations was $13.8 billion and increased 1% year over year as strong cloud billings and collections were partially offset by tax payments related to the Q4 transfer of intangible property free cash flow was $10.4 billion and increased 4% excluding the impact at this.

Amy E. Hood: The U.S. dollar was a bit weaker than anticipated, which resulted in slightly less impact to our results.

Amy E. Hood: FX reduced revenue growth by less than two points, and COGS and operating expenses growth by approximately one point. Operating expenses grew 8% and 9% in constant currency, slightly lower than expectations, mainly driven by the timing of marketing and project spend. And operating margins expanded this quarter, driven by the combination of higher gross margins and operating leverage through effective resource allocation. Now to our segment results.

Tax payments cash flow from operations and free cash flow grew 27% and 39% respectively.

As expected in other income and expense interest income was offset by interest expense foreign currency Remeasurement and recognized losses on investments.

Amy E. Hood: Revenue from productivity and business processes was $11.1 billion, increasing 13% and 15% in constant currency, ahead of expectations, primarily driven by our on-premises office commercial business. Office commercial revenue grew 13% and 15% in constant currency and benefited approximately two points from the transactional strength in Japan. Office 365 commercial revenue growth 25% and 28% in constant currency was, again, driven by install-based growth across all workloads and customer segments, as well as higher ARPU. Office 365 commercial seats increased 21%, with a growing mix from our Microsoft 365 suite.

Our effective tax rate was 16% inline with expectation.

And finally, we returned $7.9 billion to shareholders through share repurchases and dividends, an increase of 28% year over year.

Now, let's move to our outlook.

Assuming current rates remained stable, we expect FX to decrease intelligent cloud revenue growth by approximately two point total company productivity and business processes and more personal computing revenue growth by approximately one point and have no impact on total company Cogs and operating expenses growth we.

Amy E. Hood: Office consumer revenue grew 5% and 6% in constant currency, with roughly seven points of benefit from transactional strength in Japan, more than offsetting the strong prior year comparable related to the launch of Office 2019. Office 365 consumer subscribers grew to 35.6 million.

Expect another strong quarter in our commercial business.

Demand for our hybrid offerings and cloud services remained strong and capital expenditures will continue to reflect that.

Given the normal variability and infrastructure spend timing, we expect Q2 capex spend to be down slightly on a sequential basis, but still growing from the prior year and commercial cloud gross margin percentage will continue to improve on a year over year basis, even with the continued mix of revenue toward azure consumption based surfaces.

Amy E. Hood: Dynamics revenue grew 14% and 16% in constant currency, driven by Dynamics 365 revenue growth of 41% and 44% in constant currency.

Amy E. Hood: LinkedIn revenue increased 25% and 26% in constant currency, with continued strength across all businesses.

Now to segment guidance.

And productivity and business processes, we expect revenue between 11.3 and $11.5 billion driven by double digit growth across office commercial dynamics and link them.

Amy E. Hood: LinkedIn sessions increased 22% as engagement again reached record levels.

Amy E. Hood: Segment gross margin dollars increased 16% and 19% in constant currency, and gross margin percentage increased two points year over year, as improvements in LinkedIn and Office 365 margins more than offset an increase in cloud revenue mix.

For intelligent cloud, we expect revenue between 11.25, an $11.45 billion in Azure. We expect continued strong growth in our consumption based business and moderating growth in our per user business given the size of the installed base.

Amy E. Hood: operating expenses increased 8% and 9% in constant currency, driven by continued investment in LinkedIn and cloud engineering. Operating income increased 23% and 27% in constant currency.

Our on premises server business will be driven by demand for our hybrid and premium solution as well as the continued benefit from increased demand ahead of the end of support for Windows server 2008.

Amy E. Hood: next the intelligent cloud segment revenue was 10.8 billion dollars increasing 27 and 29 in constant currency ahead of expectations driven by our on-premises server business on a significant base

And more personal computing, we expect revenue between 12.6 and $13 billion and Windows overall OEM revenue growth should again be ahead of the PC market as we balance healthy windows 10 demand and the benefit from the upcoming and the support for Windows seven with the supply chains ability to meet this summer.

Amy E. Hood: Server products and cloud services revenue increased 30% and 33% in constant currency, driven by continued demand from our hybrid value. Azure revenue increased

Satya Nadella: And with that, I'll turn the call over to Satya. Thank you, Mike, and thanks to everyone on the phone for joining us. We're off to a strong start in fiscal 2020, delivering $33 billion in revenue this quarter. Our commercial cloud business continues to grow at scale as we work alongside the world's leading companies to help them build their own digital capability. Microsoft provides a differentiated technology stack spanning application infrastructure, data, and AI, developer tools and services, security and compliance, business process, productivity, and collaboration. For each of these areas, each of these areas represents secular, long-term growth opportunities.

And in Q2.

Amy E. Hood: 59% and 63% in constant currency, with strong growth in our consumption-based business across all customer segments, partially offset by further moderation in our per-user business.

Based on our customer demand signal and prior end of support cycles. We expect some continued momentum past January and that support deadline.

And windows commercial products and cloud services, we expect another strong quarter benefiting from continued Microsoft 365 momentum.

Amy E. Hood: our enterprise mobility installed base grew 36 percent to over 120 million seats benefiting from the microsoft 365 suite momentum

And surface the launch at the latest surface pro and surface laptop devices to drive low double digit revenue growth on a strong prior year comparable.

Amy E. Hood: And our on-premises server business grew 12% and 14% in concurrency, driven by continued strength across our hybrid and premium offerings, GitHub, and roughly four points of benefit from the end of support for SQL and Windows Server 2008.

In search ex Tac, we expect revenue growth similar to Q1.

And in gaming, we expect revenue to decline in the mid 20% range driven by lower console sales as we near the end of this generation as well as the most challenging quarterly comparable and third party titles from last year.

Amy E. Hood: Enterprise services revenue increased 7% and 8% in constant currency, driven by growth in Premier support services.

Amy E. Hood: Segment gross margin dollars increased 27% and 30% in constant currency. Gross margin percentage was up slightly, as another quarter of material improvement in Azure gross margin was partially offset by a growing mix of Azure, IaaS, and PaaS revenue.

Now back to overall company guidance.

We expect Cogs of $12.45 billion to $12.65 billion and operating expenses of $10.8 billion to $10.9 billion.

Other income and expense should be approximately $50 million as interest income is partially offset by interest and finance lease expense.

Amy E. Hood: operating expenses increased 22 percent driven by ongoing engineering and sales investments in cloud and ai including github

And finally, we expect our Q2 effective tax rate to be slightly above the full year rate of 17%.

Amy E. Hood: Operating income grew 33% and 38% in constant currency.

Amy E. Hood: Now to more personal computing.

Now, let me share some additional comments on the full year.

Amy E. Hood: revenue was 11.1 billion dollars increasing four percent and five percent in constant currency ahead of expectations as better than expected performance in our oem pro and windows commercial businesses more than offset lower than expected monetization across third-party titles within gaming

At the company level, we continue to expect double digit revenue and operating income growth driven by continued momentum in our commercial business.

Given our strong first quarter results and the expected sales mix for the remainder of the year. We now expect operating margins to be up slightly year over year, even as we continue to invest with significant ambition in high growth areas with that Mike, Let's go to Q and act.

Amy E. Hood: in windows oem non-pro revenue declined seven percent below the consumer pc market with continued pressure in the entry level category oem pro revenue grew 19 percent ahead of the commercial pc market driven by strong windows 10 demand and momentum in advance of the windows 7 and port inventory levels into the quarter in the normal range

Thanks, Amy will now move over to culinary and respect to others on the call request that participants. Please only ask one question operator can you. Please repeat your instructions.

Thank you.

Tyler will be conducting a question and answer session if you'd like to ask a question. Please press star one on your telephone keypad confirmation tunnel indicate your line is in the question Q in your press Star too if you would like to remove your question from the Q.

Amy E. Hood: Windows commercial products and cloud services revenue grew 26% and 29% in constant currency, driven by healthy demand for Microsoft 365, which carries higher inquiry revenue recognition.

Satya Nadella: Second, we are delivering best-in-class innovation and openness in each layer. And third, we offer unparalleled integration and architectural coherence across the entire stack to meet the real-world needs of our customers. Now, I'll briefly highlight how we're accelerating our progress and innovation starting with Azure. Organizations today need a distributed computing fabric to meet their real-world operational sovereignty and regulatory needs.

Participants using speaker equipment, it may be necessary to pick up your handset before passing the star keys and thank you. Our first question comes on line of Keith Weiss with Morgan Stanley . Please proceed.

Amy E. Hood: Surface revenue declined 4% and 2% in constant currency, driven by the timing of product lifecycle transitions ahead of the recently announced product launches.

Excellent. Thank you for taking the question and very nice quarter, I was hoping to dig in a little bit and to the intelligent cloud business and what you guys are seeing there for a more hybrid perspective, and so many one question for such in one for Amy for it for Satya you talk to us a little bit about sort of how these hibernating engagements are kind of.

Amy E. Hood: Search revenue X-PAC increased 11% and 13% in constant currency, driven by Bing rate growth.

Amy E. Hood: In gaming, revenue declined 7% and 6% in content currency, driven by lower console sales. Xbox content and services revenue was relatively unchanged and increased 1% in content currency, with growth from Minecraft, Gears of War 5, and Game Pass subscriptions offset by a strong third-party title in the prior year.

Rolling out with the largest customers how their contracting from it and in any sense you give us in terms of.

In what way that due to engage both kind of the on premise assets as well as the cloud assets could I think this this part of the equation as really.

Amy E. Hood: Segment gross margin dollars increased 12% and 13% in constant currency, and gross margin percentage increased four points due to higher margin sales mix.

Positively surprising a lot of investors on how well, Sir and tools that are doing and then maybe for Amy can help us understand sort of.

Amy E. Hood: operating expenses declined seven percent and six percent in constant currency as redeployment of engineering resources to higher growth opportunities was partially offset by investments in gaming as a result operating income grew 28 and 31 percent in constant currency now back to total company results

When we look at server and tools up 14% constant currency, which is well ahead of our expectations. How should we think about the durability of that in terms of what comes from sort of the.

Pull forward of demand ahead of some like sequel server and Windows server explorations in what is going to be more durable overtime.

Satya Nadella: This quarter, we opened a new data center region in Germany and Switzerland. And in India, we are bringing the power of Microsoft Cloud to millions of small businesses through our partnership with Jio, one of the largest mobile carriers in the country. Every Fortune 500 customer today is on a cloud migration journey, and we are making it faster and easier. Just this week, we announced an extensive go-to-market partnership with SAP, making Azure the preferred destination for every SAP customer. And our partnerships with VMware and Oracle also bring these ecosystems to our cloud. We're extending beyond the cloud to the edge, enabling customers to get real-time insights where data is generated while ensuring security and privacy. And we're seeing traction in every industry, from Azure Sphere, securely connecting Starbucks coffee machines, to Azure Stack, enabling scenarios from smart factories and modern compliant banking to mobile healthcare in remote areas. We're reimagining customers' data estates for the cloud era with new, limitless capabilities. Azure SQL Database brings hyperscale capabilities to relational databases, and Azure Cosmos DB is a low-latency, high-availability database for globally distributed applications of any data type.

Amy E. Hood: Capital expenditures, including finance leases, were $4.8 billion, of 12% year over year, driven by ongoing investment to meet growing demand for our cloud services, and slightly below expectations due to normal quarterly spend variability in the timing of our cloud infrastructure build-out. Cash paid for PP&E was $3.4 billion.

On the back of those.

Cohorts.

Sure. Okay. Thanks for the question overall, our approach has always been about this distributed computing fabric or thinking about hybrid is not as some transitory phase, but as a long term vision for how.

Computing will meet the real world needs because if you think about the long term compute will migrate to wherever data is getting generated an increasingly they'll be data generated.

Amy E. Hood: Cash flow from operations was $13.8 billion and increased 1% year over year, as strong cloud billings and collections were partially offset by tax payments related to the Q4 transfer of intangible property. Free cash flow was $10.4 billion and increased 4%. Excluding the impact of these tax payments, cash flow from operations and free cash flow grew 27% and 39% respectively.

In the real World, where just when you think about the cloud you have to think about the edge of the cloud as of very first loss costs dropped and so in that context. The what receives a couple of things that you see even in the results. Today. One is the hybrid benefits that is increasingly what is getting customers excited about the.

Amy E. Hood: As expected, in other income and expense, interest income was offset by interest expense, foreign currency remeasurement, and recognized losses on investments.

As your choice and the fact that they can renew knowing that they have the flexibility of both the cloud in the edge. That's definitely driving growth second is we also gaining share when you think about what's happening even at the edge. Some of the hub. Our datacenter addition products are very competitive in the marketplace.

Amy E. Hood: Our effective tax rate was 16% in line with expectations.

Amy E. Hood: and finally we returned 7.9 billion dollars to shareholders through share repurchases and dividends an increase of 28 percent year over year

And so you see both of those effects, but architecturally we feel well placed infected they are ignite conference you will see us even take the next leap forward even in terms of how we think about the architecture inclusive of the application models programming models on what distributed computing looks like going forward. So we feel well position there.

Amy E. Hood: Now, let's move to our outlook.

Amy E. Hood: assuming current rates remain stable we expect fx to decrease intelligent cloud revenue growth by approximately two points total company productivity and business processes and more personal computing revenue growth by approximately one point and have no impact on total company cogs and operating expenses growth

Thank you to your question on the durability, we tried to call out the four point.

That we felt transactionally was due to the end of support and Thats four of the 12.

Amy E. Hood: We expect another strong quarter in our commercial business.

Amy E. Hood: Demand for our hybrid offerings and cloud services remains strong, and capital expenditures will continue to reflect that.

And you SD and so but for US if you step back for a second at.

Amy E. Hood: Given the normal variability and infrastructure spend timing, we expect Q2 CapEx spend to be down slightly on a sequential basis, but still growing from the prior year. And commercial cloud gross margin percentage will continue to improve on a year-over-year basis, even with the continued mix of revenue toward Azure consumption-based services.

The durable trends at South you just talked about which is making sure we license in a way that respects. This long term reality of where data and compute will be needed is what we call the hybrid value proposition and the rights to that of course.

Our inherent and how we report this number and so for us what you'll see is premiums strengths, which we saw this quarter in both sequel and Windows because of some of the value proposition of of hybrid and of course up broad strength as well with people feel that flexibility to to.

Amy E. Hood: now to segment guidance in productivity and business processes we expect revenue between 11.3 and 11.5 billion dollars driven by double-digit growth across office commercial dynamics and and linkedin

Amy E. Hood: For Intelligent Cloud, we expect revenue between $11.25 and $11.45 billion. In Azure, we expect continued strong growth in our consumption-based business and moderating growth in our per-user business, given the size of the installed base.

Not be constrained by licensing in terms of how they view their estate.

Just one that's super helpful. Thanks, guys.

Thanks, Keith Operator, we'll take next question please.

Thank you. Our next question comes on line of Heather Bellini with Goldman Sachs. Please proceed.

Amy E. Hood: Our on-premises server business will be driven by demand for our hybrid and premium solutions, as well as the continued benefit from increased demand ahead of the end of support for Windows Server 2008.

Great. Thank you so much.

Question for Amy.

I was just wondering you've been saying for awhile now that you're seeing material improvements in Azure gross margins and that's obviously hugely benefited commercial cloud gross margin I'm. Just wondering if you could share with us how much of the improvement is related to the need to maybe expand datacenters at a lower.

Amy E. Hood: In more personal computing, we expect revenue between $12.6 and $13 million. In Windows, overall OEM revenue growth should again be ahead of the PC market as we balance healthy Windows 10 demand and the benefit from the upcoming end of support for Windows 7 with the supply chain's ability to meet this demand in Q2.

Our clip than you have been.

Maybe it's less.

Less depreciation and amortization, that's that's a that's coming that you're starting to recognize how much of it is due to just better capacity utilization then I'm just trying to get a sense of.

Amy E. Hood: Based on our customer demand signal and prior end-of-support cycles, we expect some continued momentum past January end-of-support deadline.

How much longer youre going to be able to say that for I guess Im just have you guys been ratcheting up your target gross margins for Azure over the years to where you think they could be.

Amy E. Hood: In Windows commercial products and cloud services, we expect another strong quarter, benefiting from continued Microsoft 365 momentum.

Amy E. Hood: in surface the launch of the latest surface pro and surface laptop devices to drive low double digit revenue growth on a strong prior year comparable in search xpac we expect revenue growth similar to q1

As you look ahead.

Thank you.

Thanks, Heather let me, let me start by saying.

In general at the commercial cloud gross margin and what you're seeing is revenue growth that for the past.

Amy E. Hood: And in gaming, we expect revenue to decline in the mid-20% range driven by lower console sales as we near the end of this generation, as well as the most challenging quarterly comparable and third-party titles from last year.

Almost two years.

Has vastly been faster than our capital expenditure gross so if you start at the at the top of the frame. What we're seeing is overall gross margin improvement across portfolio and improving and that comes from a couple of things, which is where you're getting too on azure.

Amy E. Hood: Now, back to overall company guidance.

Amy E. Hood: We expect COGS of $12.45 to $12.65 billion, and operating expenses of $10.8 to $10.9 billion.

It comes from structural improvement on sort of cost per unit, but it also comes from mix shift of revenue.

Amy E. Hood: other income and expense should be approximately 50 million dollars as interest income is partially offset by interest and finance lease expense

The premium services from being able to sell more SAS like services.

Amy E. Hood: And finally, we expect our Q2 effective tax rate to be slightly above the full year rate of 17%.

And consumption services or even premium data services.

That really do have.

Amy E. Hood: Now, let me share some additional comments on the full year.

Both more margin, but also are quite consistent in terms of their growth and you see then that represented as improving target for us, but I would say in general has or what the team has done is actually delivered on what I think we felt was a five year roadmap others.

Amy E. Hood: At the company level, we continue to expect double-digit revenue and operating income growth, driven by continued momentum in our commercial business.

Amy E. Hood: Given our strong first quarter results and the expected sales mix for the remainder of the year, we now expect operating margins to be up slightly year over year, even as we continue to invest with significant ambition in high growth areas. With that, Mike, let's go to Q&A.

Proving gross margins.

On.

On a material basis.

Now as you continue to see the mix shifts to the consumption based Azure services the overall.

Michael Spencer: Thanks, Amy. We'll now move over to Q&A. Out of respect to others on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions?

Cloud gross margin will improve at the same rate and we've said that and you'll continue to see that on it on a go forward basis as well, but we do continue to expect azure, especially on the consumption side gross margins to improve and they still have room to improve especially as we start to see some of these premium services.

Speaker Change: thank you at this time we'll be conducting a question and answer session if you'd like to ask a question please press star 1 on your telephone keypad a confirmation tone will indicate your line is in the question queue here press star 2 if you would like to remove your question from the queue for participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys and thank you our first question comes from line of keith weiss of morgan's family please proceed

Both being made available and being utilized at higher rates.

Great. Thank you.

Thanks other operator, we'll take your next question please.

Thank you. Our next question comes on line of Karl Keirstead with Deutsche Bank. Please proceed.

Keith Eric Weiss: Excellent. Thank you for taking the question in a very nice quarter. I was hoping to dig in a little bit into the intelligent cloud business and what you guys are seeing there from a hybrid perspective. And so maybe one question for Satya and one for Amy. For Satya, can you talk to us a little bit about sort of how these hybriding engagements are kind of rolling out with the larger customers, how they're contracting from it, and any sense you could give us in terms of...

Oh. Thank you Amy question for you when I look at shore.

Next quarter.

Guidance by revenue segment, it seems to equate to an overall revenue growth rate, assuming the midpoint of about 9% to 10%. So when I combine that with the 14% growth you just put up in Q1 it implies that in the second half overall, Microsoft revenue growth should remain roughly in the 10%.

ZIP code to enable you to get too.

Speaker Change: in what way do they engage both kind of the on-premise assets as well as the cloud assets? Because I think that's part of the equation that's really positively surprising a lot of investors in how well Server and Tools is doing. And maybe for Amy, you could help us understand sort of when we look at Server and Tools up 14% in constant currency, which is well ahead of our expectations, how should we think about the durability of that in terms of what comes from sort of the pull forward of demand ahead of like SQL Server and Windows Server explorations and what is going to be more durable over time on the back of those pull forwards.

Double digit growth for the full year. Despite the fact that you're moving past some fairly key end of support milestones I think some of US we're expecting a little bit more of a first half second half.

Delta. So I just wanted to ask you what's what are the maybe one or two or three drivers that enable you to sustain that growth rate in the second half and if it's fair to assume that your guidance doesn't really reflect any deterioration in the overall spending environment. Thanks a lot.

Yes, I think in general across a couple of things I would point to our many of the things I talked about in the comments that we prepared.

Overall Q1 was a very strong start commercially from a bookings perspective with some very strong trends across the board whether it is in both the absolute size and number of the Azure commitments that were saying that consistency, we're seeing in that consumption growth rates of azure.

Amy E. Hood: Sure, Keith. Thanks for the question. Overall, our approach has always been about this distributed computing fabric or thinking about hybrid as not as some transitory phase, but as a long-term vision for how computing will meet the real-world need. Because if you think about the long-term, compute will migrate to wherever data is getting generated, and increasingly, there'll be data generated in the real world where just when you think about the cloud, you have to think about the edge of the cloud as a very first-class construct. And so, in that context, what we see is a couple of things that you see even in the results today. One is the hybrid benefit. That is increasingly what is getting customers excited about the Azure choice and the fact that they can renew knowing that they have the flexibility of both the cloud and the edge. That's definitely what we're seeing in the real-world. And so, in that context, what we see is a couple of things driving growth. Second is we're also gaining share. When you think about what's happening even at the edge, some of our data center edition products are very competitive in the marketplace. And so, you see both of those effects. But architecturally, we feel well-placed. In fact, at our Ignite conference, you'll see us even take the next leap forward even in terms of how we think about the architecture, inclusive of the application models, programming models, on what distributed computing looks like going forward. So, we feel well-positioned there.

The commitments were seeing to Microsoft 365.

Some of these signs we're seeing a across our dynamics the power platform. The workflow cloud that software referred to and linked in it's a good bookings quarter, a good execution quarter on overall contracting value renewals were good recapture rates were good and new business was good.

So with that confidence some of those same trends that we had talked about of course show up through the year and Weve tried to be consistent and that while end of support.

I will make four points here and there each quarter the more sustainable trends are the fact that our commercial cloud overall offer significant value and differentiation to customers and are making longer term commitments and we continue to grow ARPU.

So when I think about sort of some of the seasonality that you're talking about.

Q2, I felt we were I wanted to be clear that that's really a gaming challenge in Q2.

Speaker Change: And Keith, your question on durability, we tried to call out the four points that we felt transactionally was due to the end of support, and that's four of the 12 in USD. And so, but for us, if you step back for a second, the durable trends that Satya just talked about, which is making sure we license in a way that respects this long-term reality of where data and compute will be needed, is what we call the hybrid value proposition. And the rights to that, of course, are inherent in how we report this number. And so, for us, what you'll see is premium storage. We saw this quarter in both SQL and Windows because of some of the value proposition of hybrid, and, of course, broad strength as well, when people feel that flexibility to not be constrained by licensing in terms of how they view their estate.

And you see that reflected in the margins in Q2 being significantly better than they were last last Q2, and if you think about.

Oh age to I do expect.

Surface.

We'll have some easier comparable at age two at a new portfolio to grow from so I think that's that's another change we'll see introductory phase two as well.

Terrific. Thanks, Jamie.

Thanks, Operator, we'll take one next question please.

Our next question comes on line of Mark mother with Bernstein Research. Please proceed.

Thank you and congrats on the quarter, Yeah is obviously a large focus.

Was the large driver of intelligent cloud opex spending growth this quarter.

You can give us some more color on where you see Microsoft's on a journey and Amy is this investing way ahead of revenue or as they I already driving big revenue favour, how should we think about appreciate thanks.

Speaker Change: Excellent. That's super helpful. Thanks, guys.

Speaker Change: Thanks, Keith. Operator, we'll take the next question, please.

Speaker Change: thank you our next question comes from line of heather bellini with goldman stacks please proceed great thank you so much um this is a question for amy um i was just wondering you've been saying for a while now that you're seeing material improvements and in azure gross margins and that's obviously hugely benefited commercial cloud gross margins i'm just wondering if you could share with us how much of the improvement is related to the need to maybe expand data centers at a lower clip than you have been you know and maybe it's less uh less depreciation and amortization that's that's uh that's coming that you're starting to recognize how much of it is due to you know just better capacity utilization then i'm just trying to get a sense of you know um how much longer you're going to be able to say that for i guess and just have you guys been ratcheting up your target gross margins for azure over the years to where you think they could be um as you look ahead thank you

No. Thanks Mark.

Great question, because we look at what's happening with they all I have you are having two dimensions to it one is I would say just already own use of AI as first body SaaS applications, although it's a phenomenal breakthroughs when you see new transcription features or new computer vision features that come with all the lens.

All of these are being driven by new AI capabilities that are all by the way powered by the same cloud infrastructure, we all build everything at Microsoft with first body equals the body with Azure as the core platform and so what do you see US is in fact, using our own to our SaaS application.

Greetings and consumer innovation, even to drive the high end AI capability, but then bringing the best in class tooling up for enterprise customers. So for example, like we've innovated even in what is Dev ops look like for the machine learning age that's a unique capability that they're in Azure ml.

Amy E. Hood: Thanks, Heather. Let me let me start by saying.

And those are the types of innovations that are even driving the projects that are enterprise customers have on azure, so you'll see us leverage our overall spend whether its capex. So opex across all of what Microsoft does a and then surface them and I think what is perhaps the best way to get.

Amy E. Hood: in general at the commercial cloud gross margin what you're seeing is revenue growth that for the past uh almost two years has vastly been faster than our capital expenditure growth so if you start at the at the top of the frame what we're seeing is overall gross margin improvement across portfolios and improving and that comes from a couple of things which is where you're getting to on azure um it comes from structural improvement on sort of cost per unit but it also comes from mix shift of revenue to premium services from being able to sell more sas like services and consumption services or even premium data services that really do have both more margin but also are quite consistent in terms of their growth and just you see then that represented as improving targets for us but i would say in general heather what the team has done is actually delivered on what i think we felt was a five year road map of improving gross margins on a on a material basis now as you continue to see the mix shift to the consumption-based azure services the overall

Traction in the enterprise market, which is great tooling compliance security and Thats, a place where are you making good progress.

And so for me markets, a little bit hard for me to say gosh, we invest in AI here and you'll see it specifically here what I think you heard through spotty as commentary is actually AI woven through every layer and component of the entire tech stack and how important that is whether.

Youre.

Participating at the dynamics 365 layer with insights or whether you're using components like some of our customers are.

Maybe for a natural in our interaction work and show for me it is.

Almost fundamental.

To see that cost and investment because you'll see it in margin and usage and frankly product differentiation that we can provide versus our competitors.

I really appreciate thank you.

Thanks, Mark operator, we'll take the next question please.

Thank you. Our next question comes on line of French fill with Jefferies. Please proceed.

Amy E. Hood: cloud gross margin won't improve at the same rate, and we've said that, and you'll continue to see that on a go-forward basis as well. But we do continue to expect Azure, especially on the consumption side, gross margins to improve. And they still have room to improve, especially as we start to see some of these premium services both being made available and being utilized at higher rates.

Thanks, Amy there's been a lot of macro concern among tech investors given some of the appears in your grids they've seen some weakness it doesn't seem that you have seen anything but I'm curious if you could just comment on on what you're seeing.

From that from a demand perspective.

Thanks, Brent what I would say is for US. It has been so important to remain focused on where growth and opportunity exist and to invest in those areas that are large expansive and durable Tam.

Speaker Change: great thank you thanks heather operator we'll take the next question please

Speaker Change: Thank you. Our next question comes from the line of Carl Kirstead with Deutsche Bank. Please proceed.

Karl E. Keirstead: Thank you. Amy, a question for you. When I look at your next quarter guidance by revenue segment, it seems to equate to an overall revenue growth rate, assuming the midpoint of about 9% to 10%. So when I combine that with the 14% growth you just put up in Q1, it implies that in the second half, overall, Microsoft revenue growth should remain roughly in the 10% zip code to enable you to get to double-digit growth for the full year, despite the fact that you're moving past some fairly key end-of-support milestones. I think some of us were expecting a little bit more of a first-half, second-half delta. So I just wanted to ask you, what are the metrics? Maybe one or two or three drivers that enable you to sustain that growth rate in the second half, and if it's fair to assume that your guidance doesn't really reflect any deterioration in the overall spending environment. Thanks a lot.

And I think when you think about where we spend our time both building products investing in marketing investing in sales capability and technical capability. It has been in many if not all of those places.

So when I look and say, whereas our execution or how do I think about our ability to execute in a macro environment for me. It is about investing in the right places.

Executing at a great way remaining focused on the transition our customers need us to help them through to create their own opportunity in their own growth and I think we've done a nice job of being invested in the right Places thought you mentioned a few of them on the call, but there are really many if you think about security.

Compliant communication work flow business process reinvention. The list can go on and on or I feel like we have set up a multiyear journey to be well positioned and I tend to think of every quarter every year as an opportunity to can.

Amy E. Hood: Yes, I think in general, Carl, a couple of things I would point to are many of the things I talked about in the comments that we prepared. Overall, Q1 was a very strong start commercially from a bookings perspective with some very strong trends across the board. Whether it is in both the absolute size and number of the Azure commitments that we're seeing, the consistency we're seeing in the consumption growth rates of Azure, the commitments we're seeing to Microsoft 365, some of the signs we're seeing across our dynamics, the power platform, the workflow cloud that Satya referred to, and LinkedIn. It's a good bookings quarter, a good execution quarter on overall contracting value. Renewals were good, recapture rates were good, and new business was good.

Can you to differentiate investment innovation and execute well to take share and so that I think calif approach that and I think thats, probably the unifying theme quite frankly of all the questions. So far which is what's next what's next for US is in the apps and infra go from perhaps first inning to second innings.

Now for data in AI distort the first innings when it comes to security compliance. We never participated in this gets what we get to participate in a fairly competitive way now we've built but something that didn't even exist a few years ago, which is the work flow cloud that's a huge opportunity for us biz apps we are.

A very competitive and growing footprint, even when you think about something like Microsoft Threesix. Five you never participated in spite of out past success with all the first line work.

Amy E. Hood: So, with that confidence, some of those same trends that we had talked about, of course, show up through the year, and we've tried to be consistent in that while end of support

And now we get to participate to that so I see.

Amy E. Hood: will make for points here and there each quarter the more sustainable trends are the fact that our commercial cloud overall offers significant value and differentiation to customers and they're making longer-term commitments and we continue to grow ARPU

Long term secular growth opportunities and we're going to stay focused on making sure. Our innovation is competitive in all those lives we talked about.

Thank you.

Thanks, Brent operator, we'll take the next question please.

You are next question comes on line of Phil Winslow with Wells Fargo. Please proceed.

Thanks for taking my question congrats on another it really impressive quarter.

Such I want to focus on the strategic announcements you've talked about earlier in the called.

The Oracle via Blair and obviously, the most recently with S&P Yeah. What do we were just walk us through the sort of strategic thoughts behind these and then also especially with Vmware and an oracle since theres an out there obviously longer what's the feedback from from customers customers better than I guess to Amy how do you think about through these are the spin strategic analysis this year actually show.

Satya Nadella: The quintessential characteristic of every application going forward will be AI, and we have the most comprehensive portfolio of AI tools, infrastructure, and services. Azure AI now has more than 20,000 customers, and more than 85% of the Fortune 100 companies have used Azure AI in the last 12 months. In healthcare, Novartis chose Azure AI to transform how medicines are discovered, developed, and commercialized. Nuance will rely on our cloud to power the patient exam room of the future, where clinical documentation writes itself. And Humana is using Azure AI to build personalized healthcare solutions for its more than 10 million members. We're also pushing the bounds of how computers and AI can generalize learning beyond narrow domains, collaborating with OpenAI on a supercomputing platform to train and run AI models.

Amy E. Hood: about H2, I do expect

Amy E. Hood: surface, we'll have some easier comparables in H2 and a new portfolio to grow from, so I think that's another change you'll see in trajectory in H2 as well.

Showing up in the numbers.

Sure a feel thing so so overall I think this is again one of those things where in the past we participated in the infrastructure business.

But we had a fairly narrow footprint, which is we had our own infrastructure that supported primarily our databases and our operating systems, where does with the migration to the cloud.

Speaker Change: Terrific. Thank you, Amy.

Amy E. Hood: Thanks, Carl. Operator, we'll take the next question, please. Thank you. Our next question comes from the line of Mark Modler with Bernstein Research. Please proceed.

Customers are looking for us to be a provider of all that infrastructure needs, which is heterogeneous and that's what is really let us at the infrastructure layer two how partnerships VM wed an oracle we as you know have first across the board full windows, and Linux Java and Dot net post gross and sequel.

Mark L. Moerdler: Thank you and wrap up the quarter. AI is obviously a large focus, it was a large driver of OPEC spending growth this quarter. Satya, can you give us some more color on where you see Microsoft on the AI journey? And Amy, is this investing way ahead of revenue or is AI already driving big revenue for Azure? How should we think about it?

So all read them, where a red red hat as well as RBC or windows Hyperwise. There. So I feel that we now have that ability to be able to take the entire infrastructure to state. The entire data is state and really add value with these partnerships and Sep represents the same because that's if he's got.

Satya Nadella: No, thanks, Mark. It's a great question because we look at what's happening with AI having two dimensions to it. One is, I would say, just our own use of AI as first-party SaaS applications. There's some phenomenal breakthroughs when you see new transcription features or new computer vision features that come with HoloLens. All of these are being driven by new AI capabilities that are all, by the way, powered by the same cloud infrastructure. We all build everything at Microsoft with first-party equals third-party with Azure as the core platform. And so what you see us is, in fact, using our own SaaS applications and consumer innovation even to drive the high-end AI capability, but then bring the best-in-class tooling for enterprise customers. So, for example, we have innovated even in what does DevOps look like for the machine learning age? That's a unique case. That's a unique capability that's there in Azure ML. And those are the types of innovations that are even driving the projects that enterprise customers have on Azure. So you'll see us leverage our overall spend, whether it's CapEx or OpEx, across all of what Microsoft does, and then surface them in, I think, what is perhaps the best way to get traction in the enterprise market, which is great tooling, compliance, security, and that's the place where we're making good progress.

Both infrastructure, we now have the preferred cloud. So I think it's a fairly no brainer for any customers and sep customer who wants to accelerate their migration to the cloud a and innovation from S&P in us that they should move to Azure and that's what this announcement was all about and so we're really looking forward to essentially executing on that.

Strategy and that customer needed, we see very clearly.

And and fill to your question on where would we see this you'd actually see it in a couple of places not just in Azure, which may in fact, the the most logical extension, but at the heart of this is making it easier faster and more reliable for us to help customers move their state to.

The cloud.

And to migrate that with confidence and so when we do that it's about becoming a committed partner and you actually see that and broader Microsoft Cloud result, whether that's helping even through these partnerships to be able and get closer to tier one workloads business process changes and so I actually think these are.

Quite important for us.

To continue to make sure. The first goal is customer centric.

Which is why we continue to move in this direction.

Speaker Change: And so for me, Mark, it's a little bit hard for me to say, gosh, we invest in AI here, and you'll see it specifically here. What I think you heard through Satya's commentary is actually AI woven through every layer and component of the entire tech stack and how important that is, whether you're participating at the Dynamics 365 layer with Insight or whether you're using components like some of our customers are, maybe for natural interaction work. And so for me, it is almost fundamental to see that cost and investment because you'll see it in margin and usage and, frankly, product differentiation that we can provide versus our competitors.

Thanks Bill Thanks.

Operator, we'll take our next question please.

Thank you. Our next question comes on line of Jennifer Lowe with TBS. Please proceed.

Thank you I think this is probably in any question as I sort of parse through the dynamics within office 365, and turn the discussion around sustainability of double digit growth within the commercial segment you know we've seen seat count decelerate <unk>.

Also the uplift on pricing maybe isn't as much as quarter as we saw in the past, which leads me believes that they you are seeing a lot of success in the frontline worker piece and maybe that's a bigger driver of the seat count from here, but can you just and the same time, you're seeing in a strong uptake of the premium skews as well, but as we think about seat count going forward how much opportunity is there still.

Left on the migration front of commercial licenses versus leaning a bit more on things like frontline worker to sustain that growth.

Speaker Change: I really appreciate it. Thank you.

Speaker Change: Thanks, Mark. Operator, we'll take the next question, please.

Speaker Change: Thank you. Our next question comes from the line of Brent Bill with Jefferies. Please proceed.

And is there a point, where you know potentially the seat growth and things like frontline could start to eat further into your ability to continue to lift ARPU on on the beach already have.

Brent Thill: Thanks. Amy, there's been a lot of macro concern among tech investors, given some of the peers in your group have seen some weakness. It doesn't seem that you've seen anything, but I'm curious if you could just comment on what you're seeing from a demand perspective.

Thanks, Jen let me let me break this question apart because you're actually asking important dynamics that I don't always think of his trade off and so I want to make that.

More clear and my answer.

Amy E. Hood: Thanks Brent. What I would say is for us it has been so important

First to your question on fee growth.

Satya Nadella: I'm excited about our partnership and our collective pursuit to democratize AI and its benefits for everyone. Now, to develop a tool. The rise of digital IP creation in every organization means developers will increasingly drive and influence every business process and function, and GitHub is where they go to learn, share, and collaborate.

We have room, even beyond just first line workers, whether that is a our ability and small and midsize businesses on a global basis with mobile first workers. This is a very broad opportunity for us.

Amy E. Hood: to remain focused on where growth and opportunity exist and to invest in those areas that are large, expansive, and durable.

Amy E. Hood: and i think when you think about where we've spent our time both building products investing in marketing investing in sales capability and technical capability it has been in many if not all of those places

Turning to reach people trying to accomplish tasks and do their work on devices of any size and so there is significant room for us to continue to make progress on that front.

Amy E. Hood: So when I look and say, where is our execution, or how do I think about our ability to execute in a macro environment, for me it is about investing in the right places, executing in a great way, remaining focused on the transition our customers need us to help them through to create their own opportunity and their own growth. And I think we've done a nice job of being invested in the right places. Satya mentioned a few of them on the call, but there are really many. If you think about security, compliance, communication, workflow, business process reinvention, the list can go on and on, where I feel like we have set up a multi-year journey to be well-positioned. And I tend to think of every quarter, every year as an opportunity to continue to differentiate, invest in innovation, and execute well to take share. And so that's, I think, how I've approached that. And I think that's probably the unifying theme, quite frankly, of all the questions so far, which is, what's next? What's next for us is in the apps and infra go from perhaps first inning to second inning. For data and AI to start the first inning, when it comes to security, compliance, we never participated in this. Guess what? We get to participate in a fairly competitive way now. We have built something that didn't even exist a few years ago, which is the workflow cloud. That's a huge opportunity for us. With apps, we are a very competitive and growing footprint. Even when you think about something like Microsoft 365, we never participated in spite of our past success with all the first-line work, and now we get to participate in it. So I see long-term secular growth opportunities, and we want to stay focused on making sure our innovation is competitive in all those layers we talked about.

Now could that.

End up with some ARPU pressure or long term it certainly could but the important for me I don't think of that as being necessarily a negative.

We used to really make no money.

Through the seats that we just talked about.

And so every dollar or multiple dollars or many dollars earned on those new seats is all new revenue new opportunity and new socket for US let me separate that from the next dynamic which is why sort of an average number may not be the best indication which is.

Our ability to continue to move people to higher value skews.

Whether that's through the addition.

Satya Nadella: GitHub has grown to more than 40 million developers, up more than 30% since our acquisition a year ago. And more than 2 million organizations use GitHub, including the majority of the Fortune 50. At Ford Motor Company alone, 8,000 employees use GitHub to innovate and collaborate with a vast ecosystem of third-party software developers. Our acquisition of Symantec Code Analysis Engine, SEMILI, this quarter strengthens our security capabilities, enabling developers to more easily find vulnerabilities in large open-source code bases.

Of really compelling things and security or a compliance or communications or collaboration or knowledge or learning.

Where we can add value.

Whether we call that E fiber eathree, we have room in that transition as well and new opportunity in a way that I'm not sure I've seen us I feel very optimistic about M 365, I'm, sorry, Microsoft 365, and our ability to continue to add value. So hopefully that that helps.

Yes, that's great. Thank you.

Thanks, Jen operator, we'll take our last question now please.

Thank you I last question will come from a line of Raimo Lenschow with Barclays. Please proceed.

Anything squeezing me in.

Quick question on answer if I look at the Sep announcements, but you had some other industry announcement, altura smell like who Mama et cetera, like how do up to think about the progress you guys I'm, making here in terms of getting more into the different industries and to kind of.

Deeper relationships with around odds are rather than just doing simple infrastructure.

Speaker Change: Thank you. Thanks, Brent. Operator, we'll take the next question, please.

Speaker Change: Thank you. Our next question comes from the line of Phil Winslow with Wells Fargo. Please proceed.

You know infrastructure outsourcing thank you.

Yes, so a very deliberate strategy that we have in meeting our customers' needs or we need to have the partners. They already work with and want to work with also on our platform.

Phil Winslow: Hey, thanks guys for taking my question. Congrats on another really impressive quarter. Satya, I want to focus on the strategic announcements you talked about earlier in the call. Oracle, VMware, and obviously the most recent one with SAP. One of you would just walk us through the strategic thoughts behind these, and then also, especially with VMware and Oracle, since those have been out there obviously longer, what's the feedback from customers been? And then I guess to Amy, how do you think about these big strategic announcements this year actually showing up in the numbers?

Satya Nadella: Now, let's turn to our Workflow Cloud Power Platform. Automating workflows across every function will be key to productivity gains for every organization. We are building Power Platform as the extensibility framework for both Microsoft 365, including Microsoft Teams, as well as Dynamics 365. It brings together low-code, no-code app development, robotic process automation, and self-service analytics, enabling everyone in an organization to build an intelligent app or workflow where none exists. The Power Platform already has more than 2.5 million monthly active citizen developers. Power Apps helps domain experts, those closest to the business problem, to design, build, and publish custom apps fast, and 84% of the Fortune 500 have already created Power Applications. Now, let's talk about security.

So it starts sometimes with the customers, whether it's you mono Walgreens, a Walmart and others are it also starts with partners like are you know.

Nuance, which is another one that we announced recently.

And so the idea is for us to be really ensuring that by every industry. We have the right marquee customers as well as the partners and have strong go to markets one of the things that.

Amy E. Hood: Sure, Phil, thanks. So overall, I think this is, again, one of those things where in the past we participated in the infrastructure business, but we had a fairly narrow footprint, which is we had our own infrastructure that supported primarily our databases and our operating systems, whereas with the migration to the cloud, customers are looking for us to be a provider of all their infrastructure needs, which is heterogeneous. And that's what has really led us at the infrastructure layer to have partnerships with VMware and Oracle. We, as you know, have first-class support for Windows and Linux, Java and .NET, Postgres and SQL, VMware, Red Hat, as well as, obviously, Windows Hypervisor. So I feel that we now have that ability to be able to take the entire infrastructure estate, the entire data estate. And really. And really add value with these partnerships. And SAP represents the same, because SAP has got both infrastructure, we now have the preferred cloud. So I think it's a fairly no-brainer for any customer who's an SAP customer who wants to accelerate their migration to the cloud and innovation from SAP and us that they should move to Azure. And that's what this announcement was all about. And so we're really looking forward to essentially executing on that strategy and that customer need that we see very clearly. Thank you.

Mike everyone I think in the marketplace understands is Microsoft for especially from a partner perspective is a great route to market you have a platform directly with our sales force as well as our channel.

It is very attractive to third party developers or to get on Azure and they realize those benefits and in fact, our customers rely on that as all too as a benefit because it helps them get the best value from the partners as well.

Great. Thanks through the rest of the Q and a portion of today's earnings call. Thank you for joining us today and we look forward to speaking with all of you. Soon thank you. Thank you all.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

Speaker Change: And Phil, to your question on where would we see this, you'd actually see it in a couple of places, not just in Azure, which may in fact be the most logical extension. But at the heart of this is making it easier, faster, and more reliable for us to help customers move their estate to the cloud and to migrate that with confidence. And so when we do that, it's about becoming a committed partner. And you actually see that in broader Microsoft cloud results, whether that's helping even through these partnerships to be able and get closer to tier one workloads, business process changes. And so I actually think these are quite important for us to continue to make sure the first goal is customer centric, which is why we continue to move in this direction.

Speaker Change: Thanks, Bill. Thanks, guys.

Speaker Change: Operator, we'll take the next question, please.

Speaker Change: Thank you. Our next question comes from the line of Jennifer Lowe with UBS. Please proceed.

Jennifer Swanson Lowe: Great. Thank you. I think this is probably an Amy question. As I sort of parse through the dynamics within Office 365 and through the discussion around sustainability of double-digit growth within the commercial segment, we've seen seat count decelerate. Also, the uplift on pricing maybe isn't as much this quarter as we saw in the past, which leads me to believe that you are seeing a lot of success in the frontline worker piece, and maybe that's a bigger driver of the seat count from here. But can you just, and at the same time, you're seeing strong uptake of the premium SKUs as well, but as we think about seat count going forward, how much opportunity is there still left on the migration front of commercial licenses versus leaning a bit more on things like frontline worker to sustain that growth? And is there a point where potentially the seat growth and things like frontline could start to eat further into your ability to continue to lift ARPU on the base you already have?

Amy E. Hood: Thanks, Jen. Let me break this question apart, because you're actually asking important dynamics that I don't always think of as trade-offs, and so I want to make that more clear in my answer. First, your question on speed growth. We have room even beyond just first-line workers. Whether that is our ability in small and mid-sized businesses, on a global basis with mobile-first workers, this is a very broad opportunity for us to reach people trying to accomplish tasks and do their work on devices of any size. Thank you. And so there is significant room for us to continue to make progress on that front.

Amy E. Hood: Now, could that.

Amy E. Hood: end up with some ARPU pressure long term it certainly could but the important for me I don't think of that as being necessarily a negative

Amy E. Hood: We used to really make no money.

Amy E. Hood: through the seats that we just talked about.

Amy E. Hood: And so every dollar or multiple dollars or many dollars earned on those new seats is all new revenue, new opportunity and new socket for us. Let me separate that from the next dynamic, which is why sort of an average number may not be the best indication, which is our ability to continue to move people to higher value use, whether that's through the addition

Amy E. Hood: really compelling things in security or compliance or communications or collaboration or knowledge or learning

Satya Nadella: Rising cyber threats and increasing regulation mean security and compliance are a strategic priority for every organization. We have a comprehensive offering across identity, security, and compliance spanning people, devices, apps, developer tools, data, and infrastructure to protect customers in today's zero-trust environment. It starts with Azure Active Directory Premium, used by more than 100,000 organizations for identity, access management, and SaaS application security across heterogeneous environments. It builds on information protection and cloud security with Microsoft Defender Advanced Threat Protection and now with risk-based vulnerability management. And it extends to Azure Sentinel, now broadly available. Sentinel is a cloud-first service that analyzes security signals at massive scale across the entire organization, using AI to detect, investigate, and automatically remediate threats.

Speaker Change: where we can add value um whether we call that e5 or e3 we have room in that transition as well and new opportunity in a way that i'm not sure um i've seen us i feel very optimistic about m365 sorry microsoft 365 and our ability to continue to add value so hopefully that that helps them yeah that was great thank you

Speaker Change: Thanks, Jen. Operator, we'll take our last question now, please.

Speaker Change: Thank you. Our last question will come from the line of Ramo Lunchell with Barclays. Please proceed.

Raimo Lenschow: Thanks for squeezing me in. Quick question on Azure. If I look at the SAP announcements, but you had some other industry announcements out there as well, like Humana, et cetera. How do I have to think about the progress you guys are making there in terms of getting more into the different industries and to kind of create deeper relationships around Azure rather than just doing kind of simple infrastructure outsourcing? Thank you.

Speaker Change: Yeah, it's a very deliberate strategy that we have in meeting our customers' needs. We need to have the partners they already work with and want to work with also on our platform. So it starts sometimes with the customers, whether it's Humana or Walgreens or Walmart and others. It also starts with partners like, you know, Nuance, which is another one that we announced recently. And so the idea is for us to be really ensuring that by every industry, we have the right marquee customers as well as the partners and have strong go-to-market. One of the things that everyone, I think, in the marketplace understands is Microsoft, especially from a partner perspective, is a great route to market. We have a platform directly with our sales force as well as our channel that is very attractive to third-party developers. To get on Azure and they realize those benefits. And in fact, our customers rely on that as also as a benefit because it helps them get the best value from their partners as well.

Speaker Change: Great. Thanks, Reno. That wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with all of you soon. Thank you. Thank you all. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: Thank you.

Satya Nadella: We'll share more about our expanding opportunities in security at our Ignite conference in the next few weeks. Now on to business applications. Dynamics 365 is the only AI-powered business cloud that gives customers a 360-degree view of their business. From marketing and sales to finance and operations to unified data and unlock insights, it enables every level of an organization to move from reactive siloed transactional processes to proactive, repeatable, and predictable business outcomes. This quarter, we introduced Dynamics 365 Commerce, a new omni-channel solution to unify back-office, in-store, and digital experiences and deliver personalized content wherever shoppers are. Dynamics 365 AI Insights app ingests data from any first-party or third-party source, freeing data from systems of record to power modern systems of engagement and intelligence.

Speaker Change: You

Satya Nadella: New Dynamics 365 Product Insights provides organizations like Ecolab a real-time view of how customers are using their products to maximize customer lifetime value, and Dynamics 365 Connected Store helps retailers like Marks & Spencers analyze observational data to optimize the in-store shopping experience. We are enabling our customers to bridge the physical and digital business processes with our Mixed Reality Cloud, which spans HoloLens 2, Azure Mixed Reality Services, and Dynamics 365 applications. Cation, for example, is using Dynamics 365 Guides along with HoloLens 2 to reimagine training for its employees. Now to LinkedIn.

Satya Nadella: We saw record levels of engagement again this quarter across the platform. Marketing Solutions remains our fastest growing segment, up 44% year over year, as marketers leverage our community-based tools to connect with LinkedIn's nearly 660 million members. We continue to innovate across our talent portfolio, including Talent Solutions, Talent Insights, Glint, and LinkedIn Learning, to help every organization attract, retain, and develop the best talent. LinkedIn Skills Assessment is a new way for members to showcase their proficiencies and become more discoverable to recruiters.

Satya Nadella: Now turning to Microsoft 365 and Surface. Earlier this month, we unveiled our broader Surface lineup to date, including two new dual-screen devices coming next year. We are reimagining every layer of how we infuse AI from silicon up to device form factors and the role of operating systems to help people be more productive and creative in a multi-sense, multi-device world. We will continue to invest across form and function to create new categories that benefit our entire OEM ecosystem. And our expanded partnership with Samsung builds on our promise to help people be more productive on any device, anywhere, bringing OneDrive, Outlook, and your phone, and more to new Samsung devices. Microsoft 365 is the world's productivity cloud and the only comprehensive solution that empowers everyone from the C-suite to first-line workers with an integrated, secure experience on any device. We're infusing AI across Microsoft 365 to help make work more intuitive and natural. For example, the new Presenter Coach in PowerPoint makes anyone a better public speaker. New capabilities in Word enable professionals to transcribe or record audio files while staying in the flow. Video is more searchable, shareable, and first class within Microsoft 365 with Stream.

Satya Nadella: And new inking capabilities let users create and reply to comments from anywhere using pen or voice. Microsoft Teams continues to gain traction, bringing together everything a team needs, chat, voice, meetings, collaboration with the power of Office, and business process workflow into a single integrated user experience, all with the highest security and compliance. Teams keeps all of your work, conversations, and meetings in context, eliminating the need to bounce back and forth between different apps with features like integrated calendaring, OneTouch to join meetings from your phone, and we're broadening our opportunity with 2 billion first-line workers worldwide, adding priority notifications, role-specific targeted messages, and the ability to clock in and clock out of a shift.

Satya Nadella: Our differentiated offering is driving usage, making Teams the category leader. More than 350 organizations now have more than 10,000 users of Teams. More broadly, all this innovation is fueling growth. Office 365 commercial monthly active users surpassed 200 million this quarter. Leading organizations like Cerner, Chevron, and the Lego Group are choosing our premium Microsoft 365 E5 offerings for their advanced security and productivity experiences. Finally, gaming.

Satya Nadella: In gaming, we are investing in content, community, and cloud services to expand our opportunity with 2 billion gamers worldwide. We saw record numbers of Xbox Live monthly active users with strength both on and off console in mobile and PC, and continued growth for Game Pass subscriptions. Gears 5 saw more than 3 million players in its first weekend alone. After 10 years, Minecraft is stronger than ever with record revenue and usage, and we are bringing the franchise to new audiences with Minecraft Earth.

Speaker Change: You

Satya Nadella: Finally, just last week, we started trials of Project xCloud so gamers can play games wherever and whenever they want on any device. In closing, we are accelerating our innovation across the entire technology stack to deliver new value for customers. We're investing aggressively in large markets with significant growth potential, and it's still early days. With that, I'll hand over to Amy, who will cover our financial results in detail and share her outlook, and I look forward to rejoining for your questions. Thank you, Satya, and good afternoon, everyone.

Amy E. Hood: This quarter, revenue was $33.1 billion, up 14% and 15% in constant currency. Gross margin dollars increased 18% and 20% in constant currency. Operating income increased 27% and 32% in constant currency, and earnings per share were $1.38, increasing 21% and 25% in constant currency. Consistent execution and strong demand for our hybrid and cloud offerings drove a solid start to the fiscal year, with another quarter of double-digit top and bottom line growth. From a geographic perspective, we saw broad-based strength across all markets.

Amy E. Hood: In our commercial business, we again saw increased customer commitment across our cloud platform. For example, in Azure, we had material growth in the number of $10 million plus contracts. Additionally, Microsoft 365 drove new customer adoption, as well as expansion in our existing customer base, given the strong value Office 365, Windows 10, and Enterprise Mobility and Security provide as a secure, intelligent solution. As a result, commercial bookings growth was ahead of expectations, increasing 30% and 35% in constant currency, with a higher volume of new business and strong renewal execution. Commercial annuity mix increased to 91%, and commercial unearned revenue was ahead of expectations at $31.1 billion, up 14% and 16% in constant currency.

Amy E. Hood: Our commercial remaining performance obligation was $86 billion, up 26% and 27% in constant currency, driven by these long-term customer commitments. As a reminder, going forward, we will disclose the commercial remaining performance obligation as a KPI, which better reflects commitments our customers are making across all contract types. Commercial cloud revenue was $11.6 billion, growing 36% and 39% in constant currency. The commercial cloud gross margin percentage increased four points year over year to 66%. A significant improvement in Azure gross margin offset a sales mix shift to Azure. Company Gross Margin Percentage was 69%, up 3 points year-over-year and ahead of our expectations, driven by a shift in sales mix to higher margin businesses. The U.S. dollar was a bit weaker than anticipated, which resulted in slightly less impact on our results.

Amy E. Hood: FX reduced revenue growth by less than two points and COGS and operating expenses growth by approximately one point. Operating expenses grew eight percent and nine percent in constant currency, slightly lower than expectations, mainly driven by the timing of marketing and project spend. And operating margins expanded this quarter, driven by the combination of higher gross margins and operating leverage through effective resource allocation. Now to our segment results. Revenue from productivity and business processes was $11.1 billion, increasing 13% and 15% in constant currency, ahead of expectations, primarily driven by our on-premises office commercial business. Office commercial revenue grew 13% and 15% in constant currency and benefited approximately two points from the transactional strength in Japan.

Amy E. Hood: Office 365 commercial revenue growth of 25% and 28% in constant currency was again driven by install-based growth across all workloads and customer segments, as well as higher ARPU. Office 365 commercial seats increased 21% with a growing mix from our Microsoft 365. Office consumer revenue grew 5% and 6% in conflict currency with roughly 7 points of benefit from transactional strength in Japan, more than offsetting the strong prior year comparable related to the launch of Office 2019. Office 365 consumer subscribers grew to 35.6 million. Dynamics revenue grew 14% and 16% in constant currency, driven by Dynamics 365 revenue growth of 41% and 44% in constant currency. LinkedIn revenue increased 25% and 26% in constant currency with continued strength across all businesses.

Amy E. Hood: LinkedIn sessions increased 22% as engagement again reached record levels. Segment gross margin dollars increased 16% and 19% in constant currency, and gross margin percentage increased two points year over year as improvements in LinkedIn and Office 365 margins more than offset an increase in cloud revenue mix. Operating expenses increased 8% and 9% in constant currency, driven by continued investment in LinkedIn and cloud engineering. Operating income increased 23% and 27% in constant currency.

Amy E. Hood: Next, the Intelligent Cloud segment. Revenue was $10.8 billion, increasing 27% and 29% in constant currency, ahead of expectations driven by our on-premises server business. On a significant basis, Server products and cloud services revenue increased 30% and 33% in constant currency, driven by continued demand from our hybrid value. Azure revenue increased... 59% and 63% in constant currency, with strong growth in our consumption-based business across all customer segments, partially offset by further moderation in our per-user business. Our enterprise mobility installed base grew 36% to over 120 million seats, benefiting from the Microsoft 365 Suite momentum, and our on-premises server business grew 12% and 14% in concurrency driven by continued strength across our hybrid and premium offerings, GitHub, and roughly four points of benefit from the end of support for SQL Server 2008 and Windows Server 2008. Enterprise services revenue increased 7% and 8% in constant currency, driven by growth in Premier Support Services. Segment gross margin dollars increased 27% and 30% in constant currency.

Amy E. Hood: Gross margin percentage was up slightly, as another quarter of material improvement in Azure gross margin was partially offset by a growing mix of Azure IaaS and PaaS revenue. Operating expenses increased 22%, driven by ongoing engineering and sales investments in the cloud and AI, including GitHub. Operating income grew 33% and 38% in constant currency.

Amy E. Hood: Now to more personal computing. Revenue was $11.1 billion, increasing 4% and 5% in constant currency, ahead of expectations, as better-than-expected performance in our OEM pro and Windows commercial businesses more than offset lower-than-expected monetization across third-party titles within gaming. In Windows, OEM non-pro revenue declined 7% below the consumer PC market with continued pressure in the entry-level category. OEM pro revenue grew 19% ahead of the commercial PC market, driven by strong Windows 10 demand and momentum in advance of the Windows 7 end port. Inventory levels ended the quarter in the normal range. Windows commercial products and cloud services revenue grew 26% and 29% in constant currency, driven by healthy demand for Microsoft 365, which carries higher in-quarter revenue recognition. Surface revenue declined 4% and 2% in constant currency, driven by the timing of product lifecycle transitions ahead of the recently announced product launches.

Amy E. Hood: Search revenue XPAC increased 11% and 13% in constant currency driven by Bing rate growth. In gaming, revenue declined 7% and 6% in constant currency, driven by lower console sales. Xbox content and services revenue was relatively unchanged, and increased 1% in constant currency, with growth from Minecraft, Gears of War 5, and Game Pass subscriptions offset by a strong third-party title in the prior year. Segment growth margin dollars increased 12% and 13% in constant currency, and growth margin percentage increased 4 points due to a higher-margin sales mix. Operating expenses declined 7% and 6% in constant currency as redeployment of engineering resources to higher growth opportunities was partially offset by investments in gaming.

Amy E. Hood: As a result, operating income grew 28% and 31% in constant currency. Now back to total company results. Capital expenditures, including finance leases, were $4.8 billion, up 12% year-over-year, driven by ongoing investment to meet growing demand for our cloud services, and slightly below expectations due to normal quarterly spend variability in the timing of our cloud infrastructure build-out. Cash paid for PP&E was $3.4 billion. Cash flow from operations was $13.8 billion and increased 1% year-over-year, as strong cloud billings and collections were partially offset by tax payments related to the Q4 transfer of intangible property. Free cash flow was $10.4 billion and increased 4%, excluding the impact of these tax payments. Cash flow from operations and free cash flow grew 27% and 39%, respectively. As expected, in other income and expense, interest income was offset by interest expense, foreign currency remeasurement, and recognized losses on investment. Our effective tax rate was 16%, in line with expectations.

Amy E. Hood: And finally, we returned $7.9 billion to shareholders through share repurchases and dividends, an increase of 28% year-over-year. Now, let's move to our outlook. Assuming current rates remain stable, we expect FX to decrease intelligent cloud revenue growth by approximately 2 points, total company revenue growth by approximately 1 point, and have no impact on total company COGS and operating expenses growth. We expect another strong quarter in our commercial business. Demand for our hybrid offerings and cloud services remains strong, and capital expenditures will continue to reflect that. Given the normal variability and infrastructure spend timing, we expect Q2 CapEx spend to be down slightly on a sequential basis but still growing from the prior year.

Amy E. Hood: And Commercial Cloud gross margin percentage will continue to improve on a year-over-year basis, even with the continued mix of revenue toward Azure consumption-based services. Now to segment guidance. For productivity and business processes, we expect revenue between $11.3 and $11.5 billion, driven by double-digit growth across Office Commercial, Dynamics, and LinkedIn. For Intelligent Cloud, we expect revenue between $11.25 and $11.45 billion.

Amy E. Hood: In Azure, we expect continued strong growth in our consumption-based business and moderating growth in our per-user business, given the size of the installed base. Our on-premises server business will be driven by demand for our hybrid and premium solutions, as well as the continued benefit from increased demand ahead of the end of support for Windows Server 2008. In more personal computing, we expect revenue between $12.6 and $13 million.

Amy E. Hood: In Windows, overall OEM revenue growth should again be ahead of the PC market as we balance healthy Windows 10 demand and the benefit from the upcoming end of support for Windows 7 with the supply chain's ability to meet this demand in Q2. Based on our customer demand signal and prior end-of-support cycles, we expect some continued momentum past the January end-of-support deadline. In Windows Commercial, Products, and Cloud Services, we expect another strong quarter, benefiting from continued Microsoft 365 momentum. In Surface, the launch of the latest Surface Pro and Surface Laptop devices will drive low double-digit revenue growth on a strong prior year comparable. In Search Xpac, we expect revenue growth similar to Q1. And in gaming, we expect revenue to decline in the mid-20% range driven by lower console sales as we near the end of this generation, as well as the most challenging quarterly comparable and third-party titles from last year.

Amy E. Hood: Now, back to overall company guidance. We expect COGS of $12.45 to $12.65 billion and operating expenses of $10.8 to $10.9 billion. Other income and expense should be approximately $50 million, as interest income is partially offset by interest and financial lease expense.

Amy E. Hood: And finally, we expect our Q2 effective tax rate to be slightly above the full year rate of 17%. Now, let me share some additional comments on the full year. At the company level, we continue to expect double-digit revenue and operating income growth, driven by continued momentum in our commercial business. Given our strong first-quarter results and the expected sales mix for the remainder of the year, we now expect operating margins to be up slightly year over year, even as we continue to invest with significant ambition in high-growth areas. With that, Mike, let's go to Q&A.

Operator: Thank you. We will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Keith Eric Weiss: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And thank you. Our first question comes from the line of Keith Weiss of Morgan's family. Please proceed. Excellent. Thank you for taking the time to answer the question. And a very nice quarter. I was hoping to dig in a little bit into the intelligent cloud business and what you guys are seeing there from a hybrid perspective. And so, maybe one question for Satya and one for Amy.

Satya Nadella: For Satya, can you talk to us a little bit about sort of how these hybrid engagements are kind of rolling out with the larger customers, how they're contracting from them, and any sense you can give us in terms of, in what way do they engage both kind of the on-premise assets as well as the cloud assets? Because I think that's part of the equation that's really positively surprising a lot of investors about how well Server & Tools is doing. And maybe Amy, you could help us understand sort of when we look at Server & Tools up 14% in constant currency, which is well ahead of our expectations, how should we think about the durability of that in terms of what comes from sort of the pull-forward of demand ahead of some, like SQL Server and Windows Server expirations, and what is going to be more durable over time on the back of those pull-forwards?

Satya Nadella: Sure, Keith, thanks for the question. Overall, our approach has always been about this distributed computing fabric or thinking about hybrid computing as not some transitory phase but as a long-term vision for how computing will meet real world needs. Because if you think about the long term, compute will migrate to wherever data is getting generated, and increasingly, there'll be data generated in the real world where just when you think about the cloud, you have to think about the edge of the cloud as a very first-class construct. And so in that context, what we see is a couple of things that you see even in the results today. One type is the hybrid benefit.

Satya Nadella: That is increasingly what is getting customers excited about the Azure choice and the fact that they can renew knowing that they have the flexibility of both the cloud and the edge. That's definitely driving growth. Second, we're also gaining share. When you think about what's happening even at the edge, some of our data center edition products are very competitive in the marketplace. And so you see both of those effects.

Amy E. Hood: But architecturally, we feel well-placed. In fact, at our Ignite conference, you'll see us even take the next leap forward, even in terms of how we think about the architecture, inclusive of the application models, and programming models of what distributed computing looks like going forward. So we feel well-positioned. And Keith, your question on durability, we tried to call out the four points that we felt transactionally were due to the end of support, and that's four of the 12 in USD. And so, but for us, if you step back for a second, the durable trends that Satya just talked about, which is making sure we license in a way that respects this long-term reality of where data and compute will be needed, is what we call the hybrid value proposition. And the rights to that, of course, are inherent in how we report this number.

Amy E. Hood: And so, for us, what you'll see is premium strength, which we saw this quarter in both SQL and Windows because of some of the value proposition of hybrid, and, of course, broad strength as well, when people feel that flexibility to not be constrained by licensing in terms of how they view their estate. Excellent. That's super helpful.

Keith Eric Weiss: Thanks, guys. Thanks, Keith. Operator, we'll take the next question, please. Thank you. Our next question comes from the line of Heather Bellini with Goldman Sachs. Please proceed. Great. Thank you so much. This is a question for Amy.

Heather Bellini: I was just wondering, you've been saying for a while now that you're seeing material improvements in Azure gross margins, and that's obviously hugely benefited commercial cloud gross margins. I'm just wondering if you could share with us how much of the improvement is related to the need to maybe expand data centers at a lower clip than you have been, and maybe it's less depreciation and amortization that you're starting to recognize How much of this is due to just better capacity utilization, then?

Heather Bellini: I'm just trying to get a sense of how much longer you're going to be able to say that for, and have you guys been ratcheting up your target gross margins for Azure over the years to where you think they could be as you look ahead? Thank you.

Amy E. Hood: In general, at the commercial cloud growth margin, what you're seeing is revenue growth that for the past almost two years has been far faster than our capital expenditure growth. So if you start at the top of the frame, what we're seeing is overall growth margin improvement across portfolios and improving, and that comes from a couple of things, which is where you're getting to on Azure. It comes from structural improvement in sort of cost per unit, but it also comes from a shift of revenue to premium services, from being able to sell more SaaS-like services and consumption services or even premium data services that really do have more margin but also are quite consistent in terms of their growth. And you see that as improving targets for us.

Amy E. Hood: But I would say in general, Heather, what the team has done is actually delivered on what I think we felt was a five-year roadmap of improving gross margins on a material basis. Now, as you continue to see the makeshift to the consumption-based Azure services, the overall growth margin has been much, much higher. And we've said that, and you'll continue to see that on a go forward basis as well, but we do continue to expect Azure, especially on the consumption side, gross margins to improve, and they still have room to improve, especially as we start to see some of these premium services both being made available and being utilized at higher rates. Great, thank you.

Heather Bellini: Thanks, Heather. Operator, we'll take the next question, please. Thank you. Our next question comes from the line of Karl Keirstead with Deutsche Bank. Please proceed. Oh, thank you. Amy, I have a question for you.

Karl E. Keirstead: When I look at your next quarter guidance by revenue segment, it seems to equate to an overall revenue growth rate, assuming the midpoint of about 9 to 10%. So when I combine that with the 14% growth you just put up in Q1, it implies that in the second half, overall, Microsoft revenue growth should remain roughly in the 10% zip code to enable you to get to double-digit growth for the full year, despite the fact that you're moving past some fairly key end-of-support milestones. I think some of us were expecting a little bit more of a first-half, second-half delta.

Karl E. Keirstead: So I just wanted to ask you, what are the maybe one or two or three drivers that enable you to sustain that growth rate in the second half? And if it's fair to assume that your guidance doesn't really reflect any deterioration in the overall, you know, spending environment? Thanks a lot.

Amy E. Hood: Yes, I think in general, Karl, a couple of things I would point to are many of the things I talked about in the comments that we prepared. Overall, Q1 was a very strong start commercially from a bookings perspective, with some very strong trends across the board. Whether it is in both the absolute size and number of the Azure commitments that we're seeing, the consistency we're seeing in the consumption growth rates of Azure, the commitments we're seeing to Microsoft 365, some of the signs we're seeing across our dynamics, the power platform, the workflow cloud that Satya referred to, and LinkedIn. It's a good bookings quarter, a good execution quarter on overall contracting value. Renewals were good, recapture rates were good, and new business was good. So, with that confidence, some of those same trends that we had talked about, of course, showed up through the year. And we've tried to be consistent in that, while end of support will make for points here and there each quarter.

Amy E. Hood: The more sustainable trends are the fact that our commercial cloud overall offers significant value and differentiation to customers, and they're making longer-term commitments, and we continue to grow our pool. So when I think about some of the seasonality that you're talking about, Q2, I wanted to be clear that that's really a gaming challenge in Q2, and you see that reflected in the margins in Q2 being significantly better than they were last quarter. And if you think about... About H2, I do expect...

Karl E. Keirstead: I think that's another change you'll see in trajectory in H2 as well. Terrific. Thank you, Amy. Thanks, Karl.

Operator: Operator, we'll take the next question, please. Thank you. Our next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed.

Mark L. Moerdler: Thank you. And Brad, AI is obviously a large focus, and it was a large driver of intelligent cloud OPEX spending growth. Satya, can you give us some more color on where you see Microsoft on the AI journey? And Amy, is this investing way ahead of revenue? Or is AI already driving big revenue for Azure? How should we think about it? No, thanks, Mark.

Satya Nadella: It's a great question, because we look at what's happening with AI having two dimensions to it. One is, I would say, just our own use of AI as first-party SaaS applications. There are some phenomenal breakthroughs when you see new transcription features or new computer vision features that come with HoloLens. All of these are being driven by new AI capabilities that are, by the way, powered by the same cloud infrastructure. We all build everything at Microsoft with first party equals third party, with Azure as the core platform. And so, what you see is, in fact, using our own SaaS applications and consumer innovation even to drive the high-end AI capability, but then bringing the best-in-class tooling for enterprise customers. So, for example, we have innovated even in what DevOps looks like for the machine learning age. That's a unique capability that's there in Azure ML.

Amy E. Hood: And those are the types of innovations that are even driving the projects that enterprise customers have on Azure. So, you'll see us leverage our overall spend, whether it's CapEx or OpEx across all of what Microsoft does, and then surface it in, I think, what is perhaps the best way to get traction in the enterprise market, which is great tooling, compliance, and security, and that's the place where we're making good progress. And so for me, Mark, it's a little bit hard for me to say, gosh, we invest in AI here, and you'll see it specifically here. But what I think you heard through Satya's commentary is actually AI woven through every layer and component of the entire tech stack and how important that is.

Amy E. Hood: Whether you're participating at the Dynamics 365 layer with Insight, or whether you're using components, like some of our customers are, maybe for natural interaction work. And so for me, it is almost fundamental to see that cost and investment, because you'll see it in margin and usage, and, frankly, product differentiation that we can provide versus our competitors, a really good thing. Thanks, Mark.

Brent Thill: Operator, we'll take the next question, please. Thank you. Our next question comes from the line of Brent Thill with Jefferies. Please proceed. Thanks, Amy. There's been a lot of macro concern among tech investors, given some of the peers in your group have seen some weakness. It doesn't seem that you've seen anything, but I'm curious if you could just comment on what you're seeing from a demand perspective.

Brent Thill: Thanks, Brent. What I would say is that for us, it has been so important to remain focused on where growth and opportunity exist and to invest in those areas that are large, expansive, and durable camps. And I think when you think about where we've spent our time both building products, investing in marketing, investing in sales capability, and technical capability, it has been in many, if not all of those places. So, when I look and say, where is our execution, or how do I think about our ability to execute in a macro environment, for me, it is about investing in the right places, executing in a great way, remaining focused on the transition our Satya mentioned a few of them on the call, but there are really many.

Satya Nadella: If you think about security, compliance, communication, workflow, business process reinvention, the list can go on and on. I feel like we have set up a multi-year journey to be well positioned. And I tend to think of every quarter, every year, as an opportunity to continue to differentiate, invest in innovation, and execute well to take share. And so that's, I think, how I've approached that. And I think that's probably the unifying theme, quite frankly, of all the questions so far, which is, what's next? What's next for us is the apps and infra go from perhaps the first inning to the second inning.

Satya Nadella: For data and AI to start the first inning, when it comes to security and compliance, we never participated, and guess what? We get to participate in a fairly competitive way now. We have built something that didn't even exist a few years ago, which is the workflow cloud. That's a huge opportunity for us.

Satya Nadella: With this app, we are a very competitive and growing footprint. Even when you think about something like Microsoft 365, we never participated in spite of our past success with all the first line work, and now we get to participate in it. So I see long-term secular growth opportunities, and we're going to stay focused on making sure our innovation is competitive in all those layers we talked about. Thank you. Thanks, Brent.

Operator: Operator, we'll take the next question, please. Thank you. Our next question comes from the line of Phil Winslow with Wells Fargo. Please proceed.

Phil Winslow: Hey, thanks guys for taking my question, and congrats on another really impressive quarter. Satya, I want to focus on the strategic announcements you talked about earlier in the call, Oracle, VMware, and obviously the most recent one with SAP.

Satya Nadella: Why don't you just walk us through sort of the strategic thoughts behind these? And then also, especially with VMware and Oracle, since those have been out there obviously longer, what's the feedback from customers been? And then, I guess to Amy, how do you think about sort of these big strategic deficits that you're actually showing up in the numbers? Sure, Phil, thanks. So, overall, I think this is, again, one of those things where, in the past, we participated in the infrastructure business, but we had a fairly narrow footprint, which was we had our own infrastructure that supported primarily our databases and our operating systems. Whereas, with the migration to the cloud, customers are looking for us to be a provider of all their infrastructure needs, which is heterogeneous. And that's what has really led us at the infrastructure layer to have partnerships with VMware and Oracle. We, as you know, have first-class support for Windows and Linux, Java and.NET, Postgres and SQL, VMware, Red Hat, as well as obviously Windows Hypervisor.

Satya Nadella: So, I feel that we now have that ability to take the entire infrastructure estate, the entire data estate, and really add value with these partnerships. And SAP represents the same because SAP has got both the infrastructure and the preferred cloud. So, I think it's a fairly no-brainer for any customer who's an SAP customer who wants to accelerate their migration to the cloud and innovation from SAP and us, they should move to Azure. And that's what this announcement was all about. And so, we're really looking forward to essentially executing on that strategy and that customer need that we see very clearly. And Phil, to your question on where would we see this, you'd actually see it in a couple of places, not just in Azure, which may, in fact, be the most logical extension.

Satya Nadella: But at the heart of this is making it easier, faster, and more reliable for us to help customers move their estate to the cloud and migrate that with confidence. And so when we do that, it's about becoming a committed partner. And you actually see that in broader Microsoft Cloud results, whether that's helping, even through these partnerships, to be able to get closer to tier one workloads, and business process changes. And so I actually think these are quite important for us to continue to make sure the first goal is customer-centric, which is why we continue to move in this direction. Thanks, Phil.

Phil Winslow: Thanks, guys. Operator, we'll take the next question, please. Thank you. Our next question comes from a line from Jennifer Lowe with UBS. Please proceed. Great, thank you. I think this is probably an Amy question.

Jennifer Swanson Lowe: As I sort of parse through the dynamics within Office 365 and through the discussion around the sustainability of double-digit growth within the commercial segment, you know, we've seen the seat count decelerate. Also, the uplift on pricing maybe isn't as much this quarter as we saw in the past, which leads me to believe that you are seeing a lot of success on the frontline worker piece, and maybe that's a bigger driver of the seat count from here. But can you just, and at the same time, you're seeing, you know, strong uptake of the premium SKUs as well, but as we think about seat count going forward, how much opportunity is there still left on the migration front of commercial licenses versus leaning a bit more on things like frontline workers to sustain that growth?

Jennifer Swanson Lowe: And is there a point where, you know, potentially, the seat growth and things like Frontline could start to eat further into your ability to continue to lift ARPU on the base you already have? Thanks, Jen. I'll break this question apart, because you're actually asking important dynamics that I don't always think of as trade-offs, and so I want to make that more clear in my answer.

Amy E. Hood: First, to your question on speed growth, we have room even beyond just first-line workers, whether that is our ability in small and mid-sized businesses to reach people trying to accomplish tasks and do their work on devices of any size. This is a very broad opportunity for us to reach people trying to accomplish tasks and do their work on devices of any size, and so there is significant room for us to continue to make progress on that front. Now, could that end up with some ARPU pressure in the long term?

Amy E. Hood: It certainly could. But, important for me, I don't think of that as necessarily being a negative. We used to really make no money through the seats that we just talked about. And so every dollar or multiple dollars or many dollars earned on those new seats is all new revenue, new opportunity, and new socket for us. Let me separate that from the next dynamic, which is why sort of an average number may not be the best indication, which is our ability to continue to move people to higher value seats, whether that's through the addition of really compelling things in security or compliance or communications or collaboration or knowledge or learning, where we can add value. Whether we call that E5 or E3, we have room in that transition as well and new opportunities in a way that I'm not sure I So hopefully, that will help them.

Jennifer Swanson Lowe: Yes, that's great. Thank you. Thanks, Jen.

Operator: Operator, we'll take our last question now, please. Thank you. Our last question will come from the line of Raimo Lenschow with Barclays. Please proceed. Thanks for tuning in. Quick question on Azure.

Raimo Lenschow: If I look at the SAP announcements, but you had some other industry announcements out there as well, like Humana, etc., how do you think about the progress you guys are making there in terms of getting more into the different industries and kind of creating deeper relationships around Azure rather than just doing simple infrastructure outsourcing? Thank you. Yeah, it's a very deliberate strategy that we have.

Satya Nadella: In meeting our customers' needs, we need to have the partners they already work with and want to work with also on our platform. So it sometimes starts with the customers, whether it's Humana or Walgreens or Walmart and others. It also starts with partners like, you know, Nuance, which is another one that we announced recently. And so the idea is for us to be really ensuring that in every industry, we have the right marquee customers as well as partners and have a strong go-to-market. One of the things that everyone, I think, in the marketplace understands is Microsoft, especially from a partner perspective, is a great route to market. We have a platform directly with our sales force as well as our channel that is very attractive to third-party developers to get on Azure, and they realize those benefits.

Satya Nadella: And, in fact, our customers rely on that also as a benefit because it helps them get the best value from their partners as well. Thanks, Raimo. That wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with all of you soon. Thank you. Thank you all. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Hmm.

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