Q3 2024 Microsoft Corp Earnings Call

Operator: Greetings and welcome to the Microsoft Fiscal Year 2024 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brett Iversen, Vice President of Investor Relations.

Greetings and welcome to the Microsoft fiscal year, 2024 third quarter earnings Conference call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Brett Hi person Vice President of Investor Relations.

Brett Iversen: Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chairman and Chief Executive Officer, Amy Hood, Chief Financial Officer, Alice Jha, Chief Accounting Officer, and Keith Dolleber, Corporate Secretary and 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 the reconciliation of differences between GAAP and non-GAAP financial measures.

Brett: Good afternoon, and thank you for joining us today on the call with me are Satya, Nadella, Chairman and Chief Executive Officer, Amy Hood, Chief Financial Officer.

Alice Shaw Chief Accounting Officer.

Brett: Keith Dolliver, corporate Secretary and Deputy General Counsel.

Brett: 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.

Brett Iversen: More detailed Outlook slides will be available on the Microsoft Investor Relations website when we provide Outlook commentary on today's call. On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP.

Brett: Our detailed outlook slides will be available on the Microsoft Investor Relations website, when we provide outlook commentary on today's call.

Brett: On this call we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP.

Brett Iversen: They are included as additional clarifying items to aid investors in further understanding the company's third-quarter performance in addition to the impact these items and events have on the financial results. 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. Where growth rates are the same in constant currency, we'll refer to the growth rate only.

They are included as additional clarifying items to aid investors in further understanding the company's third quarter performance. In addition to the impact these items and events have on the financial results.

Brett: All growth comparisons would make on the call today relate to the corresponding period of last year, unless otherwise noted we.

Brett: We will also provide growth rates in constant currency when available as a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations.

Brett: Growth rates are the same in constant currency, we will refer to the growth rate holding.

Brett Iversen: 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'll be making four looking statements, which are predictions, projections, or other statements about future events.

Brett: We will post our prepared remarks to our website immediately following the call until the complete transcript is available today's.

Brett: Today's call is being webcast live and recorded.

Brett: If you ask a question it will be included in our live transmission in the transcript and in any future use of the recording.

Brett: You can replay the call and view the transcript on the Microsoft Investor Relations website.

Brett: During this call we will be making forward looking statements, which are predictions projections or other statements about future events.

Brett Iversen: 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, in the comments made during this conference call, and in the risk factor section of our Form 10-K, Forms 10-Q, and other reports and filings with the Securities and Exchange Commission. And with that, I'll turn the call over to Satya.

Brett: These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Brett: 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 factors section of our Form 10-K forms 10-Q, and other reports and filings with the Securities and Exchange Commission.

Brett: We do not undertake any duty to update any forward looking statements and with that I'll turn the call over to Satya.

Satya Nadella: Thank you, Brett. It was a record third quarter powered by the continued strength of Microsoft Cloud, which surpassed $35 billion in revenue, up 23%. Microsoft Copilot and the Copilot Stack, spanning everyday productivity, business process, and developer services to models, data, and infrastructure, are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry. Now, I'll highlight examples walking up the stack starting with AI infrastructure. Azure again took share as customers use our platforms and tools to build their own AI solutions. We offer the most diverse selection of AI accelerators, including the latest from NVIDIA, AMD, as well as our own first-party silicon.

Satya Nadella: Thank you Brett It was a record third quarter powered by the continued strength of Microsoft cloud, which surpassed $35 billion in revenue up 23%.

Satya Nadella: Microsoft Co pilot and copilot stack spanning everyday productivity business process and develop a services two models data and infrastructure are orchestrating a new era of AI transformation driving better business outcomes across every role in the industry.

Brett: Now I'll highlight examples walking up the stack starting with the <unk> infrastructure.

Brett: Again took share as customers use our platforms and tools to build their own AI solutions. We offer the most diverse selection of AI accelerators, including the latest from Nvidia AMD as well as our own first party silicon.

Satya Nadella: Our AI innovation continues to build on our strategic partnership with OpenAI. More than 65% of the Fortune 500 now use Azure OpenAI service. We also continue to innovate and partner broadly to bring customers the best selection of frontier models and open source models, LLMs, and SLMs. With 5.3, which we announced earlier this week, we offer the most capable and cost-effective SLM available.

Innovation continues to build on our strategic partnership with opening more than 65% of the Fortune 500, now use Azure open AI service.

Brett: We also continue to innovate and partner broadly to bring customers. The best selection of frontier models and open source models Llm's Vanessa lens with five three which we announced earlier. This week, we offer the most capable and cost effective SLM available. It is already being trialed by companies like call minor LTI.

Satya Nadella: It's already being trialed by companies like CallMiner, LTI, Mindtree, PwC, and TCS. Our models as a service offering makes it easy for developers to use LLMs and SLMs without having to manage any underlying infrastructure. Hundreds of paid customers, from Accenture and EY to Schneider Electric, are using it to take advantage of API access to third-party models, including, as of this quarter, the latest from Cohere, Meta, and Mistral. And as part of a partnership announced last week, G42 will run its AI applications and services on our cloud.

Brett: <unk> tree Pwc and Tcs are models as a service offering makes it easy for developers to use <unk> and SLM without having to manage any underlying infrastructure.

Brett: <unk> paid customers from Accenture and UI to Schneider electric are using it to take advantage of API access to third party models, including as of this quarter. The latest from meta and Mistral and as part of a partnership announced last week G 42 will run its AI applications and services on a cloud.

Satya Nadella: All up, the number of Azure AI customers continues to grow, and average spend continues to increase. We also saw an acceleration of revenue from migrations to Azure. Azure Arc continues to help customers like Dick's Sporting Goods and the World Bank streamline their cloud migration.

Brett: All up the number of Azure AI customers continues to grow and average spend continues to increase.

Brett: You also saw an acceleration of revenue from migration strategy Azure arc continues to help customers like Dick's sporting goods and World Bank streamline the cloud migrations arc now has 33000 customers up over two X year over year.

Satya Nadella: Arc now has 33,000 customers, up over 2x year-over-year, and we are the hyperscale platform of choice for SAP and Oracle workloads, with Conduit and Medline moving their on-premise Oracle estates to Azure, and Kendral and L'Oreal migrating their SAP workloads to Azure. Overall, we are seeing an acceleration in the number of large Azure deals from leaders across industries, including billion-dollar-plus multi-year commitment The number of $100 million-plus Azure deals increased over 80% year-over-year, while the number of $10 million-plus deals more than doubled.

Brett: And we are the Hyperscale platform of choice for SAP, and Oracle workloads with conduit and Medline moving their on premise Oracle estates to Azure and Kendall and l'oreal migrating their S&P workloads to Azure.

Brett: Overall, we are seeing an acceleration in the number of large azure deals from leaders across industries, including $1 billion plus multi year commitments announced this month from cloud software group and the Coca Cola company, the number of $100 million plus azure deals increased over 80% year over year.

Brett: While the number of 10 million dollar plus deals more than doubled.

Satya Nadella: Now on to data and analytics. Our Microsoft Intelligent Data Platform provides customers with the broadest capability, spanning databases, analytics, business intelligence, governance, and AI. Over half of our Azure AI customers also use our data and analytics tools. Customers are building intelligent applications running on Azure, PostgreSQL, and Cosmos DB with deep integrations with Azure AI. TomTom is a great example.

Brett: Now on to data and analytics.

Brett: Microsoft Intelligent data platform provides customers with the broadest capability spanning databases analytics business intelligence governance, and AI over half of our Azure AI customers also use our data and analytics tools customers are building intelligent applications running on Azure postscript sequel, and Cosmos DB would deepen.

Brett: Integrations with Azure AI, Tom Tom is a great example, the views Cosmos DB, along with Azure opening I service to build their own immersive in car infotainment system.

Satya Nadella: They've used Cosmos DB along with Azure OpenAI Service to build their own immersive in-car infotainment system. We are also encouraged by our momentum with our next-generation analytics platform, Microsoft Fabric. Fabric now has over 11,000 paid customers, including leaders in every industry, from ABB, EDP, energy transfer to Equinor, FootLocker, Itochut, and Lumen, and we are seeing increased usage intensity. Fabric is seamlessly integrated with Azure AI Studio, meaning customers can run models against enterprise data that's consolidated in Fabric's multi-cloud data lake, OneLake.

Brett: We were also encouraged by our momentum with our next generation analytics platform, Microsoft fabric fabric now has over 11000 paid customers, including leaders in every industry from ABB Edp energy transfer to Ecuador, Footlocker, It all chewed and movement and we are seeing increased usage.

Brett: Intensity.

Brett: Fabric is seamlessly integrated with Azure AI studio, meaning customers can run models against enterprise data that's consolidated in fabrics multi cloud data Lake one Lake and power Bi which is also natively integrated with fabric provides business users with AI powered insights we now have over 350.

Satya Nadella: And Power BI, which is also natively integrated with Fabric, provides business users with AI-powered insights. We now have over 350,000 paid customers.

Brett: <unk> thousand paid customers.

Brett: Now onto developers get up co pilot is bending the productivity curve for developers.

Satya Nadella: GitHub Copilot is bending the productivity curve for developers. We now have 1.8 million paid subscribers with growth accelerating to over 35% quarter over quarter and continues to see increased adoption from businesses in every industry, including Itaou, Lufthansa Systems, Nokia, Pinterest, and Volvo Cars. Copilot is driving growth across the broader GitHub platform too. AT&T, Citigroup, and Honeywell all increased their overall GitHub usage after seeing productivity and code quality increases with Copilot. All up, more than 90% of the Fortune 100 are now GitHub customers, and revenue accelerated over 45% year over year.

Brett: We now have 1.8 million paid subscribers with growth accelerating to over 35% quarter over quarter and continues to see increased adoption from businesses in every industry, including Utah, Lufthansa systems, Nokia Pinterest and Volvo cars copilot is driving growth across the broader github.

Brett: Platform to AT&T, Citigroup and Honeywell all increased their overall get up usage after seeing productivity and good quality increases with copilot, all up more than 90% of the fortune 100 are now get up customers and revenue accelerated over 45% year over year.

Satya Nadella: Anyone can be a developer with new AI-powered features across our low-code, no-code tools, which makes it easier to build an app, automate workflow, or create a copilot using natural language. 30,000 organizations across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter-over-quarter. Cineplex, for example, built a copilot for customer service agents, reducing query handling time from as much as 15 minutes to 30 seconds.

Brett: Anyone can be a developer with new AI powered features across a low code no code tools, which makes it easier to build an app automate workflow or create a copilot using natural language 30000 organizations across every industry have used copilot studio to customized co pilot for Microsoft 365 or <unk>.

Brett: Build their own up 175% quarter over quarter.

Brett: Cineplex for example, built a copilot for customer service agents, reducing quarry handling time from as much as 15 minutes to 30 seconds, all up over 330000 organizations, including over half of Fortune 100 have used AI powered capabilities in power platform and power apps now has over 25.

Satya Nadella: All up, over 330,000 organizations, including over half of the Fortune 100, have used AI-powered capabilities in Power Platform, and Power Apps now has over 25 million monthly active users, up over 40% year-over-year. Now on to the future of work. We are seeing AI democratize expertise across the workforce. What inventory turns are to the efficiency of supply chains, knowledge turns, the creation and diffusion of knowledge, are to the productivity of an organization.

Brett: 5 million monthly active users up over 40% year over year.

Brett: Now onto future of work, we are seeing AI democratize expertise across the workforce, what inventory dawns ought to efficiency of supply chains knowledge dawns, the creation and diffusion of knowledge at the productivity of an organization and copilot for Microsoft 365 is helping.

Satya Nadella: And Copilot for Microsoft 365 is helping increase knowledge turns. That's having a cascading effect, changing work, work artifacts, and workflows and driving better decision-making, collaboration, and efficiency. This quarter, we made Copilot available to organizations of all types and sizes, from enterprises to small businesses. Nearly 60% of the Fortune 500 now use Copilot, and we have seen accelerated adoption across industries and geographies with companies like Amgen, BP, Cognizant, Koch Industries, Moody's, Nova Nordisk, NVIDIA, and Tech Mahindra purchasing over 10,000 seats.

Brett: <unk> knowledge tons.

Brett: Having a cascading effect changing work woke artifacts and workflows and driving better decision, making collaboration and efficiency. This quarter, we made copilot available to organizations of all types and sizes from enterprises to small businesses nearly 60% of the fortune 500, now use copilot and we've seen it.

Brett: Celebrated adoption across industries and geographies with companies like Amgen BP cognizant Koch industries, Moody's Novo Nordisk, Nvidia and tech Mahindra purchasing over 10000 seats.

Satya Nadella: We're also seeing increased usage intensity from early adopters, including a nearly 50% increase in the number of Copilot-assisted interactions per user in Teams, bridging group activity with business process workflows and enterprise knowledge. And we're not stopping there.

Brett: We're also seeing increased usage intensity from early adopters, including a nearly 50% increase in the number of copilot assisted interactions for us up in teams.

Brett: Bridging group activity with business process workflows and enterprise knowledge.

Brett: And we're not stopping there we are accelerating our innovation, adding over 150 copilot capabilities since the start of the year with copilot and dynamics 365, we are helping businesses transform every role in business function as we take share with our AI powered apps across all categories. This quarter, we made a copilot for service and copilot for sales.

Satya Nadella: We're accelerating our innovation, adding over 150 Copilot capabilities since the start of the year. With Copilot and Dynamics 365, we're helping businesses transform every role and business function as we take share with our AI-powered apps across all categories. This quarter, we made our Copilot for Service and Copilot for Sales broadly available, helping customer service agents and sellers at companies like Land O'Lakes, Northern Trust, Rockwell Automation, and Toyota Group generate role-specific insights and recommendations from across Dynamics 365 and Microsoft 365, as well as third-party platforms like Salesforce, ServiceNow, and Zendesk.

Brett: Broadly available, helping customer service agents and sellers at companies like land O' Lakes, Northern Trust Rockwell automation and Toyota group generate role specific insights and recommendations from our cross dynamics 365, and Microsoft 365, as well as third party platforms like Salesforce service, now and Zen desk and with a cold.

Satya Nadella: And with our Copilot for Finance, we are drawing context from Dynamics as well as ERP systems like SAP to reduce labor-intensive processes like collections and contract and invoice capture for companies like Dentsu and IDC. ISVs are also building their own Copilot integrations. For example, new integrations between Adobe Experience Cloud and Copilot will help marketers access campaign insights in the flow of their work. When it comes to devices, Copilot for Windows is now available on nearly 225 million Windows 10 and Windows 11 PCs, up 2x quarter over quarter.

Brett: Pilot for finance, we are drawing context from dynamics as well as ERP systems like S. B.

Brett: To reduce labor intensive processes like collections in contract and invoice capture for companies like Dentsu and IDC.

Brett: I assume these are also building their own copilot integrations for example, new integrations between Adobe experience cloud and Copilot will help marketeers access campaign insights in the floor of their work.

Brett: It comes through devices Copilot and Windows is now available on nearly 225 million Windows 10, Windows 11, Pcs up to X quarter over quarter with copilot, we have an opportunity to create an entirely new category of devices purpose built for this new generation of AI all of our largest store.

Satya Nadella: With Copilot, we have an opportunity to create an entirely new category of devices, purpose-built for this new generation of AI. All of our largest OEM partners have announced AI PCs in recent months, and this quarter, we introduced new Surface devices that include integrated NPUs to power on-device AI experiences like auto-framing and live captioning. And there's much more to come in just a few weeks.

Brett: M partners have announced AI Pcs in recent months and this quarter, we introduced new surface devices, which includes integrated and be used to power on device AI experiences like auto framing and life captions.

Brett: And there's much more to come in just a few weeks, we will hold a special event to talk about our AI vision across windows and devices.

Satya Nadella: We'll hold a special event to talk about our AI vision across windows and devices. When it comes to Teams, we once again saw year-over-year usage growth. We're rolling out a new version which is up to two times faster while using 50% less memory to all customers.

Brett: When it comes to teams we once again saw euro we usage growth, we're rolling out a new version, which is up to two times faster, while using 50% less memory to all customers. We surpassed 1 million teams rooms for the first time as we continue to make hybrid meetings better with new AI.

Satya Nadella: We surpassed 1 million Teams rooms for the first time as we continue to make hybrid meetings better with new AI-powered features like automatic camera switching and speaker recognition. And Teams Phone continues to be the market leader in cloud calling, now with over 20 million PSTN users, up nearly 30% year-over-year. All of this innovation is driving growth across Microsoft 365; companies across the private and public sectors, including Amadeus, BlackRock, Chevron, Ecolab, Kimberly Clark, all chose our premium E5 offerings this quarter for advanced security, compliance, voice, and analytics.

Brett: Powered features like automatic camera switching and speaker recognition.

Brett: And teams phone continues to be the market leader in cloud, calling now with over 20 million PSTN users up nearly 30% year over year.

Brett: All of this innovation is driving growth across Microsoft 365 companies across the private and public sector, including Amadeus Blackrock Chevron Ecolab, Kimberly Clark all chose our premium <unk> offerings this quarter for advanced security compliance voice and analytics.

Satya Nadella: Now on to industry and cross-industry clouds. We are also bringing AI power transformation to every industry. In healthcare, DAX Copilot is being used by more than 200 healthcare organizations, including Providence, Stanford Healthcare, and WellSpan Health. And in manufacturing this week at Hanover Massey, customers like BMW, Siemens, and Volvo Penta shared how they're using our cloud and AI solutions to transform factory operations. Now on to security.

Brett: Now on to industry and cross industry clouds.

Brett: We're also bringing AI powered transformation to every industry in healthcare Dax co pilot is being used by more than 200 healthcare organizations, including Providence, Stanford health care, and well span health and in manufacturing this week at Hanover, Massa customers like BMW, Siemens and Volvo Penta shared how.

Brett: They're using our cloud and AI solutions to transform factory operations.

Brett: Now on to security.

Satya Nadella: Security underpins every layer of the tech stack, and it's our number one priority. We launched our Secure Future Initiative last fall for this reason, bringing together every part of the company to advance cybersecurity protection. And we are doubling down on this very important work, putting security above all else, before all other features and investments. We are focused on making continuous progress across the six pillars of this initiative as we protect tenants and isolate production systems, protect identities and secrets, protect networks, protect engineering systems, monitor and detect threats, and accelerate responses and remediation.

Brett: Security underpins every layer of the tech stack and it's our number one priority we launched our secure future initiative last fall for this reason, bringing together every part of the company to advance cyber security protection and we are doubling down on this very important work putting security about all else before all other features and.

Brett: The investments we are focused on making continuous progress across the six pillars of this initiative as we protect tenants and isolate production systems protect the identities and secrets protect networks protect engineering systems monitor and detect threats and accelerate responses and remediation.

Satya Nadella: We remain committed to sharing our learnings, tools, and innovation with customers. A great example is Copilot for Security, which we made generally available earlier this month, bringing together LLMs with domain-specific skills informed by our threat intelligence and 78 trillion daily security signals to provide security teams with actionable insights.

Brett: We remain committed to sharing our learnings tools and innovation with customers a great example, as copilot with security, which we made generally available earlier this month, bringing together llm's with domain specific skills informed by our threat intelligence and 78 trillion daily security signals to provide security teams.

Brett: With actionable insights now.

Satya Nadella: Now, let me talk about our consumer businesses, starting with LinkedIn. We continue to combine our unique data with this new generation of AI to transform the way members learn, sell, and get hired. Features like LinkedIn AI Assisted Messages are seeing a 40% higher acceptance rate and are accepted over 10% faster by job seekers, saving hirers time and making it easier to connect them to candidates.

Satya Nadella: Now, let me talk about our consumer businesses, starting with linked in.

Brett: We continue to combine our unique data with this new generation of AI to transform the way members lung cell and get Hyatt features like Linkedin AI assisted messages are seeing a 40% higher acceptance rate and accepted over 10% faster by job seekers, saving hires time, and making it easier to connect them.

Brett: Two candidates.

Satya Nadella: Our AI-powered collaborative articles, which have reached over 12 million contributions, are helping increase engagement on the platform, which reached a new record this quarter. New AI features are also helping accelerate LinkedIn premium growth, with revenue up 29% year-over-year, and we are also seeing strength across our other businesses, with hiring taking share for the seventh consecutive quarter. Now on to search advertising and news. We once again took share across Bing and Edge as we continue to apply this new generation of AI to transform how people search and browse.

Brett: Our AI powered collaborative articles, which has reached over 12 million contributions are helping increase engagement on the platform, which reached a new record. This quarter. New AI features are also helping accelerate linkedin premium growth with revenue up 29% year over year, and we're also seeing strength across other businesses with hiring.

Brett: Sure for the seventh consecutive quarter.

Brett: Now on to search advertising and news, we once again took share across being an edge as we continue to apply this new generation of AI to transform how people search and browse being reached over 140 million daily active users and we are particularly encouraged by our momentum in mobile a free copilot apps on iOS and Android.

Satya Nadella: Bing reached over 140 million daily active users, and we are particularly encouraged by our momentum in mobile. Our free Copilot apps for iOS and Android saw a surge in downloads after our Super Bowl ad and are among the highest rated in this category. We also rolled out Copilot to our ad platform this quarter, helping marketers use AI to generate recommendations for product images, headlines, and descriptions.

Brett: A surge in downloads after a Super Bowl AD and are among the highest rated in this category. We also rolled out copilot to our AD platform. This quarter, helping market deals use AI to generate recommendations for product images headlines and descriptions.

Satya Nadella: Now on to gaming. We are committed to meeting players where they are by bringing great games to more people on more devices. We set third-quarter records for game streaming hours, console usage, and monthly active devices. And last month, we added our first Activision Blizzard title, Diablo 4, to our Game Pass service. Subscribers played over 10 million hours within the first 10 days, making it one of our biggest first-party Game Pass launches ever.

Brett: Now on to gaming.

Brett: We are committed to meeting players, where they are by bringing great games to more people on more devices. We set third quarter records for game streaming hours console usage and monthly active devices.

Satya Nadella: And last month, we added our first Activision Blizzard title Diablo four to a game power service subscribers played over 10 million hours within the first 10 days, making it one of our biggest first party game pass launches ever.

Satya Nadella: We are also encouraged by the ongoing success of Call of Duty's Modern Warfare 3, which is attracting new gamers and retaining franchise loyalists. Finally, we are expanding our games to new platforms, bringing four of our fan-favorite titles to Nintendo Switch and Sony PlayStation for the first time. In fact, earlier this month, we had seven games among the top 25 on the PlayStation Store, more than any other publisher. In closing, I'm energized about our opportunity ahead as we innovate to help people and businesses thrive in this new era. With that, let me turn it over to Amy.

Brett: We were also encouraged by ongoing success of call of duty modern warfare, three which is attracting new gamers and retaining franchise loyalists.

Brett: Finally, we are expanding our games through new platforms, bringing four of our fan favorite titles to Nintendo switch and Sony Playstation for the first time in fact earlier. This month, we have seven games among the top 25 on the Playstation store more than any other publisher.

Satya Nadella: In closing I'm energized about our opportunity ahead, as we innovate to help people and businesses thrive in this new era with that let me turn it over to Amy <unk>.

Amy E. Hood: Thank you, Satya, and good afternoon, everyone. Our third-quarter revenue was $61.9 billion, up 17%, and earnings per share were $2.94, up 20%. Results exceeded expectations, and we delivered another quarter of double-digit top and bottom line growth, with continued share gains across many of our businesses. In our commercial business, bookings increased 29% and 31% in constant currency significantly ahead of expectations, driven by Azure commitments with an increase in average deal size and deal length, as well as strong execution across our core annuity sales operations. In Microsoft 365, SuiteStrength contributed to ARPU expansion for our Office commercial business.

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

Amy E. Hood: Our third quarter revenue was $61 $9 billion up 17% and earnings per share was $2 94 up 20% results exceeded expectations and we delivered another quarter of double digit top and bottom line growth with continued share gains across many of our businesses.

Amy E. Hood: In our commercial business bookings increased 29% and 31% in constant currency significantly ahead of expectations driven by Azure commitments with an increase in average deal size and deal length as well as strong execution across our core annuity sales motions.

Amy E. Hood: Microsoft 365 suite strength contributed to our two expansion for our office commercial business, although new business growth continued to moderate for Standalone products sold outside the Microsoft 365 suite.

Amy E. Hood: Although new business growth continued to moderate, for standalone products sold outside the Microsoft 365 Suite, the commercial remaining performance obligation increased 20% and 21% in constant currency to $235 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 20% year-over-year. The remaining portion, recognized beyond the next 12 months, increased 21%.

Amy E. Hood: Commercial remaining performance obligation increased 20% and 21% in constant currency to $235 billion.

Amy E. Hood: 45% will be recognized in revenue in the next 12 months up 20% year over year. The remaining portion recognized beyond the next 12 months increased 21%.

Amy E. Hood: And this quarter, our annuity mix increased to 97%. In our consumer business, PC market demand was slightly better than we expected, benefiting Windows OEM, while advertising spend landed relatively in line with our expectations. In gaming, we also saw better-than-expected performance of Activision titles, benefiting Xbox content and services. At a company level, Activision contributed a net impact of approximately 4 points to revenue growth with a 2 point drag on operating income growth and had a negative 4 cent impact on earnings per share. A reminder that this net impact includes adjusting for the movement of Activision content from our prior relationship as a third-party partner to first-party and also includes $935 million from purchase accounting adjustments, integration, and transaction-related costs.

Amy E. Hood: This quarter, our annuity mix increased to 97%.

Amy E. Hood: In our consumer business PC market demand was slightly better than we expected benefiting windows OEM.

Amy E. Hood: <unk> spend landed relatively in line with our expectations.

Amy E. Hood: <unk>, we also saw better than expected performance of Activision titles benefiting Xbox content and services.

Brett: At a company level Activision contributed a net impact of approximately four points to revenue growth was a two point drag on operating income growth and had a negative <unk> <unk> impact to earnings per share.

Brett: A reminder, that this is.

Brett: Net impact include suggesting kind of movement of Activision content from our prior relationship as a third party partner to first party and also includes $935 million from purchase accounting adjustments integration and transaction related costs.

Amy E. Hood: FX did not have a significant impact on our results and was roughly in line with our expectations for total company revenue, segment level revenue, COGS, and operating expense growth. Microsoft Cloud revenue was $35.1 billion and grew 23%, ahead of expectations. Microsoft Cloud gross margin percentage decreased slightly year over year to 72%, a bit better than expected. However, excluding the impact of the change in accounting estimate for useful lives, gross margin percentage increased slightly, driven by improvement in Azure and Office 365, even with the impact of scaling our AI infrastructure, partially offset by sales makeshift to Azure.

Amy E. Hood: FX did not have a significant impact on our results and was roughly in line with our expectations on total company revenue segment level revenue Cogs and operating expense growth.

Amy E. Hood: Microsoft Cloud revenue was $35 $1 billion and grew 23% ahead of expectations Micros.

Brett: Microsoft Cloud gross margin percentage decreased slightly year over year to 72% a bit better than expected.

Brett: Excluding the impact of the change in accounting estimate for useful lives gross margin percentage increased slightly driven by improvement in Azure and office 365, even with the impact of scaling our AI infrastructure, partially offset by sales mix shift to Azure company gross margin dollars increased 18% and gross margin percentage increased slightly year over year.

Amy E. Hood: Company gross margin dollars increased 18%, and gross margin percentage increased slightly year over year to 70%. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly one point, even with the impact of the purchase accounting adjustments, integration, and transaction-related costs from the Activision acquisition. Growth was driven by the improvement in Azure and Office 365, just mentioned, as well as a shift to higher-margin businesses. Operating expenses increased 10% with 9 points from the Activision acquisition. At a total company level, the headcount at the end of March was 1% lower than a year ago.

Amy E. Hood: 70%, excluding the impact of the change in accounting estimate gross margin percentage increased roughly one point, even with the impact from the purchase accounting adjustments integration and transaction related costs from the Activision acquisition.

Brett: Growth was driven by the improvement in Azure and office 365, just mentioned as well as sales mix shift to higher margin businesses.

Brett: Operating expenses increased 10% with nine points from the Activision acquisition at a total company level head count at the end of March was 1% lower than a year ago.

Amy E. Hood: Operating income increased 23%, and operating margins increased roughly 2 points year-over-year to 45%. Excluding the impact of the change in accounting estimate, operating margins increased roughly three points, driven by the higher gross margin noted earlier and improved operating leverage through continued cost discipline. Now to our segment results.

Brett: Operating income increased 23% and operating margins increased roughly two points year over year to 45% exclude.

Brett: Excluding the impact of the change in accounting estimate operating margins increased roughly three points driven by the higher gross margin noted earlier and improved operating leverage through continued cost discipline.

Speaker Change: Now to our segment results.

Amy E. Hood: Revenue from productivity and business processes was $19.6 billion and grew 12% and 11% in constant currency, in line with expectations. Office commercial revenue grew 13% and 12% in constant currency. Office 365 commercial revenue increased 15% in line with expectations, driven by healthy renewal execution, ARPU growth from continued E5 momentum, and early Copilot for Microsoft 365 progress. Paid Office 365 commercial seats grew 8% year over year with installed base expansion across all customer segments. Seek Growth was again driven by our small and medium business and frontline worker offerings, although growth continued to moderate in SMB.

Brett: From productivity and business processes was $19 $6 billion and grew 12% and 11% in constant currency in line with expectations.

Brett: Office commercial revenue grew 13% and 12% in constant currency office 365, commercial revenue increased 15% inline with expectations driven by healthy renewal execution ARPA growth from continued <unk> momentum and early copilot for Microsoft 365 progress.

Brett: Paid off the 365 commercial seats grew 8% year over year with installed base expansion across all customer segments.

Brett: Growth was again, driven by our small and medium business and frontline worker offerings, although growth continued to moderate and F&B.

Amy E. Hood: Office commercial licensing declined 20% and 18% in constant currency with continued customer shift to cloud offerings. Office Consumer revenue increased 4%, slightly below expectations. Microsoft 365 subscriptions grew 14% to $80.8 million. LinkedIn revenue increased 10% and 9% in constant currency, ahead of expectations, driven by slightly better than expected performance in our premium subscriptions and Talent Solutions businesses. However, in Talent Solutions, bookings growth continues to be impacted by the weaker hiring environment and key verticals.

Brett: Office commercial licensing declined 20% and 18% in constant currency with continued customer shift to cloud offerings.

Brett: Office consumer revenue increased 4% slightly below expectations, Microsoft 365, subscriptions grew 14% to $80 8 million.

Brett: <unk> revenue increased 10% and 9% in constant currency.

Brett: Ahead of expectations, driven by slightly better than expected performance in our premium subscriptions and talent solutions businesses.

Brett: However, and talent solutions bookings growth continues to be impacted by the weaker hiring environment in key verticals.

Amy E. Hood: Dynamics revenue grew 19% and 17% in constant currency ahead of expectations.

Amy E. Hood: Dynamics revenue grew 19% and 17% in constant currency ahead of expectations. Growth was driven by Dynamics 365, which grew 23% and 22% in constant currency, with continued growth across all workloads and better-than-expected new business, although bookings growth remains moderated. Segment gross margin dollars increased 11%, and gross margin percentage decreased slightly year over year. However, excluding the impact of the change in accounting estimate, gross margin percentage increased slightly, driven by improvement in Office 365. Operating expenses increased 1%, and operating income increased 17% and 16% in constant currency. Next, the Intelligent Cloud segment.

Brett: What's driven by dynamics, 365, which grew 23% to 22% in constant currency with continued growth across all workloads.

Brett: And better than expected new business, although bookings growth remains moderate it segment gross margin dollars increased 11% and gross margin percentage decreased slightly year over year, excluding the impact of the change in accounting estimate gross margin percentage increased slightly driven by improvement in office 365 operating expenses increased one.

Brett: Percent and operating income increased 17% and 16% in constant currency.

Brett: Next the intelligent cloud segment.

Amy E. Hood: Revenue was $26 $7 billion, increasing 21% ahead of expectations with better than expected results across all businesses.

Amy E. Hood: Overall server products and cloud services revenue grew 24% Azure and other cloud services revenue grew 31% ahead of expectations, while our AI services contributed seven points of growth as expected.

Amy E. Hood: Revenue was $26.7 billion, increasing 21%, ahead of expectations with better than expected results across all businesses. Overall, server products and cloud services revenue grew 24%, Azure and other cloud services revenue grew 31%, ahead of expectations, while our AI services contributed seven points of growth, as expected. In the non-AI portion of our consumption business, we saw greater than expected demand broadly across industries and customer segments, as well as some benefit from a greater than expected mix of contracts with higher in-period recognition.

Brett: And then non AI portion of our consumption business, we saw greater than expected demand broadly across industries and customer segments as well as some benefit from a greater than expected mix of contracts with higher in periodic recognition.

Brett: In our per user business, the enterprise mobility and security installed base grew 10% to over 274 million seats with continued impact from the growth trends in new Standalone business noted earlier.

Brett: And our on premises server business revenue increased 6% ahead of expectations driven by better than expected renewal strength, particularly for contracts with higher in period revenue recognition enterprise and partner services revenue decreased 9% on a strong prior year comparable for enterprise support services.

Amy E. Hood: In our per user business, the enterprise mobility and security install base grew 10% to over 274 million seats with continued impact from the growth trends and new standalone business noted earlier. In our on-premises server business, revenue increased 6%, ahead of expectations, driven by better-than-expected renewal strength, particularly for contracts with higher end-period revenue recognition. Enterprise and partner services revenue decreased 9%, on a strong prior year comparable, for enterprise support services.

Amy E. Hood: Segment gross margin dollars increased 20% and gross margin percentage decreased slightly year over year.

Brett: Putting the impact of the change in accounting estimate.

Brett: Percentage increased slightly primarily driven by the improvement in Azure noted earlier, even with the impact of scaling our AI infrastructure, partially offset by sales mix shift to azure.

Brett: Operating expenses increased 1% and operating income grew 32%.

Amy E. Hood: Segment Gross Margin dollars increased 20%, and Gross Margin Percentage decreased slightly year-over-year, including the impact of the change in accounting estimates. However, percentage increased slightly, primarily driven by the improvement in Azure noted earlier, even with the impact of scaling our AI infrastructure, partially offset by sales makeshift to Azure. Operating expenses increased 1%, and operating income grew 32%. Now, to more personal computing.

Brett: Now to more personal computing.

Amy E. Hood: Revenue was $15 $6 billion, increasing 17% with 15 points of net impact from the Activision acquisition.

Brett: Results were above expectations, driven by better than expected performance in gaming and Windows OEM.

Brett: When does the OEM revenue increased 11% year over year ahead of expectations, primarily driven by the slightly better PC market noted earlier as well as mix shift to higher monetizing markets.

Amy E. Hood: Revenue was $15.6 billion, increasing 17%, with 15 points of net impact from the Activision acquisition. Results were above expectations, driven by better than expected performance in gaming and Windows OEM. Windows OEM revenue increased 11% year-over-year ahead of expectations, primarily driven by the slightly better PC market noted earlier, as well as a shift to higher-monetizing markets. Windows Commercial Products and Cloud Services revenue increased 13% and 12% in constant currency, below expectations, with impact from the growth trends in new standalone business noted earlier, as well as lower in-period revenue recognition from the mix of contracts. Devices revenue decreased 17% and 16% in Overall, surface demand was slightly lower than expected.

Brett: Windows commercial products and cloud services revenue increased 13% and 12% in constant currency below expectations with impact from the growth trends in new Standalone business noted earlier as well as lower in period revenue recognition from a mix of contracts.

Brett: Devices revenue decreased 17% and 16% in constant currency as we remained focused on our higher margin premium products overall surface demand was slightly lower than expected.

Brett: Search and news advertising revenue ex Tac increased 12% head of expectations with continued volume growth and increased engagement on being at the edge.

Brett: And in gaming revenue increased 51% and 50% in constant currency with 55 points of net impact from the acquisition acquisition results were ahead of expectations, primarily driven by call of duty.

Amy E. Hood: Xbox content and services revenue increased 62% and 61% in constant currency with 61 points of net impact from the Activision acquisition.

Amy E. Hood: Search and news advertising revenue XTAC increased 12% ahead of expectations with continued volume growth and increased engagement on Bing and Edge, and in gaming. Revenue increased 51% and 50% in constant currency with 55 points of net impact from the Activision acquisition. Results were ahead of expectations, primarily driven by Call of Duty. Xbox content and services revenue increased 62% and 61% in constant currency with 61 points of net impact from the Activision acquisition. Xbox hardware revenue decreased 31% and 30% in constant currency.

Brett: Xbox hardware revenue decreased 31% and 30% in constant currency.

Brett: Segment gross margin dollars increased 27% to 26% in constant currency with 13 points of net impact from the Activision acquisition gross margin percentage increase roughly four points year over year, primarily driven by sales mix shift to higher margin businesses operating expenses increased 41% with 43 points from the Activision.

Brett: Acquisition operating income increased 16% and 15% in constant currency now to total company results capital expenditures, including finance leases were $14 billion to support our cloud demand inclusive of the need to scale, our AI infrastructure cash paid for PP&E was $11 billion cash flow.

Amy E. Hood: Segment gross margin dollars increased 27% to 26% in constant currency with 13 points of net impact from the Activision acquisition. Gross margin percentage increased roughly 4 points year over year, primarily driven by a sales mix shift to higher margin businesses. Operating expenses increased 41% with 43 points from the Activision acquisition.

Amy E. Hood: From operations was $31 $9 billion up 31% driven by strong cloud billings and collections free cash flow was once your $1 billion up 18% year over year, reflecting higher capital expenditures to support our cloud and AI offerings. This quarter other income and expense was negative $854 million.

Amy E. Hood: Operating income increased 16% and 15% in constant currency. Now, back to total company results. Capital expenditures, including finance leases, were $14 billion to support our cloud demand, inclusive of the need to scale our AI infrastructure. Cash paid for PP&E was $11 billion.

Amy E. Hood: Lower than anticipated driven by losses on investments accounted for under the equity method.

Brett: Our effective tax rate was approximately 18%.

Amy E. Hood: And finally, we returned $8 $4 billion to shareholders through dividends and share repurchases.

Amy E. Hood: Cash flow from operations was $31.9 billion, up 31%, driven by strong cloud billings and collections. Free cash flow was $21 billion, up 18% year over year, reflecting higher capital expenditures to support our cloud and AI offerings. This quarter, other income expense was negative $854 million, lower than anticipated, driven by losses on investments accounted for under the equity method.

Amy E. Hood: Now moving to our Q4 outlook, which unless specifically noted otherwise is on a U S dollar basis.

Brett: First FX.

Amy E. Hood: Just on current rates, which reflect the recent strengthening of the U S. Dollar. We now expect FX to decrease total revenue and segment level revenue growth by less than one point when compared to our January guide for Q4 FX. This is a decrease to total revenue of a roughly $700 million, we expect FX to decrease Cogs growth by approximately one point.

Brett: And operating expense growth by less than one point and commercial bookings, we expect solid growth on a relatively flat expiry base driven by continued strong commercial sales execution. As a reminder, larger long term azure contracts, which are more unpredictable and their timing can drive increased quarterly volatility in our bookings growth rate.

Amy E. Hood: Our effective tax rate was approximately 18%. And finally, we returned $8.4 billion to shareholders through dividends and share repurchases. Now, moving to our Q4 Outlook, which, unless specifically noted otherwise, is on a U.S. dollar basis. First, FX.

Amy E. Hood: Croissant cloud gross margin percentage should decrease roughly two points year over year.

Amy E. Hood: Based on current rates, which reflect the recent strengthening of the U.S. dollar, we now expect FX to decrease total revenue and segment-level revenue growth by less than one point. When compared to our January guide for Q4 FX, this is a decrease in total revenue of roughly $700 million. We expect FX to decrease COGS growth by approximately 1 point and operating expense growth by less than 1 point. In commercial bookings, we expect solid growth on a relatively flat expiry base, driven by continued strong commercial sales execution.

Amy E. Hood: Excluding the impact from the change in accounting estimate Q4 cloud gross margin percentage will be down slightly as improvement in azure inclusive of scaling our AI infrastructure will be offset by sales mix shift to azure.

Amy E. Hood: We expect capital expenditures to increase materially on a sequential basis, driven by cloud and AI infrastructure investments as a reminder, there can be normal quarterly spend variability and the timing of our cloud infrastructure build out and the timing of finance leases, we continue to bring capacity online as we scale our AI investments.

Brett: Growing demand currently near term AI demand is a bit higher than our available capacity.

Amy E. Hood: As a reminder, larger, long-term Azure contracts, which are more unpredictable in their timing, can drive increased quarterly volatility in our bookings growth rate. Microsoft Cloud Gross Margin Percentage should decrease roughly two points year-over-year. Excluding the impact from the change in accounting estimate, Q4 Cloud Gross Margin Percentage will be down slightly.

Brett: Next to the segment guidance in productivity and business processes, we expect revenue to grow between nine and 11% in constant currency, our $19 $9 billion to $22 billion U S dollars.

Amy E. Hood: In office commercial revenue growth will again be driven by office 365 seat growth across customer segments, and Arco growth primarily through <unk> five we expect office 365 revenue growth to be approximately 14% in constant currency.

Amy E. Hood: As improvement in Azure, inclusive of scaling our AI infrastructure, will be offset by sales makeshift to Azure, we expect capital expenditures to increase materially on a sequential basis driven by cloud and AI infrastructure investments. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure build out and the timing of finance leases. We continue to bring capacity online as we scale our AI investments with growing demand. Currently, near-term AI demand is a bit higher than our available capacity. Next, the segment guidance.

Brett: We continue to progress with adoption of co pilot for Microsoft 365, and remain excited for the long term growth opportunity.

Brett: And our on premises business, we expect revenue to decline in the mid to high teens in office consumer we expect revenue growth in the low to mid single digits, driven by Microsoft 365 subscriptions for Linkedin, We expect revenue growth in the mid to high single digits, driven by continued growth across all businesses.

Brett: And in dynamics, we expect revenue growth in the low to mid teens, driven by dynamics 365 for both Linkedin and dynamics that continued bookings growth moderation noted earlier is a headwind to Q4 revenue growth.

Amy E. Hood: In productivity and business processes, we expect revenue to grow between 9% and 11% in constant currency, or $19.9 to $20.2 billion US dollars. In Office commercial, revenue growth will again be driven by Office 365 with seat growth across customer segments and ARPU growth primarily through E5. We expect Office 365 revenue growth to be approximately 14% in constant currency. We continue to progress with adoption of Copilot for Microsoft 365 and remain excited about the long-term growth opportunity.

Brett: For intelligent cloud, we expect revenue to grow between 19, and 20% in constant currency or 28.4 to $28 7 billion U S. Dollars revenue will continue to be driven by Azure, which as a reminder, can have quarterly variability primarily from our per user business and in period revenue recognition, depending on the mix of <unk>.

Brett: Contracts.

Brett: And Azure at least that Q4 revenue growth to be 30% to 31% in constant currency or similar to our stronger than expected Q3 results.

Amy E. Hood: Growth will be driven by our azure consumption business and continued contribution from AI with some impact from the AI capacity availability noted earlier.

Amy E. Hood: In our on-premises business, we expect revenue to decline in the mid- to high-teens. In Office Consumer, we expect revenue growth in the low- to mid-single digits driven by Microsoft 365 subscriptions. For LinkedIn, we expect revenue growth in the mid- to high-single digits driven by continued growth across all businesses. And for Dynamics, we expect revenue growth in the low- to mid-teens driven by Dynamics 365. For both LinkedIn and Dynamics, the continued bookings growth moderation noted earlier is a headwind to Q4 revenue growth.

Brett: Our per user business should see benefit from Microsoft 365 fleet momentum, though we expect continued moderation in seat growth rates given the size of the installed base.

Amy E. Hood: Our on premises server business, we expect revenue growth in the low to mid single digits with continued hybrid demand, including licenses running in multi cloud environments.

Brett: And in enterprise and partner services revenue should decline in the mid to high single digits on a high prior year comparable for enterprise support surfaces.

Amy E. Hood: In more personal computing, we expect revenue to grow between 10, and 13% in constant currency or 15.2 to $15 6 billion U S dollars.

Amy E. Hood: For Intelligent Cloud, we expect revenue to grow between 19% and 20% in constant currency, or $28.4 to $28.7 billion U.S. Revenue will continue to be driven by Azure, which, as a reminder, can have quarterly variability primarily from our per-user business and in-period revenue recognition, depending on the mix of contracts and Azure. We expect Q4 revenue growth to be between 30% and 31% in constant currency, or similar to our stronger than expected Q3 results.

Amy E. Hood: Windows OEM revenue growth should be in the low to mid single digits as PC market unit volumes continue at pre pandemic levels.

Amy E. Hood: In Windows commercial products and cloud services customer demand for Microsoft 365, and our advanced security solutions should drive revenue growth in the mid single digits. As a reminder, our quarterly revenue growth can have variability primarily from in period revenue recognition, depending on the mix of contracts.

Brett: And devices revenue should decline in the mid teens as we continue to focus on our higher margin premium products.

Brett: Search and news advertising ex Tac revenue growth should be in the low to mid teens driven by continued volume strength. This will be higher than overall search and news advertising revenue growth, which we expect to be relatively flat.

Amy E. Hood: Growth will be driven by our Azure consumption business and continued contribution from AI with some impact from the AI capacity availability noted earlier. Our per-user business should see benefit from Microsoft 365 Suite Momentum, though we expect continued moderation and steep growth rates given the size of the installed base. In our on-premises server business, we expect revenue growth in the low to mid-single digits with continued hybrid demand, including licenses running in multi-cloud environments.

Amy E. Hood: And in gaming, we expect revenue growth in the low to mid Forty's, including approximately 50 points of net impact from the Activision acquisition, we expect Xbox content and services revenue growth in the high Fifty's given by approximately 60 points of net impact from the Activision acquisition hardware revenue will decline again year over year.

Amy E. Hood: And in enterprise and partner services, revenue should decline in the mid to high single digits on a high prior year comparable for enterprise support services. In more personal computing, we expect revenue to grow between 10 and 13 percent in constant currency, or $15.2 to $15.6 billion. Windows OEM revenue growth should be in the low to mid-single digits, as PC market unit volumes continue at pre-pandemic levels. In Windows Commercial Products and Cloud Services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the mid-single digits.

Brett: Now back to company guidance.

Amy E. Hood: We expect Cogs between $19 six to $19 8 billion U S dollars, including approximately $700 million from purchase accounting integration and transaction related costs from the Activision acquisition.

Brett: We expect operating expense of $17, one 5% to 17 point to two 5 billion U S dollars, including approximately $300 million from purchase accounting integration and transaction related costs from the acquisition acquisition.

Amy E. Hood: Therefore.

Amy E. Hood: We now expect full year FY 'twenty for operating margins to be up over two points year over year, even with our cloud and AI investments the impact from the Activision acquisition and the headwind from the change in useful lives last year.

Amy E. Hood: As a reminder, our quarterly revenue growth can have variability, primarily from in-period revenue recognition, depending on the mix of contracts. For devices, revenues should decline in the mid-teens as we continue to focus on our higher margin premium products.

Amy E. Hood: This operating margin expansion reflects the hard work across every team to drive efficiencies and maintained disciplined cost management, knowing we will continue to grow our cloud and AI investments next year.

Amy E. Hood: Search and News Advertising XTAC revenue growth should be in the low to mid-teens, driven by continued volume strength. This will be higher than overall search and news advertising revenue growth, which we expect to be relatively flat, and gaming. We expect revenue growth in the low to mid 40s, including approximately 50 points of net impact from the Activision acquisition. We expect Xbox content and services revenue growth in the high 50s, driven by approximately 60 points of net impact from the Activision acquisition. Hardware revenue will decline again year over year. Now, back to the company, guys.

Amy E. Hood: Other income and expense should be roughly negative $850 million as interest income will be more than offset by interest expense and losses on investments accounted for under the equity method. As a reminder, we are required to recognize gains or losses on our equity investments, which can increase quarterly volatility. We expect our Q4 effective tax rate to be approximately 18 <unk>.

Brett: <unk>.

Speaker Change: Now I'd like to share some closing thoughts as we look to the next fiscal year.

Speaker Change: We continue to focus on building businesses that create meaningful value for our customers and therefore significant growth opportunities for years to come.

Amy E. Hood: We expect COGS between $19.6 to $19.8 billion U.S. dollars, including approximately $700 million from purchase, accounting, integration, and transaction-related costs from the Activision acquisition. We expect operating expenses of $17.15 to $17.25 billion U.S. dollars, including approximately $300 million from purchase, accounting, integration, and transaction-related costs from the Activision acquisition. Therefore, we now expect full-year FY24 operating margins to be up over two points year-over-year, even with our clouded AI investments, the impact of the Activision acquisition, and the headwind from the change in Useful Lives last year.

Brett: In FY 'twenty five that focused execution should again lead to double digit revenue and operating income growth.

Amy E. Hood: To scale to meet the growing demand signal for our cloud and AI products, we expect FY 'twenty five capital expenditures to be higher than FY 'twenty four.

Brett: These expenditures over the course of the next year are dependent on demand signals and adoption of our services. So we will manage that signal through the year.

Brett: We will also continue to prioritize operating leverage and therefore, we expect FY 'twenty five operating margins to be down only about one point year over year, even with our significant cloud and AI investments as well as a full year of impact from the Activision acquisition.

Amy E. Hood: This operating margin expansion reflects the hard work across every team to drive efficiencies and maintain disciplined cost management, knowing we will continue to grow our cloud and AI investments next year. Other income and expense should be roughly negative $850 million, as interest income will be more than offset by interest expense and losses on investments accounted for under the equity method. As a reminder, we are required to recognize gains or losses on our equity investments, which can increase quarterly volatility. We expect our Q4 effective tax rate to be approximately 18%.

Brett: We are leading the AI platform wave.

Speaker Change: And are committed to bringing that value to our global customers as we enter the final quarter of our fiscal year with that let's go to Q&A Brett.

Brett: Thanks, Amy we'll now move over to Q&A out of respect for others on the call. We request that participants. Please only ask one question operator can you. Please repeat your instructions.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.

Speaker Change: You May press Star two if you would like to remove your question from the queue.

Amy E. Hood: For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

Amy E. Hood: Now, I'd like to share some closing thoughts as we look to the next fiscal year. We will continue to focus on building businesses that create meaningful value for our customers and, therefore, significant growth opportunities for years to come. And FY25, that focus and execution should again lead to double-digit revenue and operating income growth. To scale to meet the growing demand signal for our cloud and AI products, we expect FY25 capital expenditures to be higher than FY24.

Speaker Change: And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed.

Speaker Change: Excellent. Thank you guys for taking the question and congratulations on a fantastic quarter, a lot of excitement in the marketplace around gender of AI and the potential of these technologies, but theres also a lot of investment going on behind then it looks like Microsoft is on track to ramp capex over 50% year on year this year at over $50 billion.

Amy E. Hood: These expenditures over the course of the next year are dependent on demand signals and adoption of our services. So we will manage that demand through the year. We will also continue to prioritize operating leverage, and therefore, we expect FY25 operating margins to be down only about one point year over year, even with our significant cloud and AI investments, as well as a full year of impact from the Activision acquisition. We are leading the AI platform wave and are committed to bringing that value to our global customers as we enter the final quarter of our fiscal year. With that, let's go to Q&A, Brett.

Speaker Change: And Theres media speculation of more spending ahead with some reports talking about like $100 billion data center. So obviously investments are coming in well ahead of the revenue contribution, but what I was hoping for is that you could give us some color on how user management team try to quantify the potential opportunities that underlie these investments because they are getting very big.

Brett Iversen: And maybe if you could give us some hint on whether there's any truth to that potential is like $100 billion data center out there. Thank you so much.

Brett Iversen: Thank you keep fell for the question, let me start and then you can.

Speaker Change: Thank you Doug.

Brett Iversen: XAV. We'll now move over to Q&A. Out of respect for others on the call, we request that participants please only ask one question. Operator, can you please repeat your instruction?

Speaker Change: High level the way, we as a management team talk about it is there's two sides to this.

Speaker Change: Training and inference.

Speaker Change: Given that we want to be a leader.

Operator: Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing start. And our first question comes from Keith Weiss with Morgan Stanley. Please proceed.

Speaker Change: In this big generational shift in paradigm shift in technology.

Speaker Change: That's on the training side, we want to be able to allocate the capital required to essentially be training. These large foundation models.

Speaker Change: And stay on the leadership position that we have done that successfully all the way today and you've seen it all flow through our P&L and you can continue.

Keith Weiss: Excellent. Thank you guys for taking the question and congratulations on a fantastic quarter. There's a lot of excitement in the marketplace around generative AI and the potential of these technologies, but there's also a lot of investment going on behind them. It looks like Microsoft's on track to ramp CapEx over 50% year-on-year this year to over $50 billion. And there's media speculation of more spending ahead, with some reports talking about a $100 billion data center.

Keith Weiss: To see that going forward.

Keith Weiss: Then Amy referenced.

Keith Weiss: What we also do on the infant side, which is one we first innovate and build products.

Speaker Change: And of course, we.

Speaker Change: Have an infrastructure business that is also dependent on a lot of Isps building products that run on our infrastructure and it's all going to be demand driven in other words, we track.

Speaker Change: Very closely what's happening with influence demand.

Keith Weiss: So obviously, investments are coming well ahead of revenue contribution, but what I was hoping for is that you could give us some color on how you as a management team try to quantify the potential opportunities that underlie these investments because they are getting very big. And maybe you could give us some hint on whether there's any truth to the potential of like a $100 billion data center out there. Thank you so much.

Keith Weiss: And that's something that we'll manage as Amy said in her remarks.

Speaker Change: We closely so we feel and obviously, we'll be doing this quite frankly keep for now multiple years. So this is not the quarter I realized that uses a lot more in the quarter Nowadays, but if you look at it we have been doing what is essentially capital allocation to be a leader in AI for multiple years now.

Speaker Change: And we plan to sort of essentially.

Satya Nadella: Thank you, Keith, for the question. Let me start, and then you can continue to add.

Speaker Change: Taking that forward.

Speaker Change: And Keith I do think it's important to really think about it.

Satya Nadella: At a high level, the way we, as a management team, talk about it is that there are two sides to this. Given that we want to be a leader in this big generational shift and paradigm shift in technology, that is, on the training side, we want to be able to allocate the capital required to essentially be training these large foundation models and stay in the leadership position there, and we've done that successfully all the way today, and you've seen it flow through our P&L, and you can continue to see that going forward.

Speaker Change: Our planning cycles.

Satya Nadella: We do talk about.

Speaker Change: Sending sequentially higher and we look forward to being able to continue to build out the infrastructure needed to meet the demand.

Speaker Change: The thing that you really asked in the beginning or was the opportunity and the size of that and I think in some ways.

Satya Nadella: It's important to think about every business process that can be impacted and the opportunity. That's represented by every business process.

Satya Nadella: Then Amy referenced what we also do on the inference side, which is one: we first innovate and build products. And, of course, we have an infrastructure business that's also dependent on a lot of ISVs building products that run on our infrastructure. And it's all gonna be demand driven. In other words, we track very closely what's happening with inference demand. And that's something that we'll manage, as Amy said in her remarks, very, very closely.

Satya Nadella: And so when you think of it that way I think the opportunity is significant.

Satya Nadella: The opportunity to power that next wave of quote unquote cloud infrastructure.

Satya Nadella: Is important it's important because we've been the leaders for this decade of the cloud transition and it's important for us to call.

Speaker Change: Currently invest to do that in the second wave building on our success in the first.

Satya Nadella: And I think that's really the best way to think about how we will spend is the same way we approached it for a decade.

Satya Nadella: So we feel, and obviously we've been doing this, quite frankly, Keith, for now multiple years. So this is not the quarter. I realize in the news, there's a lot more in the quarter nowadays. But if you look at it, we've been doing what is essentially capital allocation to be a leader in AI for multiple years now. And we plan to sort of essentially keep taking that forward, and keep.

Satya Nadella: What's the signal invest to be a leader in the technical Foundation and then execute.

Satya Nadella: Distantly adds value to customers.

Speaker Change: The opportunity is represented by the amount of value we add and.

Satya Nadella: And I look forward to being able to continue to deliver that.

Amy E. Hood: And Keith, I do think it's important to really think about our planning cycles, and we do talk about spending sequentially higher, and we look forward to being able to continue to build out the infrastructure needed to meet the demand. Another thing that you really asked in the beginning was the opportunity and the size of that.

Speaker Change: Excellent. Thank you so much.

Speaker Change: Thanks, Keith Operator next question please.

Amy E. Hood: The next question comes from the line of Brent Thill with Jefferies. Please proceed.

Amy E. Hood: How would you characterize the demand environment on one hand, you have bookings in Azure both accelerating.

Brent John Thill: Year over year in the quarter, but we're seeing a lot of future concern hesitation from other vendors, we all cover.

Amy E. Hood: And I think, in some ways, it's important to think about every business process that can be impacted and the opportunity that's represented by every business process. And so when you think of it that way, I think the opportunity is significant. The opportunity to power that next wave of quote unquote cloud infrastructure is important. It's important because we've been the leaders in this decade of the cloud transition, and it's important for us to confidently invest in that in the second wave, building on our success in the first.

Speaker Change: So I think everyone would love to get your sense of budget health for our customers this year.

Speaker Change: Okay great.

Amy E. Hood: Brent.

Brent: Couple of things I'd say on deal.

Amy E. Hood: On the Azure side, which I think is what you specifically asked we feel very good about.

Speaker Change: The.

Speaker Change: Fundamentally a share taker there because if you look at it from our perspective at this point.

Amy E. Hood: Asia has become a port of call for pretty much anybody who is doing any AI project.

Speaker Change: And so that's sort of been a significant help for us in terms of acquiring even new customers some of the logos.

Amy E. Hood: And I think that's really the best way to think about how we'll spend is the same way we have approached it for a decade. Watch the Signal, invest to be a leader in the technical foundation, and then execute consistently to add value to customers. The opportunity is represented by the amount of value we add, and I look forward to being able to continue to deliver that.

Amy E. Hood: Even referenced in my remarks, our new Azure customers. So that's one the second thing that we.

Amy E. Hood: We're also seeing is AI just doesn't sit on its own.

Amy E. Hood: So AI projects, obviously start with kohls to AI models, but they also use <unk>.

Operator: Thanks, Keith. Operator, next question, please. The next question comes from the line of Brent Till with Jeffries. Please proceed. Satya, how would you characterize the demand environment?

Amy E. Hood: <unk> database in fact, Azure search, which is really it was by you and Chad GPT is one of the fastest growing services for.

Brent John Thill: For us we have.

Brent John Thill: Fabric integration drag of AI.

Brent John Thill: The next question comes from the line of Brent Till with Jeffries. Please proceed.

Brent John Thill: And so cosmos DB integration, so the data tier.

Satya Nadella: Great question, Brent. There are a couple of things I'd say on the On the Azure side, which I think is what you specifically asked, we feel very, very good about the, you know, we're fundamentally a share-taker there, because if you look at it from our perspective at this point, Azure has become a portal call for pretty much anybody who is doing any AI project, and so that's sort of been a significant help for us in terms of acquiring even new customers.

Speaker Change: Dev tools.

Speaker Change: Is it out of the place where we are seeing great traction. So we are seeing adjacent services in azure that get attached to AI.

Satya Nadella: And lastly, I would say.

Speaker Change: Migration.

Satya Nadella: To Azure as well. So this is not just all in AI story.

Satya Nadella: We're also looking at customer them. This is something that we've talked about in the past Red which is there's always an optimization cycle.

Satya Nadella: Some of the logos I even referenced in my remarks are new Azure customers, so that's one. The second thing that we're also seeing is AI just doesn't sit on its own, so AI projects obviously start with calls to AI models, but they also use a vector database.

Satya Nadella: But there is also as people optimize they spend money on new project starts which will grow and then they'll optimize so it's a continuous.

Speaker Change: So these are the three trends that are playing out on azure.

Satya Nadella: In terms of what.

Satya Nadella: At least we see.

Satya Nadella: In fact, Azure Search, which is really used by even ChatGPT, is one of the fastest-growing services for us. We have Fabric integration with Azure AI, and so we have also integrated Cosmos DB. So the data tier, the dev tools, is another place where we are seeing great interest. So we are seeing adjacent services in Azure that get attached to AI. And lastly, I would say migrations to Azure as well. So this is not just an AI story.

Satya Nadella: Demand side.

Speaker Change: Thank you.

Speaker Change: Thanks, Brent Operator next question please.

Speaker Change: Yeah.

Satya Nadella: And the next question comes from the line of Mark <unk> with Bernstein Research. Please proceed.

Mark: Thank you very much for taking my question congratulations on the quarter and the guidance.

Speaker Change: Want to follow up on the AI, obviously, we're seeing companies shifting their spending to invest in.

Satya Nadella: And learned about AI, rather than receiving additional budgets for AI at some point for AI to be transformative as everyone expects it needs to be accretive to spending. So that you wouldn't do you believe AI will hit the maturity level will be net increase the I T or outside of it spending and what would be the leading indicators of that maturation.

Satya Nadella: We're also looking at customers, and this is something that we have talked about in the past, right, which is, you know, there's always an optimization cycle, but there's also, as people optimize, they spend money on new project starts, which will grow, and then they'll optimize. So it's a continuous side of it. So these are the three trends that are playing out on Azure in terms of what we at least see on the demand side.

Satya Nadella: Am I characterizing this correctly as it relates to Azure some projects are being delayed so that spending can be shifted.

Operator: Thanks Brent. Operator, next question, please.

Mark Murphy: And the next question comes from the line of Mark Mortler with Bernstein Research.

Speaker Change: Core azure toward Azure AI. Thank you.

Satya Nadella: Thank you very much for taking my question and congratulations on the quarter and the guidance. I want to follow up on AI, obviously. We're seeing companies shift their IT spending to invest in and learn about AI rather than receiving additional budgets for AI. At some point, for AI to be transformative, as everyone expects, it needs to be creative in its spending. Satya, when do you believe AI will hit the maturity level?

Mark Murphy: Yes, great set of questions, but let me just start by saying play.

Satya Nadella: Place to start is to watch what's happening in terms of standard issues with software teams right. I mean, if you think about it.

Satya Nadella: Bought tools in the past now you basically buy tools plus co pilot right. So you could even say that this is characteristic characterize that perhaps shift off what is opex dollars into effectively two spent.

Satya Nadella: Will it be a net increase to IT or outside of IT spending? And what would be the leading indicators of that maturation? And Amy, am I characterizing this correctly as it relates to Azure? Some projects are being delayed so that that spending could be shifted from core Azure toward Azure AI. Thank you.

Speaker Change: Because it gives operating leverage to all of the Opex dollars, you're spending today right.

Satya Nadella: A good example of I think what's going to happen across the board, we see that in customer service, we see that in sales, we see that in marketing.

Mark Murphy: Yeah, great set of questions, Mark. Let me just start by saying, you know, a good place to start is to watch what's happening in terms of standard issues for software teams, right? I mean, if you think about it, they bought tools in the past. Now, you basically buy tools plus a copilot, right?

Satya Nadella: As operations, that's why I described it as knowledge terms.

Mark Murphy: You can even think of it as lean for launch work right because it just reduces waste increases speed.

Mark Murphy: And customer value.

Mark Murphy: So one of the existing regional Imagers here is culture change in.

Satya Nadella: So you could even say that this is perhaps characterized as perhaps a shift of what is OpEx dollars into effectively tools spent because it gives operating leverage to all of the OpEx dollars you're spending today, right? That's really a good example of, I think, what's going to happen across the board. We see that in customer service, we see that in sales, we see that in marketing, anywhere there's an operation. That's why I described it as, you know, knowledge turns. You can even think of it as lean for laundering work, right?

Mark Murphy: Inside of organizations, but I think culture change that means process change and Amy referenced this evening to answer.

Satya Nadella: The first question because at the end of the day companies will have to take a process simplify the process automate the process and apply these solution.

Satya Nadella: And so that requires not just technology, but in fact companies to go do the hard work of culturally changing how they adopt technology to drive that operating leverage and this is where you're going to see firm level performance.

Satya Nadella: So one of the things we see is any customer who is working closely with us deploying it internally at Microsoft we see it right.

Amy E. Hood: So because it just reduces waste, increases speed, and customer value. And so one of the interesting rate limiters here is culture change inside organizations. When I say culture change, that means process change. And Amy referenced this even in her answer to the first question because, at the end of the day, companies will have to take a process, simplify the process, automate the process, and apply these solutions. And so that requires not just technology but, in fact, companies to do the hard work of culturally changing how they adopt technology to drive that operating level.

Amy E. Hood: Also taking our own medicine to apply this across every process and we know that this is not just about technology, it's about being able to have the methodology that goes with it and so we see it and software development, we see it and customer service, we're seeing it even in the horizontal use a co pilot today.

Amy E. Hood: Every day people are discovering new workflows that they can optimize and so that's like.

Amy E. Hood: The PC, but it became a standard issue and early Ninety's. That's the closest analogy I can come up with.

Amy E. Hood: And so yes, it will take time to.

Satya Nadella: To put it to percolate through the economy, but this is faster diffusion faster rate of adoption.

Amy E. Hood: And this is where we're going to see firm-level performance differences. So one of the things we see is any customer who's working closely with us, deploying it internally at Microsoft, we see it, right? We're also taking our own medicine to apply this across every process. And we know that this is not just about technology; it's about being able to have the methodology that goes with it. And so we see it in software development, we see it in customer service, we're seeing it even in the horizontal use of Copilot today, where people are discovering new workflows that they can optimize every day. And so that's like, you know, the PC, but it became standard issue in the early 1990s. That's the closest analogy I can come up with.

Amy E. Hood: Anything we have seen in the past as evidenced even by copilot right, it's faster than any suite, we have sold in the past.

Amy E. Hood: And it is in order to acquire workflow and process change.

Speaker Change: And Mark maybe to answer your question on are we seeing project starts.

Amy E. Hood: The transition from maybe that.

Amy E. Hood: Something that was core consumption to an AI project.

Amy E. Hood: And our result, that's not what we saw we saw more what kaki was speaking to earlier, which is you see.

Amy E. Hood: Maybe growth in migration again, youre seeing work in the data space again, and Youre seeing AI project starts.

Amy E. Hood: And I think Thats why maybe you see our growth be different of course than you would see it budget spend it's because it's a it's a share I think improvement plus also.

Operator: And so, yes, it'll take time for it to percolate through the economy. But this is a faster diffusion, a faster rate of adoption than anything we have seen in the past, as evidenced even by Copilot, right? It's faster than any suite we have sold in the past. And what it is, we're going to require workflow and process.

Operator: Focusing on what it's like you said, it's about spending maybe in other areas that we don't traditionally think of as being in the it budget.

Operator: Spend under our CIO spend being done by the head of customer service. It spending done by the head of marketing and I do think that will be important as we think about the opportunity ahead.

Karl Emil Keirstead: And Mark, maybe to answer your question on whether we are seeing Project Start Transition from maybe something that was core consumption to an AI project. You know, in our results, that's not what we saw. We saw more of what Satya was speaking about earlier, which is you see maybe growth in migrations again. You're seeing work in the data space again, and you're seeing AI project starts. And I think that's why maybe you see our growth be different, of course, than you see IT budget spend because it's a share, I think, improvement, plus also really focusing on what Satya said, it's about spending maybe in other areas that we don't traditionally think of as being in the IT budget.

Speaker Change: Incredibly helpful. Thank you both.

Speaker Change: Thanks, Mark Operator next question please.

Karl Emil Keirstead: The next question comes from the line of Karl Keirstead with UBS. Please proceed.

Speaker Change: And such and Amy Congrats on these outstanding as a result, I'd love to hone in a little bit on the seven point lift to Azure growth from AI outstanding number, but it is leveling off a little bit from six points in December I'm wondering if you could unpack that a little bit to what extent did the capacity issues.

Karl Emil Keirstead: You Amy highlighted on the call impact that number is there any seasonality I wouldnt think so or any other factor that can swing around that number that you'd advise us to keep in mind. Thanks. So much.

Karl Emil Keirstead: Spending under a CIO, it's spending being done by the head of customer service, it's spending being done by the head of marketing, and I do think that will be important as we think about the opportunity ahead.

Carl: Thanks Carl.

Karl Emil Keirstead: Theres not a seasonality to that number so you're absolutely right to start there and it's a good question.

Amy E. Hood: Incredibly helpful. Thank you both.

Operator: Thanks, Mark. Operator, next question, please.

Operator: And the way to think about it is a bit more by it is how much capacity we have.

Raimo Lenschow: The next question comes from the line of Karl Kirsten with UBS. Please proceed.

Satya Nadella: Thank you. And Satya and Amy, congrats on these outstanding Azure results.

Karl Emil Keirstead: In play and how much capacity that.

Operator: I'd love to hone in a little bit on the seven-point lift to Azure growth from AI. An outstanding number, but it's leveling off a little bit from six points in December. I'm wondering if you could unpack that a little bit.

Karl Emil Keirstead: That we have to sell on the inferencing side in particular, and so that is partially why you see the capital investment in the shape that is is because right. This minute. We do have demand that exceeds our supply by a bit. So it is fair to say that that could have been an impact on the number for the quarter and.

Michael James Turrin: To what extent did the capacity issues that you, Amy, highlighted on the call impact that number? Is there any seasonality? I wouldn't think so. Or any other factor that can swing around that number that you'd advise us to keep in mind?

Michael James Turrin: It does impact a little bit the number in Q4.

Speaker Change: Okay helpful. Thank you.

Speaker Change: Thanks, Karl Operator next question please.

Michael James Turrin: And the next question comes from the line of Raimo <unk> with Barclays. Please proceed.

Amy E. Hood: Thanks so much.

Speaker Change: Thank you.

Operator: Thanks, Carl. There's not seasonality in the numbers, so you're absolutely right to start there, and it's a good question. The way to think about it is a bit more about how much capacity we have in play and how much capacity that we have to sell on the inferencing side, in particular. And so that is partially why you see the capital investment in the shape that it is because right this minute, we do have demand that exceeds our supply by a bit. So it is fair to say that that could have been an impact on the number for the quarter and does impact a little bit the number in Q4.

Speaker Change: Conceptual question for Scott.

Operator: Think about coal pilots and what Youre doing there you kind of.

Operator: <unk> a lot of this and businesses and the opportunities seem very frothy.

Speaker Change: How do you think this will play out in the industry between you guys offering certain copilots versus like the rest of the industry. Following and everyone seems to have a copilot known empty it seems to be talking about it how does that impact what you wanted to do with your partner strategy going forward. Thank you.

Speaker Change: Yes, that's a great question.

Kirk Materne: Okay, very helpful, thank you.

Operator: So the way we see it play out is if you think about it.

Satya Nadella: Thanks, Carl. Operator, next question, please. And the next question comes from the line of Raimo Lenschow with Barclays. Please proceed. Thank you. I have a more conceptual question for Satya. If you think about Copilot and what you're doing there, you kind of

Satya Nadella: The.

Raimo Lenschow: We office with us.

Raimo Lenschow: Rodney with knowledge look.

Raimo Lenschow: In the context of business process right. So it's not like when people who are knowledge work, they're not doing knowledge work, they're doing knowledge work in support of making progress in the context of sales enablement customer service.

Operator: And the next question comes from the line of Raimo Lenschow with Barclays. Please proceed. Thank you. I have more.

Raimo Lenschow: Revenue ops supply chain right. So that's the first thing to note and they do it inside of email theyre doing inside the team the annuity inside of Excel Powerpoint word and whatnot.

Aleksandr J. Zukin: Yeah, it's a great question. So the way we see it play out is if you think about it, the way Office was used... Broadly speaking, knowledge work is in the context of business processes, right? So it's not like when people do knowledge work, they're not doing knowledge work. They're doing knowledge work in support of making progress in the context of sales enablement, customer service, revenue Ops, Supply Chain, or what have you, right? So that's the first thing to note.

Aleksandr J. Zukin: Now we have the ability to essentially bridge the work and the work artifact inside of these knowledge worker tools.

Aleksandr J. Zukin: Work flow and the business process and the business process data. So when we think about our co pilot copilot has that ability to integrate with whether its with.

Amy E. Hood: And they do it inside of email, they do it inside of Teams, they do it inside of Excel, PowerPoint, Word, and so on. Now we have the ability to essentially bridge the work and the work artifacts inside of these knowledge worker tools with the workflow and the business process, and the business process data. So when we think about our Copilot, our Copilot has that ability to integrate, whether it's with ServiceNow, where it has the ability to integrate with SAP, with Salesforce, and, obviously, with Dynamics.

Aleksandr J. Zukin: Service now where it has the ability to integrate with S&P with Salesforce with obviously dynamics.

Amy E. Hood: That's what we are seeing in fact.

Amy E. Hood: And again I'll talk a lot about it at our developer conference, which is the extensibility and Copilot Studios.

Amy E. Hood: Really off to the races in terms of the product that most people are excited because one of the things in the enterprise.

Amy E. Hood: Lot of ground Youll copilot with enterprise data, which is in SaaS applications and copilot studio is the tool to use it.

Amy E. Hood: That's what we are seeing. In fact, you'll hear us talk a lot about it at our developer conference, which is the extensibility, and Copilot Studio is really off to the races in terms of the product, and most people are excited, because one of the things in the enterprise is you want to ground your Copilot with enterprise data, which is in all of these SaaS applications, and Copilot Studio is the tool to use it, to make that happen, and so that's what we're seeing, which is we are building a Copilot which also happens to be an orchestrator of all these other Copilots, which to us appear as extension, and net-net, what happens is some of these knowledge worker tools that people have used all the time, because when you think about teams, when you're having a meeting, you're not doing a random meeting, the meeting is in the context of some business process, it could be a supply chain meeting where you're trying to understand which suppliers to bet on, or what terms to do, and so now you can access all of that data right in the team, in the team's context, so that's, I think, what's exciting for us, having built all these horizontal tools, which I would say were under, you know, underappreciated for the amount of work, you know, how people use those tools to make progress on business process, but we now get to bridge that between the business applications and knowledge worker tools, more horizontally.

Amy E. Hood: To make that happen and so thats, what we are seeing which is we are building a copilot, which also happens to be an orchestrator of all these other copilot, which dwarf appeared as extension.

Amy E. Hood: And net net what happens is some of these knowledge worker pools that people have used all the time right because when you think about teams.

Amy E. Hood: Having a meeting youre not doing around the meeting the meeting is in the context of business process it could be a supply chain.

Amy E. Hood: Meeting, where youre trying to understand which suppliers to bet on or what to do and so now you can access all of that data right in the teens context. So that's I think what's exciting for us having built all of these horizontal tools, which I would say we're under.

Amy E. Hood: Underappreciated for the amount of.

Amy E. Hood: Look.

Amy E. Hood: How people use those tools to make progress on business process, but we now get to bridge that.

Amy E. Hood: Between the business applications that knowledge workers more horizontally.

Speaker Change: Okay perfect. Thank you congrats from me as well.

Speaker Change: Thanks, Brian Operator next question please.

Amy E. Hood: And the next question comes from the line of Michael <unk> with Wells Fargo. Please proceed.

Speaker Change: Okay. Great I. Appreciate you taking the question wanted to go back to Azure, you've been hinting at stabilization there for the past couple of quarters.

Operator: Thanks, Raimo. Operator, next question please. And the next question comes from the line of Michael Turin with Wells Fargo. Please proceed. Hey, great. Appreciate you taking the question. I wanted to go back to Azure. You've been hinting at stabilization there for the past couple of quarters, but it's still very

Amy E. Hood: Very good to see the balance maybe you can expand on just what the commercial bookings number appreciating the variability there does in terms of visibility and any characterization you can give us around what youre seeing in areas like cost optimization and core workload growth coming back.

Operator: And the next question comes from the line of Michael Turin with Wells Fargo. Okay, great. I appreciate you taking the time to answer the question.

Operator: Helpful content context for us unpacking the numbers. Thank you.

Speaker Change: Thanks, Michael.

Operator: Thanks, Michael. Maybe I may take those a bit in reverse.

Operator: Maybe I may take those a bit in reverse.

Amy E. Hood: It's a little easier to address them. When you think about We've been talking about sort of stabilization and what you saw this quarter if you break down the Azure number as you saw, which I think I talked a little bit about with with Carl was, you know, seven points of contribution from AI and you could call them the difference 24 from our core, really, Azure, Business, And within that, the activity we saw on the consumption side, was really this balance that we were quite used to and have seen throughout the cloud transition.

Speaker Change: Well is your to address them.

Amy E. Hood: When you think about.

Amy E. Hood: We've been talking about sort of stabilization and what you saw this quarter. If you breakdown the azure number as you saw.

Amy E. Hood: Which I think I talked a little bit about with with Karl was seven points of contribution from AI and you can call them. The difference 24 from our core.

Amy E. Hood: Really.

Amy E. Hood: Is your.

Amy E. Hood: Business and.

Amy E. Hood: And within that the activity we saw on the consumption side.

Amy E. Hood: Was really this balance that we are quite used to and have seen.

Amy E. Hood: Throughout the cloud transition, we saw new workloads start.

Amy E. Hood: We saw new workloads start, and we saw optimization, and then those optimizations create a new budget, and you apply it, and that cycle, which is actually quite normal. We saw it again this quarter in a balanced way. And I think, so when we talk about stabilization or even what we saw between Q2 and Q3, which is a bit of acceleration in that core, a lot of the newer project starts relate back to not just AI starts but lots of other workflows that companies are still going from on-prem to cloud. That's why Satya mentioned migrations.

Amy E. Hood: And we saw optimization.

Amy E. Hood: And then those optimizations create new budget and you apply and that cycle.

Amy E. Hood: Which is actually quite normal we saw it again this quarter in a balanced way and I think so when we talk about stabilization or even what we saw between Q2 and Q3, which is a bit of acceleration.

Amy E. Hood: In that core.

Amy E. Hood: Was a lot of the newer projects starts relating back to not just AI starts.

Amy E. Hood: Lots of other workflows that companies are still going from on Prem to cloud.

Amy E. Hood: This migration.

Amy E. Hood: And some of that, which I know isn't as exciting as talking about all the AI projects, but this is still really foundational work to allow companies to take advantage of the cost savings, and the total TCO is still really good. And so I think that balance is really what you saw this quarter. And I feel like there wasn't really a big difference, Michael, across industries or across geos. So I would say it was actually pretty consistent, is the other maybe texture that I could give you on that question.

Amy E. Hood: And some of that which I know isn't as exciting as talking to you about all of the AI project. This is still really foundational work to allow companies to take advantage of the cost savings.

Amy E. Hood: The total PCL was still really good and so I think that balance is really what you saw this quarter.

Amy E. Hood: Do you feel like there wasn't really a big difference Michael across industries or across Geos. So I would say it was actually pretty consistent.

Amy E. Hood: Is the other maybe texture that I.

Amy E. Hood: I'd give you to that to that question and so then when you are saying do we keep sort of pointing to stabilization I really do look.

Amy E. Hood: And so then when you're saying, do we keep sort of pointing to stabilization? I really do look sort of workload to workload. What are we seeing? Where are we starting?

Amy E. Hood: Workload to workloads, what are we seeing where it starts and this would actually felt quite balanced and optimizations looked like they normally would which by the way is super important it's something we encourage customers to do.

Amy E. Hood: And this one actually felt quite balanced, and optimizations looked like they normally would, which, by the way, is super important. It's something we encourage customers to do. You want to run your workloads as efficiently as you possibly can. It's critical to customers being able to grow and get value out of them. So I sometimes think we all may ask the question more from a negative angle. And for us, it's just about a healthy cycle at the customer account level.

Amy E. Hood: You want to run your workloads as efficiently as you, possibly can it's critical.

Amy E. Hood: Customers being able to grow and get value out of that so I, sometimes think we.

Amy E. Hood: You May ask the question more is a negative and for US it's just about a healthy cycle.

Amy E. Hood: At the customer account level.

Amy E. Hood: Consistent core cloud still pretty exciting to us as well thank you.

Operator: Thanks, Michael. Operator, next question, please. The next question comes from the line of Kirk Materne with Evercore ISI. Please proceed. Yes, thanks for taking the question. I'll add my congratulations on the quarter. Satya, I was wondering if you could chime in on a discussion that comes up a lot with investors.

Operator: Thanks, Michael.

Speaker Change: The next question please.

Kirk Materne: The next question comes from the line of Kirk <unk> with Evercore ISI. Please proceed.

Kirk Materne: Yes, thanks for taking the question I'll add my congrats on the quarter Satya I was wondering if you could.

Speaker Change: I'm in on that.

Operator: Discussion that comes up a lot with investors which is.

Operator: The next question comes from the line of Kirk Materne with Evercore ISI. Please proceed. Ah yes, thanks for taking the time.

Kirk Materne: Is there a sort of data quality problem in the market in terms of being able to take advantage of all of these new Gen. AI capability is it I was just curious if you could comment on do you see companies making.

Satya Nadella: Yeah, it's a great, great question because there are two sets of things to make sense of for the, you know, successful deployment of these new AI capabilities. I mean, if you sort of say this, what this AI does is two things, right? There's a new user experience as a natural language interface. And the second thing is, it's a reasoning engine. The reasoning engine requires good data, and it requires good data for grounding, right? So people talk about something called retrieval augmented generation, and in that context, having good grounding data that then helps with the reasoning, I think, is helpful.

Satya Nadella: Inroads on sort of addressing that and do you see that as sort of inhibitor.

Satya Nadella: Growth at all at this point.

Satya Nadella: Yes, it's a great great question, because there are two sets of things.

Satya Nadella: In order to make sense of.

Satya Nadella: The successful deployment of these new AI capabilities I mean, if you sort of say this what is as AI does two things right. There is a new user experience is a natural language interface and second thing is that the reasoning engine and the reasoning engine requires good data and its good requires good data for gravity right. So people talk about something called retrieval augment to generation.

Satya Nadella: And in that context, having good grounding data.

Satya Nadella: That helps.

Satya Nadella: And then, of course, people are also looking to sort of fine-tune or RLHF or essentially take the large model and ground it further. So all of these tools are now available. The sophistication of how people can deploy these models across various business processes where there is data and where there is tuning of these models is also getting more widespread, even as system integrators and other developers are there to help enterprises. So all that's maturing. So we feel, you know, good.

Satya Nadella: The reasoning I think is helpful. And then of course people are also looking to sort of fine tune, our late Jeff or essentially take the large model and grounded. So all of these tools that are available the sophistication of how people can deploy these models across various business processes.

Satya Nadella: Where that is data and where there is tuning of these models is also getting more widespread even at system integrators and other developers are there to help enterprises to all of that is maturing so.

Satya Nadella: So we feel good.

Satya Nadella: And this is what I think on the commercial side. These are some of the harder problems to solve for the broad consumer, right? I mean, I think there's a couple of orders of magnitude of improvements in, I'll call it, our models before we can sort of have more sophisticated, open-ended consumer scenarios, whereas in the enterprise, these are all things we can tackle. Again, I point to GitHub. If you think about how it's got an entire system, right?

Satya Nadella: On the commercial side. These are some of the harder problems to solve broad consumer right. I mean, I think this is a couple of orders of magnitude of improvements in.

Satya Nadella: I'll call. It our models before we can sort of have more sophisticated open ended consumer denies whereas in the enterprise. These are all things. We can go tackle again I point to get out if you think about how it is.

Speaker Change: Got it.

Satya Nadella: It's just not an AI model. The user experience scaffolding, the editor, the chat, the interpreter, and the debugger work along with the continuations of the model to help essentially create these reasoning traces which help the entire thing work. And effectively, what we are doing with Copilot, Copilot Studio, and connectors to all these business systems, think of it as we are creating GitHub Copilot-like scenarios for every business system. That's what I think is going to have both what Amy referenced as business value and better grounding.

Satya Nadella: System is just not an AI model as the AI.

Satya Nadella: User experience scaffolding they added the chance that the interpreter and the debugger work along with.

Satya Nadella: The continuation of the model to help essentially create these reasoning traces which help.

Satya Nadella: Entire being work and effectively what we're doing with co pilot copilot studio and connectors to all of these business system think of it as we are creating get up co pilot like scenarios for every business system.

Satya Nadella: That's what I think is going to have both what Amy referenced as business value.

Satya Nadella: But you are absolutely right in saying that a lot of the work we're doing with Fabric or Cosmos or Postgres or SQL is about preparing that data so that it can be integrated with these AI projects.

Satya Nadella: And better grounded, but youre, absolutely right in saying a lot of work.

Satya Nadella: We are doing with fabric or Cosmo Progresso sequel is about providing that data so that it can be integrated with AI projects.

Operator: Thanks, Kurt. Operator, we have time for one last question.

Speaker Change: Thank you.

Operator: Yeah.

Speaker Change: Thanks, Kurt operator, we have time for one last question.

Operator: And our last question will come from the line of Alex Zukin with Wolfe Research. Please proceed.

Operator: And our last question will come from the line of Alex Zukin with Wolfe Research. Please proceed.

Aleksandr J. Zukin: Hey guys, thanks for taking the question. I wanted to ask the AI question, but from a Microsoft 365 Copilot perspective, I think you talked a little bit about starting to see some of those impacts positively in the quarter on the office business. I wanted to ask more broadly around that capacity constraint that you alluded to in your prepared remarks, Amy, and kind of how the easing, how tied are we as you invest in that CapEx and bring more of the capacity online, how much does that unblock or unlock the ability to deliver both a higher Azure AI number as well as a higher Microsoft 365 Copilot number? Thanks for the question. It's a good opportunity.

Aleksandr J. Zukin: Hey, guys. Thanks for taking the question I wanted to ask the AI question, but from a Microsoft 365, Copilot perspective, I think you talked a little bit about.

Aleksandr J. Zukin: Starting to see some of those impacts positively in the quarter on the office business I wanted to ask more broadly around that capacity constraint that you alluded to.

Aleksandr J. Zukin: In your prepared remarks, and kind of how does the easing.

Aleksandr J. Zukin: Are we like as you invest for that Capex.

Aleksandr J. Zukin: And bring more of the capacity on line how much.

Aleksandr J. Zukin: Does that unblock or unlock the ability to deliver both a higher azure AI number as well as a higher Microsoft today 65 copilot number.

Amy E. Hood: Thanks for the question. It's a good opportunity to clarify.

Speaker Change: Thanks for the question, it's a good opportunity to clarify.

Amy E. Hood: We, and I would not say that there is a capacity constraint on Copilot. It's a real priority for us to make sure we optimize the allocation of our capacity to make sure that those per-user businesses are able to continue to grow. And so think about that as our priority one. And so then, what that does mean is capacity constraints when we have them, you'll tend to see them on the Azure infrastructure side. The consumption side of the business is a better way of thinking about it.

Amy E. Hood: And I would not say that there is a capacity constraint on the co pilot is a real priority for us to make sure we optimize.

Amy E. Hood: The allocation of our capacity to make sure that does per user businesses.

Amy E. Hood: Are able to continue to grow and so think about that is our priority one and so then what that does mean is capacity constraints. When we have them youll tend to see them on the azure infrastructure side the consumption side of the business is a better way of thinking about it.

Operator: 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.

Speaker Change: Perfect. Thank you.

Operator: Thanks, Alex 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.

Operator: This concludes today's conference. You may now disconnect your lines at this time.

Speaker Change: You all thank you.

Operator: This concludes today's conference.

Operator: May now disconnect your lines at this time.

Operator: The rest of your day.