Q1 2025 Microsoft Corp Earnings Call
Greetings and welcome to the Microsoft fiscal year 2025 first quarter earnings conference call. At this time, our participants are in a listen-only mode. The question in that process will follow the formal presentation.
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Actual results could materially differ because of factors discussed in today's earnings press release and 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, we do not undertake any duty to update any forward looking statements and with that I'll turn the call over to Satya. Thank you Bret we're off to a solid start to our fiscal year driven by continued <unk>.
The Microsoft cloud, which surpassed $38 $9 billion in revenue opportunity, 2%, yes.
AI driven transformation is changing walk walk artifacts and workflow across every role function and business process, helping customers drive new growth and operating leverage.
Satya: All up our AI business is on track to surpass an annual revenue run rate of $10 billion next quarter, which will make it the fastest business in our history to reach this milestone.
Now I'll highlight examples of our progress starting with infrastructure.
Asia took share this quarter, we are seeing continued growth in cloud migration Azure arc now has over 39000 customers across every industry, including American tower, CGT l'oreal up more than 80% year over year.
We now have data centers in over 60 regions around the world and this quarter, we announced new cloud and AI infrastructure investments in Brazil, Italy, Mexico and Sweden.
As we expand our capacity in line with our long term demand signals.
Satya: At the Silicon layer of new Cobalt 100, Vms are being used by companies like data breaks elastic Siemens snowflake and Synopsys to power. The general purpose workloads at up to 50% better price performance than previous generations.
On top of this we are building out our next generation AI infrastructure innovating across the full stack to optimize our fleet for AI workloads.
We offer the broadest selection of AI accelerators, including our first party accelerated my 100 as well as the latest Gpus from AMD and Nvidia in fact, we were the first cloud to bring up Nvidia is black oil system with GBP 200 powered AI service.
Our partnership with open AI also continues to deliver results. We have an economic interest in a company that has grown significantly in value and we have build differentiated IP and are driving revenue momentum more broadly with Azure AI. We are building an end to end app platform to help customers build their own co pilots in age.
<unk> Azure open AI usage more than doubled over the past six months as both digital natives like gradually and Harvey as well as established enterprises like George Finance, Hitachi <unk> LG move apps from test to production.
Satya: <unk> Aerospace for example used Azure open AI to build a new digital assistant for all 52000 of its employees.
In just three months it has been used to conduct over 500000 internal inquiries and processed more than 200000 documents and this quarter. We added support for <unk> newest model family <unk>. We would also bringing industry specific models through Azure AI, including a collection of best in class multimodal models for medic.
Imaging and with Github models, we now provide access to our full model catalog directly within to get help develop a workflow.
Azure AI is also increasingly an on ramp to our data and analytics services as developers build new AI apps on Asia, we have seen an acceleration of Azure Cosmos, DB and Azure sequel, DB Hyperscale usage as customers like Air India, Novo Nordisk Telefonica turtle.
In North America, and unit or take advantage of capabilities purpose built for AI applications and with Microsoft fabric. We provide a single AI powered platform to help customers like Chanel E Y KPMG Swissair and Cindy go unify their data across clouds.
We now have over 16000 paid fabric customers over 70% of the Fortune 500.
Now on to developers.
Get up copilot, it's changing the way the world build software copilot enterprise customers increased 55% quarter over quarter as companies like AMD and flutter Entertainment tailor copilot to their own code base and we are introducing the next phase of AI cogeneration, making Github copilot.
<unk> across the developer workflow get up copilot workspace is a developer environment, which leverages agents from start to finish. So developers can go from spec to plan to code all in natural language.
Copilot auto fixes and AI agent that helps developers that companies like <unk> and Otto group fixed vulnerabilities in that code over three times faster than it would take them on their own. We're also continuing to build on get ups open platform ethos by making more models available via get up co pilot and we are expanding the reach of good help too.
Satya: A new segment of developers introducing get up spark, which enables anyone to build apps in natural language.
Satya: Already we have brought generate of AI to power platform to help customers use low code no code tools to cut costs and development time to date nearly 600000 organizations have used AI powered capabilities in power platform up forex year over year.
Citizen developers at VF for example, built app simply by describing what they need using natural language and this quarter, we introduced new ways for customers to apply AI to streamline complex workflows with power automate.
Satya: Now on to work.
Satya: We launched the next wave of Microsoft 365, Copilot and innovation last month, bringing together of web work and pages as the new design system for knowledge work pages is the first new digital artifact for the agent and it's designed to help you ideate with AI and collaborate with other people.
We've also made Microsoft 365, copilot responses to X faster and improved response quality by nearly three X. This innovation is driving accelerated usage and the number of people using Microsoft 365 daily more than doubled quarter over quarter.
Also seeing increased adoption from customers in every industry as they use Microsoft three six by co pilot to drive real business value. Vodafone for example will rollout Microsoft three six by Copilot to 68000 employees. After the trial showed that on average they save three hours per person per week, and UBS will deploy $50.
And our largest fin serv deal to date.
And we continue to see enterprise customers coming back to buy more seats, all up nearly 70% of the fortune 500, now use Microsoft 365, copilot and customers continue to adopt at a faster rate than any other new Microsoft 360 <unk> suite.
Copilot easy UI for AI, and with Microsoft 365, co pilot Copilot studio and agents and now autonomous agents. We have built an end to end system for AI business transformation with copilot studio organizations can build and connect Microsoft 365, copilot to autonomous agents, which then.
Delegate to co pilot when there is an exception more than 100000 organizations from ensure standard bank and Thomson Reuters to wedge in money in Zurich insurance have used copilot studio to date up over two <unk> quarter over quarter.
More broadly we are seeing AI drive a fundamental change in the business applications market as customers shift from legacy apps to AI first business processes die.
Dynamics 365 continues to take share as organizations like everyone Heineken and lexmark chose our apps over other providers and monthly active users a copilot across our CRM and ERP portfolio increased over 60% quarter over quarter on.
Dynamics 365 contact center is also winning customers like <unk> <unk> and <unk> as it brings generate of AI to every customer engagement channel.
And just last week, we added 10 out of the box of autonomous agents to dynamics 365 that helps customers automatically qualify sales leads track suppliers and work hand in hand with service reps to resolve issues.
We're also bringing AI to industry specific workflows, one year in Dax co pilot is now documenting over one 3 million physician patient encounters each month at over 500 health care organizations like Baptist Medical grew Baylor, Scott and White Greater Baltimore Medical Centre move.
Satya: <unk> health and overlaid medical center, it is showing faster revenue growth than get up copilot did in this first year and new features extend dax beyond notes, helping physicians automatically drop referrals after visit instructions and diagnostic evidence.
On top of all this AI innovation, Microsoft teams usage remains at all time highs as people use it to streamline all their communications nearly 75% of our teams enterprise customers now buy premium phone or rooms.
When it comes to Windows, our new class of co pilot plus Pcs is winning new customers. They offer best in class AI capability performance and value AMD, Intel and Qualcomm now all support copilot plus Pcs.
This quarter, we also introduced new AI experience only available on copilot plus species like click to do which places an interactive overlay over your desktop to suggest next best actions and as we approach the end of support for Windows 10, a year from now we are well positioned to transition our customers to windows 11, ensuring they benefit from.
Enhanced features and security improvements we have introduced over the past few years.
Satya: Now on to security.
We continue to prioritize security above all else with our secure future initiative. We have dedicated the equivalent of 34000 full time engineers to address the highest priority security TASS, we've made significant progress to better protect tendons identities networks in engineering systems, and we've created new processes to ensure.
Satya: Securities prioritized at every level of the company and we continue to take what we learn and turn it into innovations across our products security Copilot. For example is being used by companies in every industry, including Clifford chance Intesa.
Paolo and shell to perform <unk> tasks faster and more accurately.
And we are now helping customers protect the AI deployments to customers have used defender discover and secure more than 750000 Gen. AI app instances and use both U two audits over 1 billion copilot interactions to meet their compliance obligations and all up we continue to take share.
Across all major categories, we serve and are consistently recognized by top analysts as a leader in 'twenty categories more than any other vendor.
Satya: Now, let me turn to our consumer businesses, starting with Linkedin.
Member growth continues to accelerate with markets in India, and Brazil, both growing at double digits. We're also seeing record engagement as we introduce new ways for our more than 1 billion members to connect sell services get hired and share knowledge, our investments and rich formats like video strengthen our.
Leadership in <unk> advertising and amplify the value we deliver to our customers weekly immersive video views increased six <unk> quarter over quarter and total video viewership on Linkedin is up 36% year over year. Our AI powered tools also continue to transform how people sell and higher.
Sales new AI features help every team member perform at the level of top sellers and drive more profitable growth in learning just yesterday, we announced updates to our coaching experience, including personalized career development plans Linkedin first agent hiring assistant will help hires find quantified.
Satya: Candidates faster by tackling the most time consuming tasks already hires who use AI assistant messages.
C a 44% higher acceptance rate compared to those who don't and our hiring business continues to take share now on to search advertising and news with copilot. We are seeing the first step towards creating a new AI companion for everyone with new co pilot experience. We introduced earlier this month <unk>.
<unk>, a refresh design and tone, along with improved speed and fluency across the web and mobile and it includes advanced capabilities like voice envision that make it more delightful and useful and feel more natural.
Satya: You can both brows and converse with copilot simultaneously because copilot sees what you see more broadly AI is also transforming search browsers in digital advertising and we continue to take share across being an edge being ex Tac revenue growth outpace the search market now on to gaming one year since we.
<unk> acquisition of Activision Blizzard and King we are focused on building a business positioned for long term growth driven by higher margin content and services you already see this transformation in our results as we diversify the ways that gamers access our content.
Satya: We set new records for monthly active users in the quarter as more players than ever play our games across devices and on the Xbox platform.
Game pass also set a new Q1 record for total revenue and average revenue per subscriber and as we look ahead, our IP across our studios has never been stronger last week's launch of Black ops six was the biggest call of duty release ever.
Satya: Setting a record for day, one players as well as game pass subscriber adds on launch day and unit sales on Playstation and steam were also up over 60% year over year. This speaks to our strategy of meeting gamers, where they are by enabling them to play more games across the screens they spend their time on.
Speaker Change: In closing we are rapidly innovating to expand our opportunity across our commercial and consumer businesses in three weeks' time, we will hold our ignite conference and I look forward to sharing more than about how we are helping every business function use AI to drive growth in this new era with that let me turn it over to Amy <unk>.
Amy: You Satya and good afternoon, everyone. This quarter revenue was $65 6 billion up 16% and earnings per share was $3 30, an increase of 10% with.
With strong execution by our sales teams and partners, we delivered a solid start to our fiscal year.
Digit top and bottom line growth.
Amy: Also saw continued share gains across many of our businesses.
In our commercial business increased demand and growth and long term commitments to our Microsoft.
Amy: Farm drove our results.
Bookings were ahead of expectations and increased 30% and 23% in constant currency.
Else were driven by strong execution across our core annuity sales motions and growth in the number of $10 million plus contracts for both Azure and Microsoft 365.
Amy: Additionally, we also saw an increase in the number of $100 million plus contracts for ACA.
Commercial remaining performance obligation increased 22% and 21% in constant currency to 259 billion.
Amy: Roughly 40% will be recognized in revenue in the next 12 months up 17% year over year. The remaining portion recognized beyond the next 12 months increased 27% and this quarter, our annuity mix increased to 98%.
In addition to commercial results that were in line with expectations. We also saw some benefit from in period revenue recognition across Microsoft 365, commercial Azure and our on premises server business.
At a company level Activision contributed a net impact of approximately three points to revenue growth was at two point drag on operating income growth and had a negative impact.
Impact to earnings per share.
A reminder, that this net impact included adjusting for the movement of Activision content from our prior relationship with a third party partner to first party and includes $911 million from purchase accounting adjustments and integration and transaction related cost.
FX did not have a significant impact on our results and was roughly in line with expectations on total company revenue segment level revenue Cogs and operating expense growth.
Amy: Microsoft Cloud revenue was $38 $9 billion and grew 22% roughly in line with expectations, Microsoft Cloud gross margin percentage decreased two points year over year to 71%. This was slightly better than expected due to improvement in azure.
Amy: Although the gross margin percentage decrease year over year continues to be driven by scaling our AI infrastructure.
Company gross margin dollars increased 13% and 14% in constant currency and gross margin percentage was 69% down two points year over year, driven by the lower Microsoft Cloud gross margin noted earlier as well as the impact from purchase accounting adjustments integration and transaction related cost from the Activision acquisition.
Operating expenses increased 12% lower than expected due to our focus on cost efficiencies and ongoing prioritization or operating expense growth included nine points from the Activision acquisition.
And the total company level head count at the end of September was 8% higher than a year ago.
Excluding the growth in the activation acquisition head count was 2% higher.
Operating income increased 14% and operating margins were 47% down one point year over year, excluding the net impact from the Activision acquisition operating margins were up one point as we continue to drive efficiencies across our businesses as we invest in AI infrastructure and capabilities.
Now to our segment results.
Revenue from productivity and business processes was $28 3 billion and grew 12% and 13% in constant currency ahead of expectations driven by better than expected results across all businesses.
Amy: <unk> hundred 65, commercial cloud revenue increased 15% and 16% in constant currency with business trends that were as expected.
Better than expected result was due to a small benefit from the in period revenue recognition noted earlier.
Amy: ARPA growth was primarily driven by <unk> five as well as M 365 co pilot.
Paid <unk> hundred 65 commercial seats grew 8% year over year.
Base expansion across all customer segments.
<unk> growth was driven by our small and medium business and frontline worker offerings.
Amy: <unk> hundred 65 commercial cloud revenue represents nearly 90% of total M 365, commercial products and cloud services.
And for 65 commercial products revenue increased 2% and 3% in constant currency ahead of expectations, primarily due to the benefit from in period revenue recognition noted earlier and 365 consumer products and cloud services revenue increased 5% and 6% in constant currency and 365 consumer cloud revenue increased 6% and 7%.
Constant currency with continued momentum in M 365, consumer subscriptions, which grew 10% to $84 4 million.
Amy: <unk> hundred 65 consumer cloud revenue represents 85% of total M 365, consumer products and cloud services.
Linkedin revenue increased 10% and 9% in constant currency slightly ahead of expectations with growth across all lines of business.
Dynamics revenue grew 14% driven by dynamics, 365%, which grew 18% and 19% in constant currency with continued growth across all workloads and continued share gains as a reminder, dynamics 365 represents about 90% of total dynamics revenue.
Segment gross margin dollars increased 11% and 12% in constant currency and gross margin percentage decreased slightly year over year, driven by scaling our AI infrastructure.
Operating expenses increased 2% and operating income increased 16%.
Next the intelligent cloud segment.
Revenue was $24 $1 billion, increasing 20% and 21% in constant currency in line with expectations.
Azure and other cloud services revenue grew 33% and 34% in constant currency with healthy consumption trends that were in line with expectations. The better than expected result was due to the small benefit from in period revenue recognition noted earlier.
As your growth included roughly 12 points from AI services similar to last quarter demand continues to be higher than our available capacity.
Amy: Non AI growth trends were also inline with expectations in total and across regions as customers continue to migrate and modernize on the Azure platform.
The non AI point contribution to Azure growth was sequentially lower by approximately one point.
And our on premises server business revenue decreased 1% lower than expected transactional purchasing ahead of the Windows server 2025 launch as well as lower purchasing of licenses running in multi cloud environments, but mostly offset by the benefit from in period revenue recognition noted earlier.
Amy: Enterprise and partner services revenue decreased 1% and was relatively unchanged in constant currency.
Segment gross margin dollars increased 15% and gross margin percentage decreased three points year over year, driven by scaling our AI infrastructure operating expenses increased 8% and operating income grew 18%.
Now to more personal computing revenue was $13 $2 billion, increasing 17% with 15 points of net impact from the Activision acquisition results were above expectations, driven by gaming and search.
Amy: Windows, OEM and devices revenue increased 2% year over year and better than expected results in windows OEM due to mix shift to higher monetizing markets was partially offset by the lower than expected results in devices due to execution challenges in the commercial segment.
Amy: <unk> advertising revenue ex Tac increased 18% and 19% in constant currency ahead of expectations, primarily due to continued execution improvement. We saw rate expansion. In addition to healthy volume growth in both edge and being.
And in gaming revenue increased 43% and 44% in constant currency with 43 points of net impact from the Activision acquisition results were ahead of expectation driven by stronger than expected performance in both first and third party content as well as consoles Xbox.
<unk> content services revenue increased 61% with 53 points of net impact from the Activision acquisition.
Amy: Segment gross margin dollars increased 16% and 17% in constant currency with 12 points of net impact from the Activision acquisition.
Gross margin percentage was relatively unchanged year over year, our strong execution on margin improvement in gaming and search with offset by sales mix shift to those businesses.
Amy: Operating expenses increased 49% with 51 points from the Activision acquisition operating income decreased 4%.
Now back to total company results.
Amy: Capital expenditures, including finance leases were $20 billion in line with expectations and cash paid for PP&E was $14 9 billion.
Roughly half of our cloud and AI related spend continues to be for long lived assets that will support monetization over the next 15 years and beyond the.
Amy: The remaining cloud and AI spend is primarily for servers, both Cpus and Gpus to serve customers based on demand signals.
Cash flow from operations was $34 2 billion up 12% driven by strong cloud billings and collections, partially offset by higher supplier employee and tax payments free cash flow was $19 3 billion down 7% year over year, reflecting higher capital expenditures to support our cloud and AI offerings. This.
Other income expense was negative $283 million significantly more favorable than anticipated due to foreign currency remeasurement and net gains on investments or losses on investments accounted for under the equity method were as expected our effective tax rate was approximately 19% and finally, we returned <unk>.
Amy: $9 billion to shareholders through dividends and share repurchases.
Now moving to our Q2 outlook, which unless specifically noted otherwise is on a us dollar basis.
Amy: First FX.
With the weaker U S dollar and assuming current rates remain stable, we expect FX to increase total revenue and segment level revenue growth by less than one point, we expect FX to have no meaningful impact to Cogs or operating expense growth.
Our outlook has many of the trends we saw in Q1 continued through Q2 customer demand for our differentiated solutions should drive another quarter of strong growth.
And commercial bookings, we expect strong growth on a growing expiry base driven by increased long term commitments to our platform and strong execution across core annuity sales promotion as a reminder, larger long term azure contracts, which are more unpredictable and their timing can drive increased quarterly volatility.
Amy: <unk> and our bookings growth rate.
Microsoft Cloud gross margin percentage should be roughly 70% down year over year, driven by the impact of scaling our AI infrastructure, we expect capital expenditures to increase on a sequential basis, given our cloud and AI demand signals as I said last quarter, we will stay aligned and if needed to adjust to the demand signals we see.
Amy: Check.
As a reminder, there can be quarterly spend variability from cloud infrastructure build outs and the timing of delivery of finance leases.
Amy: Next segment guidance.
With productivity and business processes.
We are the market leader when it comes to knowledge based co pilots and agents and the enterprise space and we are focused on continuing to gain share across our productivity solutions. Therefore, we expect revenue in productivity and business processes to grow between 10%, 11% in constant currency or $28 seven to 29 billion U S. Dollar.
Amy: <unk>.
Amy: <unk> hundred 65, commercial cloud revenue growth should be approximately 14% in constant currency with moderating seat growth across customer segments, and ARPA growth through <unk> and M 365 co pilot for H. Two we expect revenue growth to remain relatively stable compared to Q2, we continued to see growth in <unk> hundred 60.
Amy: Five co pilot seats, and we expect the related revenue to continue to grow gradually overtime.
<unk> hundred 65 commercial products, we expect revenue to decline in the low single digits. As a reminder, 65 commercial products include on premises components of M. 365 suites. So our quarterly revenue growth can have variability primarily from in period revenue recognition, depending on the mix of contracts.
And for 65 consumer cloud revenue growth should be in the mid single digits driven by M 365 subscriptions for Linkedin, we expect revenue growth of approximately 10% driven by continued growth across all businesses and in dynamics for 65, we expect revenue growth to be in the mid to high teens driven by continued growth across all.
Amy: All workloads next.
Amy: Next intelligent cloud.
Helping our customers transform and grow with innovative cloud and AI solutions is driving continued growth in Azure. Therefore, we expect revenue in intelligent cloud to grow between 18, and 20% in constant currency or 20, 555% to $25 85 billion U S dollars revs.
Amy: Revenue will continue to be driven by Azure, which as a reminder, can have quarterly variability primarily from MPA revenue recognition, depending on the mix of contracts.
In Azure, we expect Q2 revenue growth to be 31% to 32% in constant currency driven by strong demand for our portfolio of services, we expect consumption growth to be stable compared to Q1, and we expect to add more sequential dollars to azure than any other quarter in history, we expect the contra.
<unk> from AI services to be similar to last quarter, given the continued capacity constraints.
Amy: As well as some capacity that shifted out of Q2 and.
And in <unk>, we still expect azure growth to accelerate from H, one and our capital investments create an increase in available AI capacity to serve more of the growing demand.
And in our on premises server business, we expect revenue to decline in the low to mid single digits on a prior year comparable that benefited from purchasing ahead of Windows server 2012 and support.
And in enterprise and partner services, we expect revenue growth to be in the low single digits.
Now to more personal computing.
We continue to make decisions to prioritize strategic higher margin opportunities within each of our consumer businesses. Our outlook reflects the improvement in gross and operating margins from this prioritization work across gaming search and devices.
We expect revenue in more personal computing to be $13 85 to $14 two 5 billion U S dollars.
Windows OEM devices revenues to decline in the low to mid single digits, we expect windows OEM revenue growth in line with the PC market to be more than offset by a decline in devices as the trends from Q1 continue.
Search and news advertising ex Tac revenue growth should be in the high teens with continued growth in both volume and revenue per search this will be higher than overall search and news advertising revenue growth, which we expect to be in the high single digits.
Amy: In gaming, we expect revenue to decline in the high single digits due to hardware.
We expect Xbox content and services revenue growth to be relatively flat. We're excited about last week's launch of call of duty, where we saw the most game pass subscriber ads, we've ever seen on a launch day.
Amy: There are two things about the launch that are different than the call of duty launch a year ago. Our revenue was mostly recognized in the quarter of purchase.
Amy: First the game is available and game pass.
So for players who play for game have the subscription revenue is recognized over time.
Second the game requires an online connection to play so even for players who purchased the Standalone game revenue recognition will also occur ratably over time now.
Now back to company guidance, we expect Cogs to grow between 11, and 13% in constant currency or to be between $21 nine to $22 1 billion U S dollars and operating expense to grow approximately 7% in constant currency or to be between $16, four and $16 5 billion U S dollars.
This should result in another quarter of operating margin expansion.
Other income and expense is expected to be roughly negative one 5 billion, primarily driven by our share of the expected loss from opening I, which is accounted for under the equity method. As a reminder, we do not recognize mark to market gains or losses on equity method investments.
As you heard from Satya or strategic partnership and investment in open AI has been pivotal in building and scaling our AI business and positioning us as the leader in the AI platform life.
And lastly, we expect our Q2 effective tax rate to be approximately 19% in.
Amy: In closing.
We remain focused on strategically investing in the long term opportunities that we believe drive shareholder value.
Amy: Monetization from these investments continues to grow and we're excited that only two and a half years and our AI business is on track to surpass $10 billion of annual revenue run rate in Q2.
This will be the fastest business in our history to reach this milestone.
We are committed to growing this leadership position across our entire Microsoft cloud, while maintaining our disciplined focus on cost management and prioritization across every team.
With that let's go to Q&A 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.
Amy: Thank you.
Speaker Change: And gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, 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.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star.
And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed.
Excellent. Thank you guys for taking the question and congratulations on a really solid quarter.
The expansion of capabilities, the speed of innovation and the magnitude of the opportunity to head regenerative AI. It makes us the most exciting period for software I've seen in my 25 years of covering the space and based upon this call. It seems like you share that excitement, but in my investor conversation that excited it also feeds two related questions and they both have to do with constraints.
Amy: And the first is like what are the internal constraints or guardrails that Microsoft has when it comes to investing behind these innovations, particularly in relation to the funding of future generations of foundational models, where people were talking about price tags tens of billions or even $100 billion plus and then on the other side of the spectrum.
Amy: What are the external constraints that Microsoft sees in building out this capacity to meet the demand and capture the opportunity, particularly constrained senior ability to power all of these new data centers being built out empowered and environmentally sustainable fashion I'd love to get the Microsoft perspective on both those questions.
Thank you Keith for those questions I think on the first point.
Amy: Ultimately.
When you think about let's say a capital outlay for training because that's essentially what you're asking.
It is going to be rate limited by your monetization of inference given generation right. So just like in the past, we would allocate capital to build out cloud based on the demand signal, we were seeing and then b with projected demand and Thats, what we would build for so you can think of training essentially is that <unk> you.
Building. The next generation model. So that then you have a more capable model that then drives more.
Demand right. So ultimately even with all of the scaling laws and what have you I think you ultimately will normalize to having a pace in fact I think the best way to think about even is given the Moore's law effectively is working on.
Our silicon and system side. So it's just not compute reddit deficiencies in compute it's data as well as algorithms.
You will want to sort of keep on that Cup, which is you really want to refresh your fleet.
Amy: With the Moore's law every year, and then effectively depreciated over the period of the lifecycle of it and then the influence demand ultimately with governor on how much we invest in training because that's I think at the end of the day.
You are all subject to ultimately demand the second piece of the external constraints, we have run into obviously lots of external constraints because as demand all showed up pretty fast right. I mean, if you think about even changed the most hit products of this generation all are in a club fragmented it's chat GPT.
But its copilot with its get up early with that scope I mean pick the top four or five products of this generation. They are all sort of in and around our ecosystem and so therefore, we ran into a set of constraints, which are everything because DC is don't get built overnight. So there is <unk> there is power.
And so that's sort of been the short term constraint even in Q2 for example, some of the demand issues, we have with our ability to fulfill demand is because we are in fact external third party stuff the least moving up so that's the constraints, we have but in the long run.
We do need effectively powered.
And we need Bdcs and some of these things are more long lead in but I feel pretty good going into the second half of even this fiscal year that some of that supply demand will match up.
Excellent. Thank you guys.
Thanks, Keith Operator next question please.
Speaker Change: The next question comes from the line of Brent Thill with Jefferies. Please proceed.
Thanks, Amy good to hear the Reacceleration in the back half for Azure I guess many are asking.
34% growth in Q1 falling to low thirties, I know the comp is a couple of points harder, but is there anything else you are contemplating in that guide for Q2 to see that to see that deceleration other than a tougher comp. Thank you.
Thanks, Brent maybe this is a great question, because I can sort of reiterate some of the points I made in and tie them together a little bit.
Amy: In Q1.
<unk> 34 in CEC as we talked about.
Amy: That upside versus the 33 that we had guided to is primarily due to some revenue recognition benefits and so.
I would think about that on a sort of a pure consumption basis.
And AI as being 33, and do you think about a point or two of <unk> that we've guided to and the majority of that is due to unfortunately, some supply push out that I mentioned and then softer reiterated in terms of AI supply coming online that we counted on the underlying consumption.
Amy: <unk> growth is stable Q1 to Q2.
So to your question on some ins and out it is certainly some ins and outs.
As you heard have confidence as we get them.
A good influx of supply across the second half of the year, particularly on the AI side, and there will be better able to do some supply demand matching and hence why we're talking about acceleration in the back half I also take the opportunity to say when you see them.
Using AI workload, we always intend to think about that as just a GPU exercise.
The importance of having Gpus and Cpus be able to run. These workloads is also important so that's a piece of.
The acceleration in H, two as well.
Thanks, Brent Thanks, Brad Operator next question please.
The next question comes from the line of Mark Modeler with Bernstein. Please proceed.
Thank you very much for taking my question and congratulations on the quarter.
A question every investor obviously asked US the question on the Capex growth in the Capex spend obviously half of that facility is equivalent that have a longer life, but the other half is the rest of the components.
Can you give any color on how you think of that growth is it return to the traditional approach where basically capex is going to grow in line or slightly slower than cloud revenue and if so any sense of the timing to do we have enough facilities online, but by some time next year et cetera, any color would be appreciated.
Mark: Thanks Mark.
Speaker Change: Think in some ways. It's helpful to go back to.
To the cloud transitions that we worked on.
Gosh over a decade ago I think in the early stages.
And what you did see and Youll see us doing the same time is you have to build to meet demand. Unlike the cloud transition we're doing on a global basis in parallel as opposed to sequential given the nature of the demand and then as long as we continue to see that demand.
So youre right.
The growth in Capex will.
Speaker Change: Slow and the revenue growth will increase and those two things to your point get closer and closer together over time, the pace of that entirely depends really on the pace of adoption and just at this point.
Some of that spend goes towards building. The next training infrastructure. So you won't see all of that and caught some of it.
It goes to Opex when youre spending on training, but in general that's a that's a healthy way to think about the balance as it overtime that you and should like the last cycle get closer together.
Thank you very much that's very helpful.
Thanks, Mark Operator next question please.
The next question comes from the line Karl Keirstead with UBS. Please proceed.
Karl Keirstead: Okay, great. Thank you.
I'm actually not going to ask a question about the numbers, but satya and Amy I'd Love to ask a question about open AI.
Speaker Change: Since the.
The print three months ago, we investors had been hit with a torrent of media stories about open AI, and Microsoft and I'd love to give Microsoft and opportunity to frame the relationship. It seems to me it's critically important but we.
We have been I think everyone on the line picking up signals that perhaps Microsoft wants to diversify somewhat at the model layer and offer customers choice. So it's actually I would love to get your framing of the relationship and then in terms of the numbers. Maybe this is a little bit more few Amy, but how does Microsoft manage the demands on capex from.
Helping open AI with its scaling ambitions and how do you manage the the impact on other income that you just gave us some color on thank you so much.
Amy: Sure.
Thanks, Scott So I'd say first.
Partnership for both sides, that's open AI and Microsoft has been Super beneficial.
Amy: After all we with the <unk>.
Actively sponsored what is one of the most highest valued.
Private companies today, when we invested in them.
He took a bet on them and that innovation for five years ago.
That has led to great success for Microsoft It's Greg led to great success for open AI.
Amy: And we continue to build on it right. So we serve them with world class infrastructure on which they do their innovation.
Innovation in terms of models on top of which we innovate on both the model there with some of the post screening stuff we do.
As well as some of the small models rebuild and then of course all of the product innovation one of the things that my own sort of conviction of open AI and what they were doing came about when I start seeing something like get a copilot as a product get built our backs copilot get built RMB 365.
So we have a fantastic portfolio of innovation.
Let me build on top of that.
Amy: <unk>.
Amy: At the same also I would say we are investors, we feel very very good about sort of our investment stake in open AI and.
And so our all our focus and we're always in constant dialogue with them in a partnership like this where both sides are achieve mutual success at this pace at which we've achieved it that means we need to kind of push each other to do more.
To capture the moment and that's what we plan to do and we intend to keep building on it.
And maybe to your other two questions Carl listen.
I'm thrilled.
With their success and the need for supply.
From Azure and infrastructure and really what it's meant in terms of being able to also serve other customers for us.
It's important that we continue to invest capital to meet not only their demand signal and needs for compute but also from our broader customers.
Amy: That's partially why you've seen us committing the amounts of capital we've seen over the past few quarters as our commitment to both grow together and for us to continue to grow the azure platform for customers beyond that.
And so I don't really think of it as how do you balance. It. It's just we have customers who have needs in real use cases, and they are delivering value today and and if we can't meet that we need to work to meet it.
Amy: That means working harder and faster to make sure we do that which is what the team is committed to do second piece of your question I think.
It was on the impact to other income.
Not to get too accounting heavy on the earnings call, but I would say just a reminder, this is under the equity method.
Amy: Means.
We just take our percentage of losses every quarter.
And those losses of course are capped by the amount of investment we make in total which we did.
Amy: Out in the Q this quarter as being $13 billion and so over time, that's just the constraint.
Speaker Change: And it's a bit of a mechanical entry and so I don't really think about managing that that's the investment and acceleration that opening is making them themselves and we take a percentage of that got it. Okay very helpful. Thank you both.
Thanks, Karl Operator next question please.
Speaker Change: The next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.
Kash Rangan: Hi, yes. Thank you very much Saturday when you talked about the investment cycle. These models are getting bigger more expensive, but you also pointed out to hope the inference pace.
Likely to get paid how does that cycles look like an inference from micro where are the the products and the applications that will show up on the Microsoft P&L as a result of the inference space of kicking it. Thank you very much.
Speaker Change: Thanks, Kevin.
The good news for us.
Is that we're not waiting for that insurance to show up right. If you sort of think about that.
<unk> been made that this is going to be the fastest growth.
$10 billion of any business in our history, it's all infants.
One of the things that it may not be.
Speaker Change:
As evident is that we're not actually selling raw gpus for other people to train in fact, that's sort of our business, we turn away because we have so much demand on inference that we're not taking what I would in fact that the that there's a huge outlet selection problem. Today people. It's just a bunch of tech companies still using <unk>.
Money to buy a bunch of Gpus, we kind of really are not even participating in most of that because we are actually going to the real demand, which is in the enterprise space or our own products like get a coupon or Mg six five co pilot. So I feel the quality of our revenue is also pretty superior in that context, and that's what gives us even the conviction to even amy's answers.
It's really about our capital spend.
If this was just all about sort of a bunch of people training large models and that was all we got then that would be.
Ultimately, we're still waiting to your point for someone to actually have demand, which is real and in our case. The good news here is we have a diversified portfolio, we're seeing real demand across all of that portfolio.
Speaker Change: Maybe just a little bit what's hockey is saying I think a part of his two answers is that what youre, saying is this number we're talking about a $10 billion across in France, and our apps.
Speaker Change:
Speaker Change: Is already what that momentum and that investment in that progress and that revenue is what builds the next cycle of training right and so it's that circle as opposed to Oh, We're doing training now and then in France.
Speaker Change: Much of the training investments that are in that fuel this revenue growth came.
Speaker Change: Before.
Speaker Change: And we already funded that work and so that's an important that's to your point that you invest now and you can get the growth later, even if you slow down the capex, that's what you're trying to tell us.
That's the cycle that is important to understand.
Got it thank you so much.
Thanks, Kash operator next question please.
The next question comes from the line of Mark Murphy with Jpmorgan. Please proceed.
Thank you very much I was wondering if you can shed anymore light just on the nature of the supply limitations that you have.
Mentioned that are impacting azure in Q2, where that impacts might be incrementally just a touch more than we expected is it more the GPU supply is there some element of power.
Cooling or the ability to wire up the networks and Amy should we infer that the.
The supply is constraining azure growth by roughly a couple a few points in Q2 or am I am I overestimating that.
Maybe to answer both those questions.
Mark very directly I wouldn't think about it component logic in my Q2 answer the supply push out of stock you said the third parties that are delivering later than we had expected.
That gets pushed mainly into the second half of the year and in general Q3.
Speaker Change: So that third parties, where we have tended to buy supply inclusive.
Of kits. So it's complete end to end third party delivery.
Speaker Change: In terms of the impact.
Speaker Change: As I was saying.
Speaker Change: When you think about having flat consumption.
Q1 to Q2, there really are only two things that.
That impact that difference and one was the help we got in Q1.
From the revenue and revenue and accounting help and then Q2 has been the supply push out.
Speaker Change: Thank you.
Thanks, Mark Operator next question please.
The next question comes from the line of where no one show with Barclays. Please proceed.
Speaker Change: Perfect. Thank you.
If you talk about the market at the moment, because you reversed a copilot you had identified along with co pilots and now we're talking to agents.
Speaker Change: Can you kind of how do you think about that to me it looks like an evolution that we are discovering how to kind of product ties AI better et cetera. So how do you think about that journey.
You mean, copilots Adrian and maybe what's coming next thank you.
Speaker Change: Sure.
The system, we have built is.
Speaker Change: Co pilot Copilot studio.
Agents in autonomous agents, you should think of that as the spectrum of things right. So ultimately the way we can.
Speaker Change: Think about.
Speaker Change: How this all comes together as.
You need humans to be able to interface with AI. So the UI layer for AI co pilot.
You can then use copilot studio to extend copilot. For example, do you want a connected to your CRM system to your office system to your.
Speaker Change: Hey, Josh system, you'll do that through co pilot studio by building agents effectively you also build autonomous agent. So you can use even that's the announcement we made a couple of weeks ago. As you can even use copilot studio to build autonomous agents now <unk> agents are working independently, but from time to time.
And they need to raise an exception giordano with agents are not fully autonomous because at some point they need to either notify someone or have someone input something and when they need to do that they need a UI layer and thats the way. It again, it's a co pilot so co pilot.
That agents built in copilot studio autonomous agents built into copilot studio that's the full system.
We think that comes together and we feel really good about the position and then of course, we are taking the underlying system services across that entire stack that I just talked about are making it available in azure right. So you have the raw infrastructure. If you want it you have the model are independent of it you have the AI apps of it in <unk>.
Azure AI right. So everything is also a building blocks servicing azure for you to be able to build in fact, if you want to build everything that we have built in.
In the copilot stack you can build it yourself using the AI platform. So that's sort of instant book strategy and Thats kind of how it all comes together.
Speaker Change: Okay, perfect very clear.
Thanks, Rob operator, we have time for one last question.
And the last question will come from the line of Rishi <unk> with RBC. Please proceed.
Wonderful thanks.
Speaker Change: I appreciate the question.
Let me go and think a little bit about co pilot.
How we should be thinking about kind of numbers here with the re categorization seems like that was maybe softer in the past and expected maybe with the numbers this quarter starting to pick up can you maybe walk us through what youre seeing on that and maybe more importantly, how we should be thinking about your overall AI strategy on consumer versus enterprise.
Rise, especially now with the stuff on the phone. Thanks, so much.
Yeah on the first part Rishi.
To your question I think we feel very good about.
We have in the commercial co pilot right as I said in my remarks, and Amy talked about this is the fastest growth of a new suite in M 365, if I compared it to what we saw in the back way back you need three or EFI, while the transition from or two and this is really much faster.
Speaker Change: The numbers of penetration of the fortune.
Speaker Change: 500, and then the fact that they're coming back for more seats and what have you. So it's very strong in that context.
The other thing I'll also mention is that.
We want this to be something that is systemic systemic right because people need to be able to put the security controls than they need to deploy than there is killing and then this change management. So this is not like you just it's not a tool like when I talk about co pilot copilot studio agents, it's really as much about a new way to work.
Speaker Change: Work.
And sometimes I would describe it as what happened throughout the nineties with PC penetration. After all if you take a business process like forecasting what was it like pre E mail.
Cell and post E mail and <unk>, that's the type of change that you see with copilot, but overall.
Speaker Change: We feel great about the rate of <unk>.
Speaker Change: Progress in the penetration and then on the consumer side.
For us the exciting part here is to be able to use the same investment we are making in the commercial where we have structural strength.
And then beyond the offense.
One of the things that I think.
I hope you all catching our earnings is.
Stack our revenue when it comes to what we described as such news and AD.
Is growing faster than market. So that's.
It's fantastic to see that in.
Speaker Change: So that's kind of what consumer business, which Microsoft large scope.
Even at 10 plus billion dollar business soda, sometimes goes missing but in our case. It is actually a fantastic growth business, that's growing faster than market.
Speaker Change: We feel good about how we will use AI in fact, Linkedin is a consumer business as you know you saw it even today this week they announced some new capabilities for both consumers and in that case, even recruiting. So we think that AI. The same investment gets monetized even through Linkedin innovation.
And gaming of course is another place where you'll see some of these things apply in windows right. So the placement I think I'm excited about as copilot plus species for us it's not about having a disconnected edge, it's about having hybrid AI, where the rebirth of the PC as the edge of AI is going to be one of them.
Most exciting things for developers, so we feel well positioned quite frankly.
We had the same investment. So this is the thing that we're not a conglomerate here, we're sort of one company that means we invest ones and then we have all of these categories that benefit from that and Thats. The period of the firm here for us and so we feel good about all of that coming together.
Speaker Change: Just to add one piece because I think we should now then listening and thinking through that question.
It feels like Youre wondering like why am I not seeing.
The co pilot if you've made all this progress and the results and the answer is you already are.
And that interest 65 commercial number.
Speaker Change: We've seen that seat growth, but don't see that we're adding the majority of them are driven by frontline worker and small businesses those have a lower our pinpoint and so it masks some of the <unk> that we're already seeing not just for <unk>, which continues to contribute but also.
So this quarter additional impact from co pilot. So as we go forward being able to that is where youre going to see the impact will be in <unk>.
And then for 65 commercial and as Satya said I think you'll see the impact of copilot engagement frankly across the St ex Tac number.
Speaker Change: Wonderful thank you.
Thanks, Rajiv 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 again soon.
Speaker Change: Yeah.
Speaker Change: Thank you. This concludes today's conference.
You may disconnect your lines at this time enjoy the rest of your day.