Q3 2025 Microsoft Corp Earnings Call
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Speaker Change: Greetings and welcome to the Microsoft fiscal year, 2025 third quarter earnings Conference call.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: A question and answer session will follow the formal presentation.
Speaker Change: And then once you require operator assistance. Please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded its now my pleasure to introduce Jonathan Nielsen Vice President of Investor Relations. Please go ahead.
Speaker Change: Good afternoon, and thank you for joining us today on the call with me asked asking Adela, Chairman and Chief Executive Officer, Amy Hood, Chief Financial Officer, Alex <unk>, Chief Accounting Officer.
Speaker Change: And keep all of the corporate Secretary and Deputy General Counsel.
Speaker Change: 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.
Speaker Change: More detailed outlook slides will be available on the Microsoft Investor Relations website, let me provide outlook commentary on today's call.
Speaker Change: 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.
Speaker Change: They are included as additional clarifying items to aid investors in further understanding the company's third quarter performance. In addition to the impact of these items and events have on the financial results.
Speaker Change: All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted.
Speaker Change: We will also provide growth rates in constant currency when available as a fee.
Speaker Change: Framework for assessing how our underlying business performed excluding the effect of foreign currency rate fluctuations.
Speaker Change: The growth rates are the same in constant currency, we will refer to the growth rate only.
Speaker Change: We will post our prepared remarks does that website immediately following the call until the complete transcript is available.
Speaker Change: Today's call is being webcast live and recorded if you also a question. It will be included in that light transmission in the transcript and in any future use of the recording.
Speaker Change: You can replay the call and view the transcript on the Microsoft Investor Relations website.
Speaker Change: During this call we will be making forward looking statements, which are predictions projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Speaker Change: 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 Form 10-Q, and other reports and filings with the Securities and Exchange Commission.
Speaker Change: We do not undertake any duty to update any forward looking statement.
Sofia: And with that I'll turn the call over to Sofia.
Sofia: Thank you Jonathan It was a record quarter driven by continued strength of Microsoft cloud, which surpassed $42 billion in revenue up 22% in constant currency cloud.
Sofia: Cloud and AI are the essential inputs for every business to expand output reduce costs and accelerate growth now.
Sofia: Now I'll highlight examples starting with infrastructure.
Sofia: We continue to expand our data center capacity this quarter alone we opened Dcs in 10 countries across four continents.
Sofia: Model capabilities are doubling in performance every six months, thanks to multiple compounding scaling laws, we continue to optimize and drive efficiencies across every layer from BC designed to hardware in silicon to system software to model optimization, all towards lowering costs and increasing performance.
Sofia: See this in our supply chain, where we have reduced doctor lead times for new Gpus by nearly 20% across our blended fleet, where we have increased AI performance by nearly 30% the ISO power.
Sofia: And our cost per token, which is more than half.
Sofia: When it comes to cloud migrations, we saw accelerating demand with customers in every industry from Abercrombie and Fitch to Coca Cola and service now expanding their footprints on Azure and we remain the cloud of choice for customers mission critical Vmware, SCP and Oracle workloads with more regional.
Sofia: The real ability than any other hyperscale.
Sofia: We're also excited about the next frontier in cloud systems with quantum in addition to putting a quantum stack on machines from our partners. We're also making real progress on our path to a utility scale quantum computer with the introduction of Myron along.
Sofia: When it comes to data and analytics, we have deeply integrated our AI platform with our data stack.
Sofia: Both gross equal usage accelerated for the third consecutive quarter and it is now used by nearly 60% of the fortune 500, including companies like BMW and being why Mellon.
Sofia: Cosmos DB revenue growth also accelerated again this quarter and remains the go to database for globally distributed no sequel workloads at any scale. It is used by customers in every industry like Carmax Doctor sign NTT data and opening ally. This quarter. We also saw analytics consumption accelerate.
Sofia: Microsoft fabric has more than 21000 paid customers up 80% year over year fabric brings together data workloads like data warehousing data signs real time intelligence, along with Paul would be I into one end to end solution real time intelligence is now the fastest growing workload and fabric.
Sofia: With 40% of customers already using it in just five months since becoming generally available all up more than 50% of fabric customers like Memorial Pacific, Louisiana State government, and Petrobras used three or more workloads and the amount of data in a multi cloud data Lake one lake.
Sofia: Has grown more than six X over the past year.
Sofia: Now on to AI platform and tools foundry is the agent in AI Apt factory. It's now used by developers at over 70000 enterprises and digital natives from atomic walk to epic Fujitsu and gained site to H&R block and LG electronics design customize and man.
Sofia: Their AI apps and agents, we processed over 100 trillion tokens this quarter up five <unk> year over year, including a record 50 trillion tokens last month alone.
Sofia: And for months in over 10000 organizations have used our new agent service to build deploy and scale. Their agents. This quarter. We also made a new suite of fine tuning tools available to customers with industry, leading reliability and we brought the latest models from open AI, along with new models from cohere.
Sofia: Deep sea meta mistral stability to foundry.
Sofia: And we've expanded our family of rest of the labs with new multimodal in many models all up Fi has been downloaded 38 million times and our research teams are taking it one step further with bit that'd be 1.58 billion parameter Lodge language model that can run on just Cpus coming to the phone.
Sofia: <unk>.
Sofia: Now on to developer tools, very well, we can get up copilot from peer to peer program, all with agent mode and be a scope copilot get now iterate on cord recognize errors and fix them automatically this adds to other copilot agents like auto fix which helps developers remediate vulnerabilities as well as code review agent, which.
Sofia: As already reviewed over 8 million pull requests and we are previewing a first of its kind three agent capable of as synchronously executing developer task all up we now have over 15 million get up copilot users up over forex year over year, and both digital natives like Twilio and enter.
Sofia: Prices like Cisco H B E Skyscanner and target continue to choose get up copilot bed developers, where they are throughout the entire Dev lifecycle with visual studio envious code, we have the world's most popular editor with over 50 million monthly active users and with power platform. We are the leading.
Sofia: Low code platform for AI makers do we now have 56 million monthly active power platform users up 27% year over year, who increasingly use our AI features to build apps and automate processes.
Sofia: Now on to future of work, Microsoft 365, Copilot has built to facilitate human agent collaboration hundreds of thousands of customers across geographies and industries now use co pilot up three X year over year. Our overall deal size continues to grow in this quarter, we saw a record number of <unk>.
Sofia: <unk> returning to buy more seats, and we're going Florida, just last week, we announced a major update bringing together agents notebooks search and create into new scaffolding for work on new researcher and analyst deep reasoning agents analyze vast amounts of web and enterprise data today.
Sofia: Our highly skilled expertise on demand directly within copilot.
Sofia: Beyond the horizontal knowledge work, we are introducing agents for every role and business process. Our sales agent dawns contacts into qualified leads and with sales chat reps can quickly get up to speed on new accounts and a customer service agent is deflecting customer inquiries and helping service reps.
Sofia: Resolve issues foster.
Sofia: With copilot studio customers can extend copilot and build their own agents with no code low code more than 230000 organizations, including 90% of the Fortune 500 have already used copilot studio with deep reasoning and agent flows and copilot studio customers can build age.
Sofia: <unk> that perform more complex tasks and also handle deterministic scenarios like document processing and financial approvals.
Sofia: And they can now build computer use agents that take action on the UI across desktop and web apps and with just a click they can turn any sharepoint site into an agent to this quarter alone customers created over 1 million custom agents across sharepoint, and copilot studio up 130% quarter over quarter.
Sofia: When it comes to business applications dynamics 306, five again took share as companies like Avaya Brunswick soft got switched to dynamics from legacy providers. Verizon for example chose dynamics 365 sales to improve the efficiency of its sellers in health care Dragon Copilot.
Sofia: Is off to a fast start last quarter alone Rehabbed document nearly $9 5 million physician patient encounters and providers like city of Hope Ottawa Hospital, tough medicine, and well start up over 50% quarter over quarter.
Sofia: In manufacturing, we introduce factory operations and safety agents that Hanover, masse, and leading partners like Autodesk BTC and Siemens have all built their own industrial AI solutions on our stack.
Sofia: And in retail we have introduced agents to help customers like Bath <unk> body works build more personalized shopping experience and improve store operations.
Sofia: When it comes to Windows, copilot, plus species foster and how better battery life than any other device in their category.
Sofia: Also continued to win new customers with best in class AI capabilities, we offer our growing number of AI apps from partners like Adobe camera and zoom just last week, we rolled out exclusively I experiences like recall click to do in Windows search to all copilot plus species and we continue to see increased.
Sofia: It'll traction as we approach end of support for Windows 10, Windows 11, commercial deployments increased nearly 75% year over year.
Now on to security security is our top priority and we have made significant progress against the engineering objectives, we outlined a year and a half ago as part of our secure future initiative.
Sofia: Applying these learnings to deliver new innovation across our platform last month, along with our partners. We introduced security copilot agents to help defenders autonomous Lee handle high volume security in <unk> dos informed by 84 trillion daily threat signals. We also added new capabilities to defend.
Sofia: And draw and purview to help organizations secure and govern the AI deployments all up we now have 1.4 million security customers over 900000, including E Y Global manpower group Tri net regions bank, how four or more workloads up 21%.
Sofia: Year over year.
Sofia: And in identity enter now has more than 900 million monthly active users.
Sofia: Now on to our consumer businesses, starting with Linkedin.
Sofia: Over 1 billion professionals use linkedin to connect blown hot cell and our membership continues to grow at double digits Euro real time.
Sofia: Time spent watching videos on the platform was up 36% and comments were up 32% year over year. We're also seeing more members use AI to gain new skills and flying jobs. The number of learners, who have used AI powered coaching increased over two X quarter over quarter.
Sofia: And we remain the market leader in hiring as customers like Equinix and Verizon use linked in the hiring the system to find qualified candidates foster.
Sofia: When it comes to Linkedin premium, we saw was 75% quarter over quarter subscriber growth through our premium pages offering for Smbs and Linkedin marketing solution continues to be the best way to reach B to B decision makers with two consecutive quarters of accelerated revenue growth.
Sofia: More broadly when it comes to advertising, we are transforming how people search browse discover content and use AI as a personal assistant with copilot searching being we're re imagining search results with overview pages curated by AI and embedded conversational capabilities with copilot vision and <unk>.
Sofia: Edge Copilot sees what do you see it gives you real time responses, while you browse with co part of discover we are personalizing M. S. N experience based on user interactions and preferences and with our updated copilot App. We are focused on building daily engagement and successful sessions across a range of modalities rather it is converging.
Sofia: Searching shopping or travel planning.
Sofia: All up we again took share across being an edge and our total advertising revenue across our businesses has surpassed $20 billion over the past 12 months.
Sofia: Now on to gaming, we continue to transform the business and focus on margin expansion as we bring our games to over 500 million monthly active users across devices. We.
Sofia: We ended the quarter as the top publisher by Preorders of Green stalls are both Xbox and Playstation store PC game pass revenue increased over 45% year over year with Xbox play anywhere players now can access more than 1000 games. They can play across console and PC and just lost.
Sofia: Weak, we brought cloud gaming to L. G T V's cloud gaming set a new record surpassing 150 million hours played for the first time this quarter.
Sofia: Also integrating AI across the X box, new copilot for gaming is a personalized gaming companion that provides in game assistant and expert coaching and our first of its kind Muse model can generate gameplay in real time.
Sofia: Finally, it's fantastic to see the success of the Minecraft movie, which is the top grossing film of the year. In addition to monetizing our IP new ways, we have seen a 75% plus increase in weekly active users of the game year over year since the release.
Sofia: In closing we are rapidly innovating to expand our opportunity across both consumer and commercial businesses in just a few weeks at all build conference will share how we are creating the most powerful AI platform for developers and I encourage you to tune in with that let me turn it over to Amy.
Amy: Thank you Satya and good afternoon, everyone. This quarter revenue was $70.1 billion up 13% and 15% in constant currency gross margin dollars increased 11% and 13% in constant currency, while operating income increased 16% and 19% in constant currency.
Amy: And earnings per share was $3.46, an increase of 18% and 19% in constant currency.
Amy: <unk> exceeded expectations driven by focused execution from our sales and partner teams. We continue to see strong demand for our cloud and AI offerings as they help customers drive productivity increase efficiencies and grow their businesses.
Amy: And again this quarter revenue from our AI business was above expectations.
Amy: Commercial bookings increased 18% and 17% in constant currency significantly ahead of expectations again, this quarter driven by an azure commitment from oak and AI.
Amy: We also saw consistent execution across our core annuity sales motions and continued long term commitments to our platform.
Amy: Commercial remaining performance obligation increased to $315 billion up 34% and 33% in constant currency 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 47% and this.
Warner: Warner our annuity mix was 98%.
Warner: <unk> was roughly in line with expectations on total company revenue.
Warner: Segment level revenue and operating expense growth.
Warner: <unk> decreased Cogs growth by only 1.1 point unfavorable to expectations Microsoft.
Warner: Microsoft's cloud revenue was $42 $4 billion ahead of expectations and grew 20% and 22% in constant currency.
Warner: Christoph cloud gross margin percentage was 69% in line with expectations and decreased <unk> three points year over year, driven by the impact of scaling our AI infrastructure company.
Warner: Company gross margin percentage was also 69% down one point year over year, driven by scaling our AI infrastructure.
Warner: Operating expenses increased 2% and 3% in constant currency lower than expected due to our focus on cost efficiencies as well as investments this shifted to Q4.
Warner: Operating margins increased one point year over year to 46%.
Warner: Better than expected as we continue to focus on building high performing teams and increasing our agility by reducing layers with fewer managers.
Warner: At a total company level head count at the end of March was 2% higher than a year ago and was down slightly compared to last quarter.
Warner: Now to our segment results revenue from productivity and business processes was $29.9 billion and grew 10% and 13% in constant currency ahead of expectations driven by Linkedin, Microsoft 365, commercial products and Microsoft 365 consumer.
Warner: And for 65 commercial cloud revenue increased 12% and 15% in constant currency in line with expectations ARPA growth was again driven by E. Five and M 365, copilot with inter 65 co pilot, we continue to see growth across customer segments and geos.
Warner: <unk> hundred 65 commercial seats grew 7% year over year to over $430 million.
Warner: Well, we continue to see installed base expansion across all customer segments growth was primarily driven by a small and medium business and frontline worker offerings.
Andrew: Andrew 65, commercial products revenue increased 5% and 8% in constant currency and it expectations due to higher than expected office transactional purchasing interest 65, consumer cloud revenue increased 10% and 12% in constant currency ahead of expectations driven by higher than expected subscription growth.
Warner: Following the January price increase.
Warner: M 365, consumer subscriptions grew 9% to $87 7 million.
Warner: <unk> revenue increased 7% and 8% in constant currency results were ahead of expectations due to better than expected performance across all businesses.
Warner: <unk> solutions business continues to be impacted by weakness in the hiring market.
Warner: Dynamics 365 revenue increased 16% and 18% in constant currency in line with expectations with continued growth across all workloads.
Warner: Segment gross margin dollars increased 10% and 13% in constant currency and gross margin percentage was relatively unchanged year over year, even with the impact of scaling our AI infrastructure.
Warner: Operating expenses increased 1% and 2% in constant currency and operating income increased 15% and 18% in constant currency.
Warner: Next the intelligent cloud segment.
Warner: Revenue was $26 $8 billion and grew 21% and 22% in constant currency ahead of expectations driven by Azure.
Warner: In Azure and other cloud services revenue grew 33% and 35% in constant currency, including 16 points from AI services.
Warner: Focused execution drove non AI services results, where we saw accelerated growth in our enterprise customer segment as well as some improvement in our scale motions and an Azure AI services, we brought capacity online faster than expected.
Warner: And our on premises server business revenue decreased 6% and 4% in constant currency slightly below expectations driven by renewals with lower in period revenue recognition from the mix of contracts the year over year decline is reflective of the continued customer shift to cloud offerings.
Warner: Enterprise and partner services revenue increased 5% and 6% in constant currency slightly ahead of expectations.
Warner: Better than expected performance in enterprise support services.
Warner: Segment gross margin dollars increased 13% and 14% in constant currency and gross margin percentage decreased four points year over year, driven by scaling our AI infrastructure operating expenses increased 6% and 7% in constant currency and operating income grew 17% and 18% in constant currency.
Warner: Now to more personal computing.
Warner: Revenue was $13 $4 billion and grew 6% and 7% in constant currency ahead of expectations due to better than expected results across all businesses.
Warner: Windows OEM and devices revenue increased 3% year over year head of expectations as tariff uncertainty through the quarter resulted in inventory levels that remained elevated.
Warner: Searching news advertising revenue ex Tac increased 21% to 23% in constant currency results were significantly ahead of expectations driven by usage from a third party partnership better than expected rate expansion and volume growth across edge and banks.
Warner: And in gaming revenue increased 5% and 6% in constant currency, Xbox content and services revenue increased 8% and 9% in constant currency had an expectations driven by stronger than expected performance in third party and first party content.
Warner: Segment gross margin dollars increased 9% and 11% in constant currency gross margin percentage increased two points year over year, driven by strong execution on margin improvement and search and gaming.
Warner: Operating expenses increased 1% operating income increased 21% and 23% in constant currency driven by continued prioritization of higher margin opportunities now back to total company results.
Warner: Capital expenditures, including finance leases were taught you $1.4 billion slightly lower than expected due to normal variability from the timing of delivery of data center leases cash paid for PP&E was $16 $7 billion roughly half of our cloud and AI related to spin was on long lived asset.
Warner: That will support monetization over the next 15 years and beyond.
Warner: The remaining cloud and AI spend was primarily for servers, both Cpus and Gpus serve customers based on demand signals, including our customer contracted backlog of $315 billion.
Warner: Cash flow from operations was $37 billion up 16% driven by strong cloud billings and collections, partially offset by higher tax payments and this quarter free cash flow was $23 billion. Other income and expense was negative $623 million more favorable than anticipated prime.
Warner: Barely due to net gains on derivatives and investments our losses on investments accounted for under the equity method were slightly higher than expected.
Warner: Active tax rate was approximately 18% and finally, we returned $9 $7 billion to shareholders through dividends and share repurchases, an increase of 15% year over year.
Warner: Now moving to our Q4 outlook, which unless specifically noted otherwise is on a U S dollar basis.
Warner: First through April demand signals across our commercial businesses as well as in Linkedin gaming and search have remained consistent our outlook assumes those trends continue in Q4.
Warner: If the environment changes our results may be impacted.
Warner: In our Windows OEM business, our outlook assumes the elevated inventory levels from Q3 will come down in Q4, we have widened our guidance range in our more personal computing segment to account for some of this variability.
Warner: Next FX with the weakening of the U S. Dollar in April we now expect FX to increase total revenue growth by one point within the segments. We expect FX to increase revenue growth by one point in productivity and business processes and less than one point and intelligent cloud and more personal computing.
Warner: FX to increased Cogs operating expense growth by less than one point.
Warner: In commercial bookings, we expect solid growth on a significant prior year comparable and growing X pre base bookings growth will be driven by strong execution across our core annuity sales motions and continued long term commitments to our platform.
Warner: As a reminder.
Warner: Larger longer term azure contracts, which are more unpredictable and their timing can drive increased quarterly volatility in our bookings growth rate.
Warner: Microsoft Cloud gross margin percentage should be roughly 67% down year over year, primarily driven by the impact of scaling our AI infrastructure and now capital expenditures, we expect Q4 capital expenditures to increase on a sequential basis.
Warner: Each to Capex in total remains unchanged from our January H to guidance as a reminder, there can be quarterly spend variability from cloud infrastructure build outs and the timing of delivery of finance leases next to segment guidance in productivity and business processes, we expect revenue of 32.05.
Warner: To 32.35 billion U S dollars or growth of 11% to 12% in constant currency.
Warner: 65, commercial cloud revenue growth should be approximately 14% in constant currency relatively stable compared to the prior quarter.
Warner: We expect continued ARPA growth through E. Five that Amtrust 65, co pilot and some seat growth moderation given the size of the installed base and for 65 commercial products revenue growth should be in the mid single digits. As a reminder, and for 65 commercial products includes both the windows commercial on premises components of <unk> hundred 65 suites and offer.
Warner: Transactional purchasing both of which can be variable due to in period revenue recognition dynamics.
Warner: <unk> hundred 65, consumer cloud revenue growth should be in the mid teens driven by the January price increase.
Warner: For Linkedin, we expect revenue growth in the high single digits and in dynamics 365, we expect revenue growth to be in the mid to high teens with continued growth across all workloads for intelligent cloud. We expect revenue of $28 75 to 29.05 billion U S dollars or growth of 'twenty to 'twenty two.
Warner: Percent in constant currency.
Warner: Revenue will continue to be driven by Acura, which as a reminder.
Warner: Quarterly variability primarily from in period revenue recognition, depending on the mix of contracts.
Warner: In Azure, we expect Q4 revenue growth to be between 34, and 35% in constant currency driven by strong demand for our portfolio of services in our non AI services, we expect focused execution to continue driving healthy growth.
Warner: And in our AI services, while we continue to bring data center capacity online as planned demand is growing a bit faster. Therefore, we now expect to have some AI capacity constraints beyond June.
Warner: And our on premises server business, we again expect revenue to decline in the mid single digits with the ongoing customer shift to cloud offerings.
Warner: And the enterprise and partner services, we expect revenue growth to be in the mid to high single digits driven by enterprise support services.
Warner: In more personal computing, we expect revenue to be 12.35 to 12.85 billion U S dollars.
Warner: Windows OEM and devices revenue should decline in the mid to high single digits, we expect windows OEM revenue to decline in the low to mid single digits, assuming OEM inventory levels come down through the quarter as noted earlier.
Warner: Although the range of potential outcomes is wider than normal.
Warner: Rice's revenue should decline in the high teens.
Warner: Search and news advertising ex Tac revenue growth should be in the high teens, even on a strong prior year comparable.
Warner: Expect to see continued growth in both volume and revenue per search with share gains across edge and being <unk>.
Warner: Overall search and news advertising revenue growth should be in the mid teens.
Warner: And in gaming at least.
Warner: Revenue growth to be in the mid single digits, we expect Xbox content and services revenue growth to be in the high single digits driven by first party content now back to company guidance.
Warner: We expect Cogs of 23.6 to $23 8 billion U S dollars or growth of 19% to 20% in constant currency and operating expense of 18 to 18.1 billion U S dollars or growth of approximately 5% in constant currency, therefore, even with ongoing.
Warner: Our investments as we scale, we continue to expect full year FY 'twenty five operating margins to be up slightly year over here.
Warner: Other income and expense expected to be roughly negative $1 $2 billion, primarily driven by investments accounted for under the equity method. As a reminder, we do not recognize mark to market gains or losses on equity method investments.
Warner: And lastly, we expect our Q4 effective tax rate to be approximately 19%.
Warner: Now I'd like to share some closing thoughts as we look to the next fiscal year.
Warner: We remain committed to investing against the strong demand signals, we see for our services.
Warner: As a reminder, our earlier comments on FY 'twenty six capital expenditures remain unchanged, we expect capex to grow it will grow at a lower rate than FY 'twenty five and will include a greater mix of short lived assets, which are more directly correlated to revenue than long lived assets.
Warner: These investments.
Warner: <unk> along with focused execution.
Warner: That delivers near term value to our customers.
Jonathan Nielsen: To ensure we continue to lead to the cloud and AI opportunity head with that let's go to Q&A Jonathan.
Speaker Change: Thanks, Amy we'll now move over to Q&A out of respect for others on the call. When we request that participants. Please only ask one question.
Jonathan Nielsen: Operator can you please repeat your instructions.
Speaker Change: Ladies 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.
Jonathan Nielsen: You May press Star two if you would like to remove your question from the queue.
Jonathan Nielsen: For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Jonathan Nielsen: 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 in what all of US are looking at as a difficult environment a lot of uncertainty out there so really impressive to put up the results that you guys did.
Speaker Change: What are the things that we heard a lot about this quarter in the media and press reports was changing datacenter commitments Navy, Microsoft walking away from some of those data.
Speaker Change: Data center can in it but it sounds like the AD demand is very strong you are talking about not being able to hit all of that demand with supply.
Speaker Change: Can you talk to us about what's going on with your data center strategy are there any shifts taking place and maybe in particular sake, you could talk about some of the comments that you had made about the potential risk for oversupply and Gpus out in the future. What exactly was that rich you were talking about are you incorporating that risk into your data center strategy.
Speaker Change: Yes.
Speaker Change: First of all thanks, Keith for the question.
Speaker Change: The reality is we.
Speaker Change: Always been making adjustments to build lease.
Speaker Change: Pes we build.
Speaker Change: All through the last 10 15 years, it's just that you all pay a lot more attention to what we do quarter over quarter Nowadays.
Speaker Change: Having said that the key thing for us is to have our.
Speaker Change: Our bills and be positioned for what is the work load growth of the future. So that's what you have to go.
Speaker Change: So there's a demand part to it.
Speaker Change: Shape of the workload part to it and there isn't location part to it.
Speaker Change: Don't want to be upside down on having one big data center in one region. When you have a global demand footprint.
Speaker Change: Don't want to be upside down when the shape of demand changes because after all with essentially retraining loss cost time compute that's a big change in terms of how you think about even what is training right forget influencing so fundamentally given all of that and then every time.
Speaker Change: Great Moore's law, but remember this is a compounding sort of S curve right reduces Moore's law the system software model architecture changes. This the app thermal efficiency given all of that we just want to make sure we are building.
Speaker Change: <unk> for the latest and greatest sort of information we have on all of that and that's what you see reflected.
Speaker Change: And I feel very very good about the pace in fact, Amy just mentioned, we will be short power and so therefore, it's not power, it's not a blanket statement I need power in specific places so that we can either lease or build at the pace at which we want and so that's the sort of plan. The good executing do maybe Amy you can add.
Amy: Yeah, maybe just to add.
Amy: Add a little bit to talk to his comment.
Amy: Just a reminder, these are very long lead time decision from land to build to build outs can be lead times are five to seven years two to three years. So we're constantly.
Amy: Balancing positioning as we watch demand curves and then thanks hop you watch and the second part is just to remind you and thought it talks about being short power He's really talking about data center space.
Amy: And so we've continued through the second half.
Amy: To put things in place in fact, we talked a little bit about pulling even some of that phase III ready earlier and being able to deliver that earlier to customers. This quarter, which is really good work by the teams as we continue to get more and more efficient at that process.
And I look forward to being able to continue to do that in the future I did talk about in my comments we.
Amy: We had hoped to be in balance by the end of Q4.
Amy: We did see some increased demand.
Amy: As you saw through the quarter. So we are going to be a little short so I'll say, a little tight as we exit the year.
Amy: But are encouraged by that.
Amy: Excellent. Thank you guys.
Amy: Thanks, Keith Operator next question please.
The next question comes from the line of Brent Thill with Jefferies. Please proceed.
Speaker Change: Thanks, Scott on your comment about.
Speaker Change: Accelerating demand for cloud migrations I am curious if you could.
Speaker Change: Dig in and extrapolate a little more what you're seeing there. Thank you.
Speaker Change: Thanks Brent.
Speaker Change: So I sort of think about three big things that are happening in the cloud all in parallel and then there is also a relationship between them. One is I'll, just say that classic migration, whether it's equal windows server.
Speaker Change: And so thats sort of again got good steady state progress because the reality is.
Speaker Change: I think everyone's now perhaps there's another sort of kick in the data center migrations, just because it would be efficiency.
Cloud provides so that's sort of one part.
Speaker Change: Pes is.
Speaker Change: Good data growth your thoughts like.
Speaker Change: Postgresql Nash I mean, forgetting sequels over post growths on Azure is growing cosmos is growing.
Speaker Change: Analytics stuff I talked about with fabric.
Speaker Change: The others, whether it is data breaks or even a snowflake on azure and growing so we feel very good about fabric growth in our data growth than the cloud native growth. So this is again before we even get to AI some of the core compute consumption.
Speaker Change: Off cloud native players.
Speaker Change: It is also.
Speaker Change: Pretty very healthy it was healthy throughout the quarter, we projected to grow moving forward as well then the thing to notice is that ratio and I think we are.
Speaker Change: <unk> this multiple times before if you look underneath even chat GPT in fact that team does a fantastic job of thinking about not only their growth in terms of AI accelerators. They need they use cosmos DB. They use postgresql they use core compute and storage and so there's even a ratio between any AI workload in terms of AI.
Speaker Change: Accelerators do others. So those are the four pockets I would say all four.
Speaker Change: Trend lines, which all have a relationship with each other and.
Speaker Change: If I step back and Amy and I talk a lot about this this time around.
Speaker Change: There is nothing certain for sure in the future except for one thing, which is our largest business is our infrastructure business and the good news here is the next big platform shift builds on that so it's not a complete rebuild having gone through with all of these platform shifts.
Speaker Change: You have to come out on the other side with a full rebuild.
Speaker Change: If there is good news here is that we have a good business in Azure that continues to grow and the new platform depends on that so we want to stay disciplined and execute super well on that.
Speaker Change: Thank you Brent.
Speaker Change: Next question please.
Speaker Change: The next question comes from the line of Mark Modeler with Bernstein Research. Please proceed.
Speaker Change: Thank you very much for taking my question and I will reiterate what my peers have said congratulations on the great quarter Satya and Amy.
Speaker Change: Microsoft is a very different business than it was during the last recession incredible job you've done if we get into a recession I hope we Don how do you think about the stability the sustainability.
Speaker Change: <unk> ability revenue volatility of Microsoft today, if we were to get into a recession with the business react early to recession of late with recession to have a more shallow impact on revenue any thoughts will be appreciated.
Speaker Change: Maybe I'll start and then Amy.
Speaker Change: Mark.
Speaker Change: At East.
Speaker Change: I think we will approach it is quite frankly.
Speaker Change: Be very focused on how we help our customers.
Speaker Change: If there is any turbulence in the macro because one of the things that we feel.
Speaker Change: We can do just because of the efficiencies.
Speaker Change: Off the cloud.
Speaker Change: And the footprint, we have and the differentiated sort of layers of the stack from the SaaS application side to the infrastructure side I think if you sort of buy into the argument that software is the most valuable resource we have to fight any type of inflationary pressure or any type of growth pressure.
Speaker Change: Or where you need to do more with less I think we can be super helpful. In that and so if anything we would probably have more of that mindset is how do we make sure we're helping our customers and then of course, we'll look to share.
Speaker Change: Share gains.
Speaker Change: Thanks Mark.
Speaker Change: Next question please.
The next question comes from the line of Karl Keirstead with UBS. Please proceed okay. Thanks, a number of metrics to applaud, but I think the one that stands out to me is the 16th.
Speaker Change: <unk> 16 point.
Speaker Change: Growth rate lift to Azure from AI.
Amy: And Amy I just wanted to ask if you could unpack that a little bit of course, you mentioned that.
Amy: You got a bit of a kicker from capacity coming online, but I'm, a little bit more interested in and where the.
Amy: Demand came in above expectations like what workload type, it's hard for us to see that on the outside was it <unk>.
Serge and chat GPT inference that landed in Azure was it an uptick in enterprise AI adoption.
Speaker Change: And Amy do you think that 16 points could be higher in June. Thank you.
Speaker Change: Thanks, Paul for the question.
Speaker Change: Just to provide some clarity because I think your question implies something that we didn't mean to imply on the call.
Speaker Change: First the real.
Speaker Change: Outperformance in Azure this quarter was in our non AI business.
Speaker Change: Then to talk about the AI business really what was better was precisely what we said we talked about this we knew Q3 that.
Speaker Change: We had and hadn't really.
Speaker Change: Match supply and demand pretty carefully and then didn't expect to do much better than we had guided to on the AI side, we've been quite consistent on that so the only real upside we saw on the AI side of the business was that we were able to deliver supply early to a number of customers.
Speaker Change: And being able to do that throughout the quarter creates quite a good benefit to us, but the majority of our outperformance versus where we had expected to be it was on the non AI piece of the business.
Speaker Change: Thanks, operator.
Speaker Change: Operator next question please.
Speaker Change: The next question comes from the line of cash Rangan with Goldman Sachs. Please proceed.
Speaker Change: Hi, Thank you very much one question for Amy you've seen in the past that.
Speaker Change: That you can attain better and better capital efficiency.
Speaker Change: With with the with the cloud business in public cloud and AI business, where do you stand today, Amy maybe something you can opine as well that you had said before that he can slow down your capex growth rate, while still accelerated Azure, which includes AI can we get a mark to market on that thank you so much.
Speaker Change: Maybe I'll start cash in.
Speaker Change: Let's talk to you at all because I really think.
Speaker Change: When you go back and read some of <unk> comments on how the S curves build on themselves.
Speaker Change: Actually.
Speaker Change: The levers that go in to the answer of the question that you're asking and so the way of course, you've seen that historically is right. When we went through the fire cloud transitions you see capex accelerate you build out a data center footprints you slowly.
Speaker Change: Phil <unk> capacity and over time, you see software efficiencies and hardware efficiencies build on themselves and you saw that process for us for goodness.
Now quite a long time and what Tom is talking about is how quickly that's happening on the AI side of the business and you add to that model diversity. So think about the same levers plus model efficiency those compounds now the one thing that's a little different this time is just the pace.
Speaker Change: So when you're seeing that happen pace in terms of efficiency side, but also pace in terms of the buildout.
Speaker Change: So it can mask some of the progress, but we are working hard across all of the teams hardware software or even the build teams to get things in place as quickly as possible Doctor lifetimes.
Speaker Change: All of that is improving in all of that actually is benefiting us.
Speaker Change: I'll go ahead, and say our margins on the AI side of the business are better than they were at this point by far than when we went through the same transition.
Speaker Change: And the server to cloud transition Yeah, I mean, I think at a macro level I think the way to think about this is you can ask the question, what's the difference between our hosting business in our Hyperscale business.
Speaker Change: It's software.
Speaker Change: Thank you.
Speaker Change: We asked for sure it's a capital intensive business, but capital efficiency come from that system wide software optimization.
Speaker Change: And that's what.
Speaker Change: The hyperscale business attractive and.
Speaker Change: And Thats, what we want to just keep executing super well.
Speaker Change: Super Thanks, so much.
Speaker Change: Operator next question please.
Operator: The next question comes from the line of Mark Murphy with Jpmorgan. Please proceed.
Speaker Change: Thank you so much such a you had commented recently that the deep sea commitment is a real thing and you had said that software efficiencies mean that the fleet will be aged for a longer time can you comment on how those advances are affecting the pace and volume of AI experimental.
Speaker Change: Sure that activity in the marketplace and Amy could we start to consider the possibility of that.
Speaker Change: Software enhancements might extend.
Speaker Change: The useful life assumption that you're using for Gpus or is it a little premature to be thinking that way.
Speaker Change: Yes first of all I think some of the work that actually open the I first pioneered indeed with all of the reasoning models and of course <unk> is sort of attitude <unk> had done good work as well and others as well.
Speaker Change: The idea that you can have.
Speaker Change: Test time compute.
Speaker Change: Plus free training and then some of the great optimization that inference time.
Speaker Change: All happen has proven out I mean, if you look at it.
Speaker Change: I would say for every every Moore's law change in movement.
Speaker Change: There's probably a 10 X improvement because the software that sort of what's happening with these models some of it come through model architecture. Some of that comes from data efficiency compute efficiency and what have you.
Speaker Change: So that's what we are writing.
Speaker Change: And we feel.
That all off.
Speaker Change: When you have a commodity that is getting that better.
Speaker Change: Then the question is how do you build out a fleet that's super balanced.
Speaker Change: So that then the workloads can be built and can in fact take advantage of that.
Speaker Change: Efficiency and the underlying infrastructure I mean, it's kind of like virtualization, what is the difference between servers.
Speaker Change: And sort of again client silver with virtualization or the efficiency what are the difference between virtualization and cloud. It was efficiency what are the difference between this generation of cloud.
Speaker Change: AI is efficiency. So the more you can kind of continue to think about software driving that efficiency is what drives demand ultimately.
Speaker Change: And to your specific question.
Speaker Change: In terms of thinking about the.
Speaker Change: The depreciable life of an asset.
Speaker Change: We have a long history before we make any of those so.
Speaker Change: We're focused on getting every bit of useful life, we can of course out of assets.
Speaker Change: At this point that tends to be a software question more than more than a hardware one.
Speaker Change: Thank you thanks Mark.
Speaker Change: Great next question please.
Speaker Change: The next question comes from the line of Kirk <unk> with Evercore ISI. Please proceed.
Speaker Change: Yes, thanks, very much and congrats on a great quarter, you Amy you mentioned that the upside in Azure came from the non AI services. This time around I was wondering if you could just talk a little bit more about that and I guess as you look forward and maybe what's different.
Speaker Change: This go round versus what we saw a few years ago, when obviously things like optimization weighed on the growth a little bit it sounds like the product portfolio is much broader right now, but just wondering if you could add some color on that front. Thank you.
Speaker Change: Oh sure.
Speaker Change: And thanks for the question.
Speaker Change: We know there's not a I talked a little bit about this in.
Speaker Change: In general we saw.
Speaker Change: Better than expected performance across our segments.
Speaker Change: But we saw acceleration in our largest customers.
Speaker Change: Called out the enterprise segment in General and then and what we talked about of our scale motions, where we had some challenges in Q2 things were a little better.
Speaker Change: And we still have some work to do.
Speaker Change: And our scale notions and we're encouraged by our progress we're excited and just stay focused on that as.
Speaker Change: As of course, we work through the final quarter of our fiscal year.
Speaker Change: By Geo the performance was pretty consistent thought you actually highlighted some of the workloads that came in a little better than we thought.
Speaker Change: Obviously, just some good consistent work on migrations good execution by the sales and partner teams data workloads he went through.
Speaker Change: So in general I wouldn't say, it's anything beyond that I.
Speaker Change: I do think it was.
Speaker Change: Improved.
Speaker Change: <unk> execution.
Speaker Change: And I was happy to see it but theres still some some work to do on our scale motions in particular.
Speaker Change: Thank you.
Speaker Change: Thanks, Scott operator, we have time for one last question.
Speaker Change: The last question will come from the line of Alex Zukin with Wolfe Research. Please proceed.
Alex Zukin: Hey, guys. Thanks for squeezing me in again, just amazing congratulations on those Azure numbers, which I think are.
Alex Zukin: Quite honestly just.
Speaker Change: Inspiring so maybe to Amy to the point that you're making that the surprise factor was on the non azure non AI side of the house.
Alex Zukin: And it sounds like there is confidence in that continuing.
Alex Zukin: Beyond how much of that are you starting to see the poll pull in of the non AI driven by the AI portion of Azure and on the AI portion specifically as tough time compute really just blows out kind of prior conceptions of.
Alex Zukin: Scaling law challenges, how much does that change potentially the curve of the AI Azure growth as you as you go forward here over the next few quarters.
Alex Zukin: I think that for me.
Alex Zukin: First of all I'll say.
Alex Zukin: I think we've talked about this.
Alex Zukin: A bit it's always get that chance to get to iterate that's it.
Alex Zukin: It's getting harder and harder to separate what AI workload is from a non AI workload and we've talked about it. This way I think in most instances can make sure people understood that when we were accelerating all of our capex spend over the past two and a half or three years now.
Alex Zukin: People have confidence that we were turning that into revenue and product.
Alex Zukin: Way that was transparent.
Alex Zukin: That everyone can understand really the goal that we had set for ourselves and for our partners and customers in terms of building product.
Alex Zukin: Turn to revenue.
Alex Zukin: But if you take a step back from that.
Alex Zukin: These were closer being built GPU.
Alex Zukin: Gpus Cpus Torres network, all the same things and so I think really what we're talking about is really how socket talked about.
Alex Zukin: And one of the earlier questions.
Alex Zukin: We're seeing digital native digital native build workloads.
Alex Zukin: Thank you and our work they do or not AI work do they tend to do that work in the same club lots of times.
Alex Zukin: Sometimes it all in the same place not all the time, but that relationship gets stronger and stronger as people pivot to more.
Alex Zukin: AI heavy workload and so I think youre starting to see some of that relationship.
Alex Zukin: I think we'll continue to see that.
Alex Zukin: As AI workloads continue to get built and experimented with.
Speaker Change: And proof of concepts get expanded and so I.
Speaker Change: I think I, mostly focus on the fact that together.
Speaker Change: We saw good performance.
In Q3 on Ash.
Speaker Change: Youre inclusive of both components.
Speaker Change: In terms of our execution in terms of the field and partner teams in backlog in conversion and interesting workloads, adding customer value and solving real problems and adding real value and I think that's probably how I would approach that number more than trying to separate it in the way that you know even though.
Speaker Change: We have talked about it but for very different reasons.
Speaker Change: Thanks, Alex.
Speaker Change: That's up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with you all soon.
Speaker Change: Thank you.
Speaker Change: This concludes today's conference you may disconnect your lines at this time.
Speaker Change: Enjoy the rest of your day.