Microsoft Corporation

Welcome to the second quarter of fiscal year 2019 Microsoft Corporation earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset prior to pressing the star keys. If anyone should require operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded. I would like to turn the call over to Mike Spencer, General Manager of Investor Relations. Thank you. Please proceed.

Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chief Executive Officer, Amy Hood, Chief Financial Officer, Frank Broad, Chief Accounting Officer, and Kellen France, Deputy General Counsel and Corporate Secretary. 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. Unless otherwise specified, we will refer to non-GAAP metrics on the call. The non-GAAP financial measures provided should be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's second quarter performance, in addition to the impact these items and events had on the financial results. All growth comparisons we make on the call today relate to corresponding period of last year unless otherwise noted. We also provide growth rates and constant currency when available as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we refer to the growth rate only. We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript, and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release. In the comments made during this conference call, and in the risk factor section of our Form 10-K, Forms 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. And with that, I'll turn the call over to Satya.

Thank you, Mike, and thanks to everyone for joining on the phone. We delivered $32.5 billion in revenue this quarter with double-digit top-line and bottom-line growth driven by strength across all of our commercial clouds. Our commercial cloud revenue grew 48% anchored by Azure revenue growth of 76%. These results speak to us picking the right secular trends in large and growing markets, many of which are still in their infancy, as well as focused innovation and execution. Leading companies in every industry are partnering with us to build their own digital capability to compete and grow. This is creating a broad opportunity for everyone, including our ecosystem. As one example, the CoSell program we introduced 18 months ago has already generated $8 billion in contracted partner revenue. Now I'll briefly highlight our momentum and innovation across our businesses. Microsoft 365 empowers everyone, enterprises, small businesses, and then more than 2 billion first-line workers with an integrated secure experience that transcends any one device. We are helping every business build out their system of communication and collaboration to drive their productivity as well as their business transformation. Microsoft Teams is the hub for teamwork and a powerful on-ramp for Microsoft 365. And we're seeing increased usage of OneDrive, SharePoint, Yammer, and the entire Office suite of applications. Teams is the only enterprise-grade solution that brings together messaging, meetings, video conferencing, as well as document collaboration. And as of this quarter, Enhanced voice capabilities like group call forwarding, delegation, location-based routing are all being brought into Teams. We are seeing rapid adoption of Teams with more than 420,000 organizations of all sizes and 89 of the Fortune 100 using Teams, including customers like Pfizer, which chose Teams as the collaboration platform for their 115,000 employees. and we are expanding into new and under-penetrated markets. This quarter, we introduced new capabilities to empower first-line workers in the service and task-oriented roles to communicate and collaborate more effectively on the go with mobile schedule management, location sharing, as well as the ability to easily record and share secure audio messages. We're expanding our opportunity in education with Microsoft 365, innovating in hardware and software to improve learning outcomes, from the more collaborative classrooms with Teams to personalized learning tools in OneNote to social learning with Flipgrid to affordable, easy-to-manage Windows 10 devices. Cybersecurity is a central challenge and Microsoft is leading the way, helping all organizations operate in what is known in the industry as a zero trust environment. It all starts with Azure Active Directory and the deep work we're doing with Microsoft Threat Protection to provide an integrated solution for our customers that extends across identities, device endpoints, email, information, cloud applications, and infrastructure. And this quarter, we introduced new advanced capabilities for identity and threat protection and for information protection and compliance. A comprehensive approach to security and compliance is another reason why customers are adopting Microsoft 365. Customers from Neiman Marcus to Brooks Running to global biopharmaceutical leader Sanofi all chose our solutions. Surface had its biggest quarter ever this holiday, delivering strong double-digit growth in both consumer and commercial. We continue to innovate and expand our family of devices, setting the bar for the industry with newer Surface Pro, Surface Laptop, and Surface Go. More broadly, Windows 10 continues to gain traction in the enterprise as the most secure and productive operating system. And at CES, our OEM partners showcased always-connected Windows 10 PCs, that deliver breakthrough levels of performance to enable powerful new scenarios like immersive gaming. Moving to business applications and LinkedIn. Dynamics 365 grew 51% this quarter as we win customers with our differentiated approach to systems of record and systems of engagement by making them more modular, extensible, and AI-driven. Increasingly, business process automation includes digitizing physical spaces, activities, and interactions. Dynamics 365, along with advances in Azure IoT, AI, and mixed reality, are leading the way for organizations to create these new systems of observation and systems of intelligence that drive end-to-end business processes and bridge the online and offline worlds. For example, we now have the capability for customers to manage inventory in real time from the shelf to the warehouse to the farm. But we're not stopping there. Our power platform spanning Power BI, Power Apps, and Flow enables anyone in an organization to start building an intelligent app or workflow where none exists. It is the only solution of its kind in the industry, bringing together no-code or low-code app development robotic process automation, and self-service analytics into a single comprehensive application platform. And it enables extensibility across Microsoft 365 and Dynamics 365, as well as leading third-party SaaS business applications. With Power Platform, Microsoft is fundamentally democratizing business processes, empowering everyone to make smarter, faster decisions. And I'm energized about the tremendous opportunity in this space. Already, Centrica is relying on Power BI, Power Apps, and Flow, along with Dynamics 365, to transform scheduling and dispatch of its first-line workforce in the United Kingdom. Virgin Group is using Power Apps and Dynamics 365 to generate a single view of its passengers, surfacing insights to improve customer service and increase operational efficiency. And in Italy, Postal Service is using Dynamics 365 to jumpstart the digital transformation of thousands of the post offices across the country. Moving to LinkedIn, we continue to generate strong revenue growth across all businesses, with sessions growth of 30% year-over-year, fueled by record levels of engagement in the feed and content shared across the platform. We also saw record job postings again this quarter. We introduced new brand and community building tools for marketeers with LinkedIn pages, making it easier for organizations of all sizes to foster strong connection with LinkedIn's 610 million members. Finally, Glint broadens our market opportunity with its industry-leading employee engagement platform. At a time when competing for talent and skill development is a priority for every leader, The combination of LinkedIn talent solutions, talent insights, LinkedIn learning, and now Glint helps every business attract, retain, and develop the best talent in an increasingly competitive jobs marketplace. Now turning to Azure. Azure is the only hyperscale cloud with a consistent computing stack that extends from the data center to the edge. and customers across every industry recognize this architectural advantage. In retail, Azure was front and center at the NRF. Kroger is partnering with us to redefine customer experience in stores and provide employees with AI-driven insights, while The Gap chose our cloud to accelerate its digital transformation. And just this week, Albertsons chose Azure as its preferred cloud. In financial services, MasterCard is partnering with us on a new, more secure way to verify digital identities. BlackRock is applying the power of the Microsoft Cloud to reimagine retirement planning. And UBS is using Azure to increase agility across the organization while meeting the highest bar of compliance and security. In healthcare, Walgreens Boots Alliance chose Azure to put people at the center of their health and wellness. with digital solutions to improve healthcare outcomes and lower costs. In addition, they will roll out Microsoft 365 to more than 380,000 employees and stores globally. We're accelerating our innovation in emerging workloads like IoT and Edge AI. At CES, our partners showcased how Azure IoT and Azure AI are enabling them to build new connected devices and experiences that span the cloud and the edge. from connected homes to cars to smart cities. Just this month, Starbucks chose Azure Sphere to secure its business-critical edge devices in the stores. Developers will increasingly drive and influence business processes and functions across every organization, and we are committed to giving developers the tools they need to be productive on any platform. More than 12 million developers around the world use Visual Studio to build applications, and new features enable them to collaborate in real time and spend more time driving innovation. We closed our acquisition of GitHub this quarter, enabling us to bring our tools and services to new audiences while enabling GitHub to grow and retain its developer-first ethos. GitHub has more than 31 million developer accounts and recently surpassed 100 million code repositories, a major milestone. Development teams at more than half of the Fortune 50 do their work in GitHub Enterprise. This month, we announced significant updates to make GitHub accessible to even more developers, introducing unlimited private repos, as well as new, simpler, and unified enterprise offering already available through the Microsoft Global Salesforce, and we're not stopping there. Just last week, we announced our acquisition of Citus Data, the leading provider of PostgreSQL, enhancing our overall data platform differentiation and building our investments in Azure and making it the most comprehensive cloud for open source and proprietary workloads at any scale. And now I'll turn to gaming. We continue to pursue our expansive opportunity to transform how games are distributed, played, and viewed. Our investments in content community and cloud services across every endpoint drove both record user engagement and record average revenue per user and contributed to our largest gaming revenue quarter ever, driven by software and services. We acquired two new studios this quarter, bringing the total to 13, and more than doubling our first-party content capacity in the past six months. Xbox Live monthly active users reached a record 64 million, with the highest number of mobile and PC users to date. Xbox Game Pass subscribers and Mixer engagement also hit new all-time highs. And Minecraft, which continues to be one of the most popular and durable gaming franchises in the industry, delivered record revenue as we expanded into new platforms, geographies, and segments like education. PlayFab surpassed 1 billion player accounts this quarter, and xCloud will be in public trials later this year as we make progress on our ambition to build a world-class gaming platform spanning mobile, PC, and consoles. In closing, our accelerating customer momentum is driven by our deep and growing partnerships with leading companies and differentiated innovation across our portfolio. Every company is becoming a digital company, and they're looking for a trusted partner to help them build tech intensity. Microsoft is that partner. With that, now I'll hand over to Amy, who will cover our financial results in detail and share our outlook, and I look forward to rejoining you for questions.