Microsoft Corporation

Welcome to the Microsoft Fiscal Year 2020 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset prior to pressing the star 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 Keith Oliver, Deputy General Counsel. On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures. Unless otherwise specified, we will refer to non-GAAP metrics on the call. The non-GAAP financial measures provided should not be considered as 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 have on the financial results. All growth comparisons we make on the call date relate to the 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 business is performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we refer to growth rate only. We will post our prepared remarks to our website immediately following the call until a 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 sections 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 Sacha.

Thank you, Mike. It was another strong quarter with double-digit top and bottom line growth driven by the strength of our commercial cloud. Stepping back from the quarter and reflecting more broadly on the next decade The defining secular trend will be the increasing rate of digitization of people, places, and things. This malleable power of software will drive productivity growth across all industries, leading to more inclusive economic growth far beyond the domains of consumer tech today. Tech spend as a percentage of GDP is projected to double over the next decade. At Microsoft, we are focused on building the most differentiated tech stack to enable every organization in every industry to build their own digital capability and tech intensity with a business model that is trusted and aligned with their success in this new era. Now I'll briefly highlight our innovation momentum starting with Azure. Every customer will need a distributed computing fabric across the cloud and the edge. to power their mission critical workloads and meet regulatory as well as operational sovereignty needs. We have more data center regions than any other cloud provider and will be the first to open in Israel and Qatar, expanding our footprint to 56 in total. Azure is the only cloud that offers consistency across operating models, development environments, and infrastructure stack, enabling customers to bring cloud computing intelligence to any connected or disconnected environment. This quarter, we expanded our portfolio of edge appliances. Azure Stack Edge brings rapid machine learning inferencing closer to where data is generated, and the new ruggedized Azure Stack form factors provide cloud capabilities in even the harshest of conditions like disaster response. With Azure Arc, we are defining the next generation of hybrid computing. Arc is an industry-first control plane built for a multi-cloud, multi-edge world, helping partners like HPE meet their customers' complex hybrid needs. Our differentiated approach across the cloud and edge is winning customers. The U.S. Department of Defense chose Azure to support our men and women in uniform at home, abroad, and at the tactical edge. And our exclusive partnership with SAP makes Azure the preferred destination for every SAP customer with large migrations in every industry, from Accenture to Coca-Cola to Rio Tinto to Walgreens Boots Alliance. We're also going beyond conventional computing architecture, ushering in a new era with Azure Quantum, a full-stack open ecosystem that enables customers like Ford Motor Company to apply the power of quantum computing today. There will be 175 zettabytes of data by 2025, up from 40 zettabytes today. Processing this data in real time will be an operational imperative for every organization. Azure Synapse is our limitless analytics service. It brings together big data analytics and data warehousing with unmatched performance, scale, and security. In concert with Power BI, it enables data scientists to generate immediate insights from structured and unstructured data and build custom AI models. Walgreens Boots Alliance is using Synapse to analyze more than 200 million items store combination, so millions of customers can rely on items always being in stock. In AI, we are seeing rapid adoption across a comprehensive portfolio of AI tools, infrastructure, and services. Six billion transactions on Azure Cognitive Services each month. Seven billion documents processed daily with Azure Cognitive Search. Two billion predictions a month using Azure Machine Learning. And 3,500 new conversational agents, bots, created each week with Azure Bot Service. Nationwide is using Azure Bot Service to simplify how millions of customers submit claims. And KPMG is using Azure Cognitive Services to transcribe and catalog thousands of hours of calls, reducing compliance costs for its clients by as much as 80%. Now to security. Cybercrime will cost businesses, governments, and individuals $1 trillion this year. We are the only company that offers integrated end-to-end identity, security, and compliance solutions to protect people and organizations. spanning identity management, devices, cloud apps, data, and infrastructure. Recent CIO surveys affirm our leadership and strong structural position, and customers from Maersk to Vodafone are increasingly turning to us to simplify security integration and speed their responses to issues. Four months since launch, more than 3,500 customers already rely on Azure Sentinel to detect and mitigate threats. It's early days and we are accelerating our investments. Now on to developer tools. From Azure DevOps to Visual Studio to GitHub, we offer the most complete developer tool chain independent of language, framework, or cloud. New capabilities make it easier for any developer to go from idea to code and from code to cloud. Developers can collaborate on the go with new GitHub mobile app, and GitHub Security Lab addresses the important need to keep open source software secure. More than 10,000 developers at Adobe are using GitHub to collaborate and create software. Stripe is using GitHub to build the online payment platform of choice for millions of customers, and Chipotle is using our dev tools to power their online ordering system. Now on to power platforms. We are empowering not only professional developers, but those closest to the business problem, from citizen developers to business decision makers with no-code, low-code tools so they can create apps and intelligent workflows that solve unique needs. Today, 2.6 million citizen developers use Power Platform to make better decisions using self-service analytics, build a mobile app, automate a business process, or even create a virtual agent, all with no coding experience. We're innovating in robotic process automation. Power Automate enables customers to turn manual tasks into automated workflows, and Power Virtual Agents enables anyone to build an intelligent bot with just point and click. TruGreen, the largest lawn care company in the United States, is using both these solutions to handle customer inquiries and take action. Now on to Dynamics 365. The competitiveness of every business going forward will be defined by their ability to harness the full value of their data. Dynamics 365 enables organizations to move from reactive, siloed transactional processes to proactive, repeatable, and predictable business outcomes. Dynamics 365 Customer Insights that's layered and built on Azure Synapse is the only customer data platform operating at scale today. AEP Energy is using it to unify first- and third-party customer data to increase upsell and reduce churn. In retail, Canada Goose is using Dynamics 365 Commerce to unify data across back office, in-store, and call centers to deliver more personalized shopping experiences. And in training, ABB is using Dynamics 365 Guides and Remote Assistant to bridge the physical and digital worlds. and Qantas is utilizing HoloLens 2 for immersive new training experiences. Now onto LinkedIn. LinkedIn continues to create economic opportunity for every member of the global workforce. Every seven seconds someone is hired on LinkedIn. We saw record levels of member engagement again this quarter Marketing Solutions remains our fastest growing business as marketeers leverage the enhanced tools and LinkedIn pages to connect with our nearly 675 million members. New data validation features in LinkedIn Sales Navigator help sellers use the power of their LinkedIn network to drive more meaningful customer engagement. We continue to innovate across our talent portfolio, including Talent Solutions, Talent Insights, Glint, and LinkedIn Learning. to help organizations attract, retain, and develop the best talent. More than five million members have already completed LinkedIn skills assessments since the launch last quarter. Now turning to Microsoft 365. Microsoft 365 is the only solution that empowers everyone with an integrated, secure experience on any device. Everyday AI in Microsoft 365 is helping create, collaborate, and convert content into knowledge in a world where computing is abundant, however attention is scarce. Presentations are more persuasive in PowerPoint, data is more insightful in Excel, videos are more searchable in Stream, and email more actionable with Cortana. The new project Cortex analyzes massive amounts of information to give people precisely the knowledge they need in the context of their work. And the new Microsoft Edge with enterprise-class security protects your privacy online and makes it easier to find information at your work with Microsoft Search. Microsoft Teams is the leading hub for teamwork. Now with more than 20 million daily active users, people are increasingly engaged across the platform in richer forms of communication and collaboration, participating in more than 27 million meetings a month. Integrated calendaring, pop-out chats, and one-touch to join meetings from your phone keeps work, conversations, and meetings in the context, eliminating the need to bounce back and forth between apps. We are reimagining the meeting rooms of the future with Teams integration with Cisco's WebEx and new devices from Lenovo. And our partnership with Samsung, along with the new walkie-talkie feature in Teams, gives first-line workers the technology they need to be more collaborative, productive, and secure on the go. All this innovation is driving usage. 64,000 employees at L'Oreal are using Teams. More than 70,000 first-line employees at IKEA are moving to Teams for shift management. From Nestle to Tesco, The world's largest companies are choosing Microsoft 365, and we continue to see increased demand for our premium offerings from customers like AXA, Rockwell Automation, Berkshire Hathaway Specialty Insurance, and Duracell. This holiday, we expanded our family of Surface devices, creating new categories that benefit the entire OEM ecosystem. And at CES, our partners showcased innovative Windows 10 devices from incredibly thin and light laptops to powerful gaming rigs. to new dual-screen designs. Finally, gaming. We continue to invest to reach gamers across every endpoint, mobile, PC, and console. xCloud is off to a very strong start, transforming how games are distributed, played, and viewed, with hundreds of thousands of people participating in initial trials. We set a new record for Xbox Live monthly active users again this quarter, led by the strength of console. Xbox Game Pass subscribers more than doubled this quarter, and Xbox Series X announced last month will be our most powerful console ever. In closing, we are expanding our opportunity across all our businesses. Along with this opportunity, we recognize the responsibility we have to ensure the technology we build is always inclusive, trusted, and is creating more sustainable worlds. Our customers see this urgent need and are looking to us in partnership with them to take action. That's why we announced an ambitious new sustainability commitment. Microsoft will be carbon negative by 2030, and by 2050, we will remove all the carbon we have emitted since the company was founded in 1975. And our $1 billion Climate Innovation Fund will accelerate the development of carbon reduction and removal technologies. We will continue to innovate alongside customers with profitable, sustainable solutions that expand our opportunity. With that, I'll hand it over to Amy, who will cover our financial results in detail and share our outlook. I look forward to rejoining you after for questions.