Microsoft Corporation

Greetings, and welcome to the Microsoft Fiscal Year 2023 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brett Iverson, Vice President, Investor Relations. Thank you. You may begin.

Good afternoon, and thank you for joining us today. On the call with me are Sati Nadella, Chairman and Chief Executive Officer, Amy Hood, Chief Financial Officer, Alice Jollett, Chief Accounting Officer, and Keith Dolliver, Deputy General Counsel. On the Microsoft Invest Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides the reconciliation of differences between GAAP and non-GAAP financial measures. 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. They're included as additional clarifying items to aid investors in further understanding the company's first quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency when available as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will 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, Brett. To start, I want to outline the principles that are guiding us through these changing economic times. First, we will invest behind categories that will drive the long-term secular trend where digital technology as a percentage of world's GDP will continue to increase. Second, we'll prioritize helping our customers get the most value out of their digital spend so that they can do more with less. And finally, we will be disciplined in managing our cost structure. With that context, this quarter, the Microsoft Cloud again exceeded $25 billion in quarterly revenue, up 24% and 31% in constant currency. And based on current trends continuing, we expect our broader commercial business to grow at around 20% in constant currency this fiscal year as we manage through the cyclical trends affecting our consumer business. With that, let me highlight our progress starting with Azure. Moving to the cloud is the best way for organizations to do more with less today. It helps them align their spend with demand and mitigate risk around increasing energy costs and supply chain constraints. We're also seeing more customers turn to us to build and innovate with infrastructure they already have. With Azure Arc, organizations like Wells Fargo can run Azure services, including containerized applications across on-premises, edge, and multi-cloud environments. We now have more than 8,500 customers, more than double the number a year ago. We are the platform of choice for customers' SAP workloads in the cloud. Companies like Chobani, Munich Re, Sodexo, Volvo Cars all run SAP on Azure. We are the only cloud provider with direct and secure access to Oracle databases running in Oracle Cloud infrastructure, making it possible for companies like FedEx, GE, and Marriott to use capabilities from both companies. And with Azure Confidential Computing, we're enabling companies in highly regulated industries, including RBC, to bring their most sensitive applications to the cloud. Just last week, UBS said it'll move more than 50% of its applications to Azure. Now to data and AI. With our Microsoft Intelligent Data Platform, we provide a complete data fabric helping customers cut integration tax associated with bringing together siloed solutions. Customers like Mercedes-Benz are standardizing on our data stack to process and govern massive amounts of data. Cosmos DB is the go-to database powering the world's most demanding workloads at limitless scale. Cosmos DB now supports PostgreSQL, making Azure the first cloud provider to offer a database service that supports both relational and NoSQL workloads. And in AI, we are turning the world's most advanced models into platforms for customers. Earlier this month, we brought the power of Dolly to Azure OpenAI service, helping customers like Mattel apply the breakthrough image generation model to commercial use cases for the first time. And Azure Machine Learning provides industry-leading ML apps, helping organizations like 3M deploy, manage, and govern models. All-up Azure ML revenue has increased more than 100% for four quarters in a row. Now on to developers. We have the most complete platform for developers to build cloud-native applications. Four years since our acquisition, GitHub is now at $1 billion in annual recurring revenue. And GitHub's developer-first ethos has never been stronger. More than 90 million people now use the service to build software for any cloud on any platform, up three times. GitHub Advanced Security is helping organizations improve their security posture by bringing features directly into the developer's workflow. Toyota North America chose the offering this quarter to help its developers build and secure many of its most critical applications. Now on to Power Platform. We are helping customers save time and money with our end-to-end suite spanning low-code, no-code tools, robotic process automation, virtual agents, and business intelligence. Power BI is the market leader in business intelligence in the cloud and is growing faster than competition as companies like Walmart standardize on the tool for reporting and analytics. PowerApps is the market leader in low-code, no-code tools and has nearly 15 million monthly active users, up more than 50% compared to a year ago. Power Automate has more than 7 million monthly active users and is being used by companies like Brown Foreman, Komatsu, MaaS, T-Mobile to digitize manual business processes and save thousands of hours of employee time. And we're going further with new AI powered capabilities and power automate that turn natural language into advanced workflows. Now on to Dynamics 365. From customer experience and service to finance and supply chain, we continue to take share across all categories we serve. For example, Lifthansa Cargo chose us to centralize customer information and related shipments. CBRE is optimizing its field service operations, gaining cost efficiencies. Darden is using our solutions to increase both guest frequency and spend at its restaurants, and Tillamook is scaling its growth and improving supply chain visibility. All up, more than 400,000 organizations now use our business applications. Now on to industry solutions. We are seeing increased adoption of our industry and cross-industry clouds. Bank of Queensland chose our cloud for financial services to deliver new digital experiences for its customers. Our cloud for sustainability is off to a fast start as organizations like Telstra use the solution to track their environmental footprint. New updates provide insights on hard-to-measure Scope 3 carbon emissions, and we are seeing record growth in healthcare driven in part by our nuanced Dax ambient intelligence solutions, which automatically documents patient encounters at the point of care. Physicians tell us Dax dramatically improves their productivity, and it's quickly becoming an on-ramp to our broader healthcare offerings. Now on to new systems of work. Microsoft 365, Teams, and Viva uniquely enable employees to thrive in today's digitally connected, distributed world of work. Microsoft 365 is the CloudFloss platform that supports all the ways people work and every type of worker, reducing cost and complexity for IT. The new Microsoft 365 app brings together our productivity apps with third-party content as well as personalized recommendations. Microsoft Teams is the de facto standard for collaboration and has become essential to how hundreds of millions of people meet, call, chat, collaborate, and do business. As we emerge from the pandemic, we are retaining users we've gained and are seeing increased engagement too. Users interact with Teams 1,500 times per month on average. In a typical day, the average commercial user spends more time in Teams chat than they do in email, and the number of users who use four or more features within Teams increased over 20% year-over-year. Teams is becoming a ubiquitous platform for business process. Monthly active enterprise users running third party and custom applications within Teams increased nearly 60% year over year, and over 55% of our enterprise customers who use Teams today also buy Teams Rooms or Teams Phone. Teams Phone provides the best in class calling. PSTN users have grown by double digits for five quarters in a row. We're bringing Teams rooms to a growing hardware ecosystem, including Cisco's devices and peripherals, which will now run Teams natively. And we're creating a new category with Microsoft Places to help organizations evolve and manage their space for hybrid and in-person work. Just like Outlook Calendar orchestrates when people can meet and collaborate, Places will do the same for wear. We also announced Teams Premium, addressing enterprise demands for advanced meeting features like additional security options and intelligent meeting recaps. All this innovation is driving growth across Microsoft 365. Leaders in every industry, from Fannie Mae and Lander Lakes to Robobank, continue to turn to our Premium E5 offerings for advanced security, compliance, voice, and analytics. We've also built a completely new suite for our employee experience platform, Microsoft Viva, which now has more than 20 million monthly active users at companies like Finstra, SES, and Unilever. And we're extending Viva to meet role-specific needs. Viva Sales is helping salespeople at companies like Adobe, Crayon, and PwC reclaim their time by bringing customer interactions across Teams and Outlook directly into their CRM system. Now on to Windows. Despite the drop in PC shipments during the quarter, Windows continues to see usage growth. All up, there are nearly 20% more monthly active Windows devices than pre-pandemic. And on average, Windows 10 and Windows 11 users are spending 8.5% more time on their PCs than they were two and a half years ago. And we are seeing larger commercial deployments of Windows 11. Accenture, for example, has deployed Windows 11 to more than 450,000 employees' PCs, up from just 25,000 seven months ago. And L'Oreal has deployed the operating system to 85,000 employees. Now to security. Security continues to be a top priority for every organization. We're the only company with integrated end-to-end tools spanning security, compliance, identity, and device management and privacy across all clouds and platforms. More than 860,000 organizations across every industry from BP and Fujifilm to ING Bank, iHeartMedia, and Lumen Technologies now use our security solutions up 33% year-over-year. They can save up to 60% when they consolidate our security stack and the number of customers with more than four workloads have increased 50% year over year. More organizations are choosing both our XDR and cloud native SIM to secure their entire digital estate. The number of E5 customers who also purchased Sentinel increased 44% year over year. And as threats become more sophisticated, we are innovating to protect customers. New capabilities in Defender help secure the entire DevOps lifecycle and manage security posture across clouds. And Entra now provides comprehensive identity governance for both on-premise and cloud-based user directories. Now on to LinkedIn. We once again saw record engagement among our more than 875 million members with international growth increasing at nearly 2x the pace as in the United States. There are now more than 150 million subscriptions to newsletters on LinkedIn, up 4x year over year. New integrations between Viva and LinkedIn Learning help companies invest in their existing employees by providing access to courses directly in the flow of work. Members added 365 million skills to their profiles over the last 12 months, up 43% year over year. And with our acquisition of Edubright, they will also soon be able to earn professional certificates from trusted partners directly on the platform. We launched the next generation sales navigator this quarter, helping sellers increase win rates and deal sizes by better understanding and evaluating customer interest. Finally, LinkedIn marketing solution continues to provide leading innovation and ROI in B2B digital advertising. More broadly, with Microsoft advertising, we offer a trusted platform for any marketeer or advertiser looking to innovate. We've expanded our geographies we serve by nearly 4X over the past year. We are seeing record daily usage of Edge, Start, and Bing driven by Windows. Edge is the fastest growing browser on Windows and continues to gain share as people use built-in coupon price comparison features to save money. We surfaced more than $2 billion in savings to date, and this quarter we brought our shopping tools to 15 new markets. Users of our start personalized content feed are consuming 2x more content compared to a year ago, and we're also expanding our third-party ad inventory. Netflix will launch its first ad-supported subscription plan next month, exclusively powered by our technology and sales. And with PromoteIQ, we offer an omnichannel media platform for retailers like the Auto Group looking to generate additional revenue while maintaining ownership of their own data and customer relationships. Now onto gaming. We're adding new gamers to our ecosystem as we execute on our ambition to reach players wherever and whenever they want on any device. We saw usage growth across all platforms driven by the strength of console. PC Game Pass subscriptions increased 159% year over year. And with cloud gaming, we're transforming how games are distributed, played, and viewed. More than 20 million people have used the service to stream games to date. And we are adding support for new devices like handhelds from Logitech and Razer, as well as MetaQuest. And as we look towards the holidays, we offer the best value in gaming with Game Pass and Xbox Series S. Nearly half of the Series S buyers are new to our ecosystem. In closing, in a world facing increasing headwinds, digital technology is the ultimate tailwind. And we're innovating across the entire tech stack to help every organization while also focusing intensely on our operational excellence and execution discipline. With that, I'll hand it over to Amy.