Microsoft Corporation

Greetings and welcome to the Microsoft Fiscal Year 2023 Second 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 cell phone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brett Iverson, Vice President, Investor Relations.

Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chairman and Chief Executive Officer, Amy Hood, Chief Financial Officer, Alice Chawla, Chief Accounting Officer, and Keith Dolliver, 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 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 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 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'll 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 very much, Brett. I want to start with the context I shared with our employees last week on the changing environment and our priorities. As I meet with customers and partners, a few things are increasingly clear. Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend. Also, organizations are exercising caution given the macroeconomic uncertainty. And the next major wave of computing is being born as we turn the world's most advanced AI models into a new computing platform. In this environment, we remain convicted on three things. This is an important time for Microsoft to work with our customers, helping them realize more value from their tech spend and building long-term loyalty and share position. while internally aligning our own cost structure with our revenue growth. This in turn sets us up to participate in the secular trend where digital spend as a percentage of GDP is only going to increase. And lastly, we're going to lead in the AI era, knowing that maximum enterprise value gets created during platform shifts. With that as the backdrop, the Microsoft Cloud exceeded $27 billion in quarterly revenue, up 22% and 29% in constant currency. Now I'll highlight examples of our innovation starting with Azure. Moving to the cloud is the best way for any customer in today's economy to mitigate demand uncertainty and energy costs while gaining efficiencies of cloud-native development. Enterprises have moved millions of cores to Azure and run twice as many cores on our cloud today than they did two years ago. And yet, we're still in the early innings when it comes to long-term cloud opportunity. As an example, Insura AIA was able to save more than 20% by migrating to Azure and reduced IT provisioning time from multiple months to just an hour. We also continue to lead with hybrid computing with Azure Arc. We now have more than 12,000 Arc customers, double the number a year ago, including companies like Citrix, Northern Trust, and PayPal. Now on to data. Customers continue to choose and implement the Microsoft Intelligent Data Platform over the competition because of its comprehensiveness, integration, and lower cost. Bayer, for example, used the data stack to evaluate results from clinical trials faster and more efficiently while meeting regulatory requirements, and ASOS chose Cosmos DB to power real-time product recommendations and order processing for over 26 million global customers. Now on to AI. The age of AI is upon us and Microsoft's powering it. We are witnessing nonlinear improvements in capability of foundation models, which we are making available as platforms. And as customers select their cloud providers and invest in new workloads, we are well positioned to capture that opportunity as a leader in AI. We have the most powerful AI supercomputing infrastructure in the cloud. It's been used by customers and partners like OpenAI to train state-of-the-art models and services, including ChatGPT. Just last week, we made our Azure OpenAI service broadly available and already over 200 customers from KPMG to Al Jazeera are using it. We will soon add support for ChatGPT, enabling customers to use it in their own applications for the first time. And yesterday, we announced the completion of the next phase of our agreement with OpenAI. We are pleased to be their exclusive cloud provider and will deploy their models across our consumer and enterprise products as we continue to push the state of the art in AI. All of this innovation is driving growth across our Azure AI services. Azure ML revenue alone has increased more than 100% for five quarters in a row, with companies like AXA, FedEx, and H&R Block choosing the service to deploy, manage, and govern their models. Now on to developers. Modernizing applications is mission critical to any company's operations today. And with GitHub, Visual Studio, and Azure PaaS services, we have the most comprehensive portfolio of tools to help. GitHub is now home to 100 million developers, and GitHub Copilot is the first at-scale AI product built for this era, fundamentally transforming developer productivity. More than 1 million people have used Copilot to date. This quarter, we brought Copilot to businesses, and we have seen strong interest in early adoption from companies including Duolingo, Lemonade, and Volkswagen Carryout Software Group. Now on to Power Platform. Power Platform is becoming an essential digital transformation tool as every business looks to streamline their operations and drive productivity in today's environment. We are helping customers realize superior time to value with our end-to-end suite spanning low-code, no-code tools, automation, virtual agents, and business intelligence. We are leading in robotic process automation. Power Automate has more than 45,000 customers from AT&T to RoboBank, up over 50% year-over-year. and we are making it easier for anyone to streamline repetitive tasks, introducing new AI-powered features to turn natural language prompts into complex workflows. Now on to business applications. Dynamics 365 is taking share as we help businesses digitize their service, finance, customer experience, and supply chain functions. For example, GNJ Pepsi Cola Bottles is moving from reactive to predictive field service. Fujifilms is optimizing its operations. Investec is closing deals faster with conversational intelligence. Baylor Scott and White in Texas is using our digital contact center to enhance patient communications. And this quarter, we introduced our new supply chain platform helping customers like iFit and Kraft Heinz apply AI to predict and mitigate disruptions. Now on to industry solutions. Our industry and cross-industry clouds are driving pull-through for our entire tech stack. Our cloud for retail was front and center at NRF last week as we introduced new tools to help retailers manage their day-to-day operations and digitize their physical stores. Polish retailer Zapka has built the largest chain of autonomous stores in Europe with the help of our technology. In financial services, our new partnership with London Stock Exchange Group will deliver next generation of data analytics and workspace solutions. And in healthcare, we are rapidly becoming the partner of choice for any provider looking to generate real value from AI. With Nuance DAX, Ampion Intelligence solutions, physicians can reduce documentation time by half, improving the quality of their patient interactions. Now onto systems of work. Microsoft 365, Teams, and Viva are essential for every organization to adapt to the new world of work. Microsoft 365 is rapidly evolving into an AI-first platform that enables every individual to amplify their creativity and productivity with both our established applications as well as new applications like Designer, Stream, and Loop. We have more than 63 million consumer subscribers, up 12% year-over-year, and we introduced Microsoft 365 Basic, bringing our premium offerings to more people. Teams surpassed 280 million monthly active users this quarter, showing durable momentum since the pandemic, and we continue to take share across every category, from collaboration to chat to meetings to calling. Teams has emerged as a first-class platform. Apps from Adobe, Atlassian, Poly, ServiceNow, and Workday have each surpassed half a million active users, and the number of third-party apps with more than 10,000 users increased nearly 40% year-over-year. There are more than 500,000 active Teams Rooms devices, up 70% year-over-year, and the number of customers with more than 1,000 Rooms doubled year-over-year. Novo Nordisk will deploy Teams Rooms to 5,000 meeting rooms globally in our largest deal to date. Teams Phone continues to take share and is the market leader in cloud calling. We have added more than 5 million PSTN seats over the last 12 months alone. With Teams Premium, we are meeting enterprise demand for advanced features like end-to-end encryption and AI-powered recaps. We have seen strong interest in Preview, and we will make it broadly available next month. With Microsoft Viva, we have created a new market category for employee experience and organizational productivity. US Bank is using Viva to streamline employee communications, and Carlsberg turned to Viva to centralize its digital employee experience for 29,000 employees. In today's environment, aligning the entire organization and the most important work is critical. Viva Goals brings objectives and key results directly into the flow of daily work. Viva has also become an indispensable tool for business process. Viva Sales is the super app in Microsoft 365 for sellers. We have seen strong interest since making it generally available this quarter. All up, we continue to see organizations consolidate on Microsoft 365. 80% of our enterprise customers use five or more Microsoft 365 applications. And organizations across the private and public sector, including EY, IKEA, NTT Communications, Rio Tinto, as well as the state government of Virginia, are increasingly choosing our premium E5 offerings for advanced security, compliance, voice, and analytics. Now on to Windows. While the number of PCs shipped declined during the quarter, returning to pre-pandemic levels, usage intensity of Windows continues to be higher than pre-pandemic, with time spent per PC up nearly 10%. Monthly active devices also reached an all-time high this quarter. And for commercial customers, Windows 11 adoption continues to grow because of its differentiated security and productivity value proposition. We're also seeing growth in cloud delivered Windows with usage of Windows 365 and Azure Virtual Desktop up by over two thirds year over year. Leaders in every industry from Campari and Grant Thornton UK to Nutrien and Woolworths are using cloud delivered Windows, including more than 60% of the Fortune 500. Now on to security. Over the past 12 months, our security business surpassed $20 billion in revenue as we help customers protect their digital estate across clouds and endpoint platforms. We're the only company with integrated end-to-end tools spanning identity, security, compliance, device management, and privacy, informed and trained on over 65 trillion signals each day. We're taking share across all major categories we serve. Customers are consolidating on our security stack in order to reduce risk, complexity, and cost. The number of organizations with four or more workloads increased over 40% year over year. UK retailer Fraser Group, for example, consolidated from 10 security vendors to just Microsoft. Roku moved identity and access management to the cloud with Azure Active Directory. And Estella Pharma, Ferrovial, and University of Toronto all switched to Microsoft Sentinel because of our integrated XDR and SIM capabilities. Now on to LinkedIn. People and companies continue to look to LinkedIn to connect, learn, sell, and get hired. We once again saw record engagement among our more than 900 million members. Three members are signing up every second. Over 80% of these members are from outside the United States. And as the members come to the platform to find and share professional knowledge and expertise, newsletter creation was up 10x year over year. Skills are the new currency and people are increasingly investing in their skill building to keep up with their changing roles and industries. We offer more than 20,000 courses in 11 languages and companies are also turning to a skills-based approach in place of degree or pedigree to identify qualified talent with more than 45% of the hires on LinkedIn explicitly using skills data to fill their roles. Finally, LinkedIn Marketing Solutions continues to be a leader in B2B digital advertising, helping companies deliver the right message to the right audience on a safe and trusted platform. Now on to advertising. Despite headwinds in the ad market, we continue to innovate across our first and third party portfolios. Our browser, Microsoft Edge, gained share for the seventh consecutive quarter. Bing continues to gain share in the United States. And daily users of our stock personalized content feed increased over 30% year over year. We are now empowering retailers and expanding our third party inventory. With PromoteIQ, we're building a complete omnichannel media platform for companies like the Australian retailer Endeavor, as well as Canada's Hudson's Bay and Globo, the largest Brazilian TV broadcasters, chose Zander to launch a new media buying platform in that market. Now on to gaming. In gaming, we continue to pursue our ambition to give players more choice to play great games wherever, whenever, and however they want. We saw new highs for Game Pass subscriptions, game streaming hours, and monthly active devices. And monthly active users surpassed a record 120 million during the quarter. We continue to invest to add value to Game Pass. This quarter, we partnered with Riot Games to make the company's PC and mobile games, along with premium content available to subscribers. And finally, we are energized by our upcoming lineup of AAA game launches, including exciting new titles from ZeniMax and Xbox Game Studios, and we'll be sharing details and gameplay at our showcase tomorrow. In closing, I want to extend my deepest gratitude to our employees for their continued dedication to our mission, customers, and partners. We will continue to pursue our long-term opportunity and innovation agenda with urgency while also raising the bar on our operational excellence. With that, I'll hand it over to Amy.