Microsoft Corporation

Greetings and welcome to the Microsoft Fiscal Year 2023 Third 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. I would now like to turn the conference over to your host, Brett Iverson, Vice President of Investor Relations. Please go ahead.

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 Jala, 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 the reconciliation of differences between GAAP and non-GAAP financial measures. Additionally, new this quarter, more detailed outlook slides will be available on the Microsoft Investor Relations website when we provide outlook commentary on today's call. 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 third 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 very much, Brett. The Microsoft Cloud delivered over $28 billion in quarterly revenue, up 22% and 25% in constant currency, demonstrating our continued leadership across the tech stack. We continue to focus on three priorities. First, helping customers use the breadth and depth of the Microsoft Cloud to get the most value out of their digital spend. Second, investing to lead in the new AI wave across our solution areas and expanding our TAM. And third, driving operating leverage, aligning our cost structure with our revenue growth. Now I'll highlight examples of our progress starting with infrastructure. Azure took share as customers continued to choose our ubiquitous computing fabric from cloud to edge, especially as every application becomes AI-powered. We have the most powerful AI infrastructure and it's being used by our partner OpenAI as well as NVIDIA and leading AI startups like Adapt and Inflection to train large models. Our Azure OpenAI service brings together advanced models including ChatGPT and GPT-4 with the enterprise capabilities of Azure. From Coursera and Grammarly to Mercedes-Benz and Shell, we now have more than 2,500 Azure OpenAI service customers up 10x quarter over quarter. Just last week, Epic Systems shared that it was using Azure OpenAI service to integrate this next generation of AI with its industry-leading EHR software. Azure also powers OpenAI API, and we are pleased to see brands like Shopify and Snap use the API to integrate OpenAI's models. More broadly, we continue to see the world's largest enterprises migrate key workloads to our cloud. Unilever, for example, went all-in on Azure this quarter in one of the largest ever cloud migrations in the consumer goods industry. Ikea Retail, ING Bank, Robobank, Telstra, and Wolverine Worldwide all use Azure Arc to run Azure services across on-premise, edge, and multi-cloud environments. We now have more than 15,000 Azure Arc customers up over 150% year-over-year. and we are extending our infrastructure to 5G network edge with Azure for Operators. We are the cloud of choice for telcos, and at MWC last month, AT&T, Deutsche Telekom, Singtel, and Telefonica all shared how they are using our infrastructure to modernize and monetize their networks. Now, on to data. Our intelligent data platform brings together databases, analytics, and governance so organizations can spend more time creating value and less time integrating their data estate. Cosmos DB is the go-to database powering the world's most demanding workloads at any scale. OpenAI relies on Cosmos DB to dynamically scale their chat GPT service, one of the fastest growing consumer apps ever, enabling high reliability and low maintenance. The NBA uses Cosmos DB to ingest more than 10 million data points per game, helping teams optimize their gameplay. And we are taking share with our analytics solutions. Companies like BP, Canadian Tire, Marks & Spencer, and T-Mobile all rely on our end-to-end analytics to improve speed to insights. Now on to developers. From Visual Studio to GitHub, we have the most popular tools to help every developer go from idea to code and code to cloud, all while staying in their flow. Today, 76% of the Fortune 500 use GitHub to build, ship, and maintain software. And with GitHub Copilot, the first at-scale AI developer tool, we're fundamentally transforming the productivity of every developer from novices to experts. In three months since we made Copilot for Business broadly available, over 10,000 organizations have signed up, including the likes of Coca-Cola and GM, as well as Duolingo and MercadoLibre, all of which credit Copilot with increasing the speed for their developers. We're also bringing next-generation AI to power platforms so anyone can automate workflows, create apps or web pages, build virtual agents, and analyze data using only natural language. More than 36,000 organizations have already used existing AI-powered capabilities in Power Platform, and with our new co-pilot in Power Apps, we are extending these capabilities to end users who can interact with any app through conversation instead of clicks. All up, we now have nearly 33 million monthly active users of Power Platform, up nearly 50% year-over-year. Now on to business applications. From customer experience and service to finance and supply chain, we continue to take share across all categories. We serve as organizations like Asahi, C.H. Robinson, Eon, Franklin Templeton, choose our AI-powered business applications to automate, simulate, and predict every business process and function. And we are going further with Dynamics 365 Co-Pilot, which works across CRM and ERP systems to bring the next generation of AI to employees in every job function, reducing burdensome tasks like manual data entry, content generation, and note taking. Now on to our industry and cross-industry solutions. Our cloud for sustainability is seeing strong adoption from companies in every industry, including BBC, Nissan, and TCL, as they deliver on their respective environmental commitments. Our cloud for healthcare was front and center at HIMSS last week as we expanded our offerings for payers and added new AI-powered capabilities for providers. We showcase the first fully AI-automated clinical documentation application, Nuance DAX Express, which will bring GPT-4 to more than 550,000 existing users of Dragon Medical. And at Hanover Massway manufacturing trade show, Siemens shared how it will use a Teams app integrated with Azure OpenAI service to optimize factory workflows. Now on to future work. Microsoft 365 Copilot combines next-generation AI with business data in the Microsoft Graph and Microsoft 365 applications, removing the drudgery and unleashing the creativity of work. Copilot works alongside users embedded in the Microsoft 365 applications millions use every day, and it also powers business chat, which uses natural language to surface information and insights based on business content and context. We've been encouraged by early feedback and look forward to bringing these experiences to more users in the coming months. Teams usage is at an all-time high and surpassed 300 million monthly active users this quarter, and we once again took share across every category, from collaboration to chat to meetings to calling, as we add value for existing customers and win new ones like ABN AMRO, Jaguar Land Rover, Mattress Firm, Unisys, and Vodafone. We announced a new version of Teams that delivers up to two times faster performance while using 50% less memory so customers can collaborate more efficiently and prepare for experiences like co-pilot. Teams is also expanding our TAM. Nearly 60% of our enterprise Teams customers buy Teams phone rooms or premiums. Teams Phone is the undisputed market leader in cloud calling, helping our customers reduce costs with a three-year ROI of over 140%. Teams Rooms revenue more than doubled year-over-year, and Teams Premium meets enterprise demand for AI-powered features like intelligent recaps, now generally available. It's one of our fastest-growing modern work products ever, with thousands of paid customers just two months in. With Microsoft Viva, we have created a completely new suite for employee experience. Viva brings together goals, communications, learning, workplace analytics, and employee feedback across industries. Companies like Dell, MasterCard, and SES are using Viva to help their employees thrive. Just last week, we announced Co-Pilot for Viva, offering leaders a new way to build high-performance teams by prioritizing both productivity and employee engagement. And with Weaver Sales, we've extended the platform to specific job functions, helping sellers apply large language models to their CRM and Microsoft 365 data so that they can automatically generate content like customer mail. All this innovation is driving growth across Microsoft 365, Ferrovial, Goldman Sachs, Nova Nordisk, and Rogers all chose E5 to empower their employees with our best-in-class productivity apps, along with advanced security, compliance, voice, and analytics. Now on to Windows. While the PC market continues to face headwinds, we again saw record monthly active Windows devices and higher usage compared to pre-pandemic. We're also seeing accelerated growth in Windows 11 commercial deployments. Over 90% of the Fortune 500 are currently trialing or have deployed Windows 11. And with Windows 365 and Azure Virtual Desktop, we continue to transform how employees at companies like Mazda and Nationwide access Windows. All up, over one-third of our enterprise customer base has purchased cloud-delivered Windows to date. A new Windows 365 frontline extends the power and security of cloud PCs to shift workers for the first time. Now on to security. A comprehensive AI-powered solution spanning all clouds and all platforms gives the agility advantage back to defenders. Among analysts, we are the leader in more categories than any other provider, and we once again took share across all major categories we serve. And we continue to introduce new products and functionality to further protect customers. With security co-pilot, we are combining large language models with a domain-specific model informed by our threat intelligence and 65 trillion daily security signals to transform every aspect of the SAC productivity. And we also added new governance controls and policy protections to better secure identities along with resources they access. Nearly 720,000 organizations now use Azure Active Directory up 33% year-over-year. And all up nearly 600,000 customers now have four or more security workloads up 35% year-over-year, underscoring our end-to-end differentiation. EY and Qualcomm, for example, both chose our full security stack to ensure the highest levels of protection and visibility across their organizations. Now on to LinkedIn. We once again saw record engagement as more than 930 million members turned to the professional social network to connect, learn, sell, and get hired. Member growth accelerated for the seventh consecutive quarter as we expanded to new audiences. We now have 100 million members in India, up 19%. And as Gen Z enters the workforce, we saw 73% year-over-year increase in the number of student sign-ups. In this persistently tight labor market, LinkedIn Talent Solutions continues to help hire us connected job seekers and professionals to build the skills they need to access opportunity. Our hiring business took share for the third consecutive quarter. The excitement around AI is creating new opportunities across every function from marketing, sales, and finance to software development and security. LinkedIn is increasingly where people are going to learn, discuss, and up-level their skills with more than 100 AI courses. And we've introduced new AI-powered features, including writing suggestions for member profiles and job descriptions and collaborative articles. 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, trusted platform. More broadly, we continue to expand our opportunity in advertising. Our exclusive partnership with Netflix brings differentiated premium video content to our ad network, and our new co-pilot for the web is reshaping daily search and web habits. Two months since the launch of new Bing and Edge, we are very encouraged by user feedback and usage patterns. All up, Bing has more than 100 million daily active users. We're winning new customers on Windows and mobile. Daily installs of the Bing mobile app have grown 4x since launch. We are making progress in share gains. Edge took share for the eighth consecutive quarter, and Bing once again grew share in the United States. We continue to innovate with first-of-their-kind AI-powered features, including the ability to set the tone of chat and create images from text prompts powered by DALI. Over 200 million images have been created to date, and we see that when people use these new AI features, their engagement with Bing and Edge goes up. As we look towards a future where chat becomes a new way for people to seek information, consumers have real choice in business model and modalities with Azure-powered chat entry points across Bing, Edge, Windows, and OpenAI's ChatGPT. We look forward to continuing this journey in what is a generational shift in the largest software category, search. Now on to gaming. We are rapidly executing on our ambition to be the first choice for people to play great games whenever, however, and wherever they want. We set third quarter records for monthly active users and monthly active devices. Across our content and services business, we are delivering on our commitment to offer gamers more ways to experience the games they love. Our revenue from subscriptions reached nearly $1 billion this quarter. This quarter, we also brought PC Game Pass to 40 new countries, nearly doubling the number of markets we are available. Great content remains the flywheel behind our growth. We have now surpassed 500 million lifetime unique users across our first-party titles and have never been more excited about our pipeline of games, including the fourth quarter launches of Minecraft Legends and Redfall. In closing, we are focused on continuing to raise the bar on our operational excellence and performance as we innovate to help our customers maximize the value of their existing technology investments and thrive in the new era of AI. In a few weeks' time, we'll hold our Build Conference, where we will share how we are building the most powerful AI platform for developers, and I encourage you to tune in. I could not be more energized about the opportunities ahead, and with that, let me turn it over to Amy.