Microsoft Corporation

year 2023 fourth 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. Mr. Iverson, 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 Jolla, 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. 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 fourth 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'll refer to the growth rate only. We'll 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. We had a solid close to our fiscal year. The Microsoft Cloud surpassed $110 billion in annual revenue, up 27% in constant currency, with Azure all up accounting for more than 50% of the total for the first time. Every customer I speak with is asking not only how, but how fast they can apply next generation AI to address the biggest opportunities and challenges they face, and to do so safely and responsibly. To that end, we remain focused on three key priorities. First, helping customers use the breadth and depth of Microsoft Cloud to get the most value out of their spend. Second, investing to lead in the new AI platform shift by infusing AI across every layer of the tech stack. And third, driving operating leverage. Now I'll highlight examples of our progress, starting with infrastructure. Azure continues to take share as customers migrate their existing workloads and invest in new ones. We continue to see more cloud migrations as it remains early when it comes to long-term cloud opportunity. We're also seeing increasing momentum with Azure Arc, which now has 18,000 customers up 150% year-over-year, including Carnival Corp, Domino's, Thermo Fisher. And Azure AI is ushering in new, born-in-the-cloud AI-first workloads with the best selection of frontier and open models, including Meta's recent announcement supporting Lama on Azure and Windows, as well as OpenAI. We have great momentum across Azure OpenAI service. More than 11,000 organizations across industries, including IKEA, Volvo Group, Zurich Insurance, as well as digital natives like Flipkart, Humane, Kahoot, Miro, Typeface use the service. That's nearly 100 new customers added every day this quarter. Mercedes-Benz, for example, is bringing ChatGPT via Azure OpenAI to more than 900,000 vehicles in the United States, making its in-car voice assistant more intuitive. And Moody's built its own internal co-pilot to improve productivity of its 14,000 employees. We're also partnering broadly to scale this next generation of AI to more customers. Snowflake, for example, will increase its Azure spend as it builds new integrations with Azure OpenAI, and KPMG has announced a multi-billion dollar commitment to our cloud and AI services to transform professional services. Now on to data. Every AI app starts with data, and having a comprehensive data and analytics platform is more important than ever. Our intelligent data platform brings together operational databases, analytics, and governance so organizations can spend more time creating value and less time integrating their data estate. We introduced Microsoft Fabric this quarter, which unifies compute, storage, and governance with a disruptive business model. One month in, we are encouraged by early interest and usage. Over 8,000 customers have signed up to trial the service and are actively using it, and over 50% are using four or more workloads. All up, we once again took share with our analytic solutions with customers like Bridgestone, Chevron, and Equinor turning to our stack. Now on to developers. New Azure AI Studio is becoming the tool of choice for AI development in this new era, helping organizations ground, fine-tune, evaluate, and deploy models and do so responsibly. VS Code and GitHub Copilot are category-leading products when it comes to how developers code every day, Nearly 90% of GitHub co-pilot sign-ups are self-service, indicating strong organic interest and pull-through. More than 27,000 organizations, up 2x quarter over quarter, have chosen GitHub Co-Pilot for Business to increase the productivity of their developers, including Airbnb, Dell, and Scandinavian Airlines. We're also applying AI across low-code, no-code toolchain to help domain experts automate workflows, create apps and web pages, build virtual agents, or analyze data using just natural language. Co-pilot in Power BI combines the power of large language models with an organization's data to generate insights faster, and co-pilot in Power Pages makes it easier to create secure low-code business websites. One of our tools that's really taken off is Copilot and Power Virtual Agents, which is delivering one of the biggest benefits of this new era of AI, helping customer service agents be significantly more productive. HP and Virgin Money, for example, have both built custom chatbots with Copilot and Power Virtual Agents that were trained to answer complex customer inquiries. All up, more than 63,000 organizations have used AI-powered capabilities in Power Platform, up 75% quarter over quarter. Finally, Power Automate now has 10 million monthly active users at companies like Jaguar, Land Rover, Repsol, Rolls-Royce, up 55% year over year. And we're going further with new process mining capabilities in Power Automate, which are helping organizations optimize business processes and in turn build their AI advantage. Now on to business applications. We are taking share in every category as we help organizations across the private and public sector from Avis to Albertsons to Breville to Equinox and the U.S. Department of Veterans Affairs transform their mission-critical business processes. All Up Dynamics surpassed $5 billion in revenue over the past fiscal year, with our customer experience, service, and finance and supply chain businesses all surpassing $1 billion in annual sales. This quarter, we brought Dynamics 365 Co-Pilot to our ERP portfolio, including finance, project operations, and supply management. And with our new Microsoft Sales Co-Pilot, sellers can ground their customer interactions with data from CRM systems, including both Salesforce and Dynamics, to personalize customer interactions and close more deals. Now on to our industry and cross-industry clouds. Our Microsoft Cloud for Sustainability is helping customers like Costco, Ladder Lakes, and REI take action to meet their environmental goals. And in healthcare, hundreds of organizations are using our Nuance DAX ambient intelligence solution to automatically document patient encounters at the point of care. This quarter, we expanded our collaboration with Epic to integrate Nuance DAX Express directly into their industry-leading EHR system. Now on to future work. Across industries, customers like Ahold Delhaize, Deutsche Bank, Novartis, Siemens, Wells Fargo are choosing Microsoft 365 Premium offerings for differentiated security, compliance, voice, and analytics value. And four months ago, we introduced a new pillar of customer value with Microsoft 365 Copilot. We are now rolling out Microsoft 365 Copilot to 600 paid customers through our early access program. And feedback from organizations like Emirates, NBD, General Motors, Goodyear, and Lumen is that it's a game changer for employee productivity. We continue to build momentum in Microsoft Teams across collaboration, chat, meetings, and calling. We now have more than 1,900 apps in Teams App Store and companies in every industry from British Airways to Dentsu to Eli Lilly and Manulife have built over 145,000 custom line of business apps, bringing business process directly into the flow of work. Five months in, Teams Premium has already surpassed 600,000 seats as companies like BNY Mellon, Clifford Chance, PepsiCo, and Starbucks chose the add-on for advanced features like end-to-end encryption and real-time translation. Teams Phone is the market leader in cloud calling with more than 17 million PSTN users, up 45% year-over-year. Teams Room is used by more than 70% of the Fortune 500, including L'Oreal, United Airlines, and U.S. Bank, and revenue more than doubled year-over-year this quarter. And with Microsoft Viva, we are creating a new market category for employee experience. Viva now has 35 million monthly active users as companies like CBRE, Fujitsu, and Unisys turn to the platform to build data-driven, high-performance organizations. Now on to Windows. The number of devices running Windows 11 has more than doubled in the last year, and we are seeing continued growth in Windows 11 commercial deployments worldwide by companies like AT&T, Kronos, and Westpac. We are also transforming how Windows is experienced and managed for enterprise customers with Azure Virtual Desktop and Windows 365, which together surpassed $1 billion in revenue for the first time over the past 12 months. Enbridge, Eurowings, Marriott International, and TD Bank Group, for example, all chose cloud-delivered Windows this quarter. Windows 11 is also rapidly becoming a powerful new canvas in this new era of AI. We introduced Windows Co-Pilot this quarter, helping every Windows 11 user become a power user with just natural language and are excited to put it in the hands of more people in the coming months. Now on to security. More than 1 million organizations now count on our comprehensive AI-powered solutions to protect their digital estate across clouds and endpoint platforms, up 26% year-over-year. More than 60%, including leading enterprises like ABN Amro, Dow, and Heineken, use four or more of our security products, up 33% year-over-year, underscoring our end-to-end differentiation. And we once again took share across all major categories we serve as we innovate to protect customers. In identity, Microsoft Entra ID has more than 610 million monthly active users, and we are adding SSE to our Entra product family to complement our leading identity solution and secure access to any app or resource from anywhere. Finally, our security co-pilot, the first product to apply this next generation of AI to SecOps, will be available to customers via a paid early access program this fall. Now on to LinkedIn. LinkedIn's revenue surpassed $15 billion for the first time this fiscal year, and membership growth has now accelerated for eight quarters in a row, a testament to how mission critical the platform has become to help more than 950 million members connect, learn, sell, and get hired. Our talent solutions business surpassed $7 billion in revenue for the first time over the past 12 months, and our hiring business took share for the fourth consecutive quarter. We continue to use AI to help our members and customers connect to opportunities and tap into experiences of experts on the platform. Our AI-powered collaborative articles are now the fastest growing traffic driver in LinkedIn. And finally, we are helping LinkedIn stay trusted and authentic. More than 7 million members have verified who they are or where they work, many using new integrations with Microsoft Entra as well as Clear and HyperVerge. Now on to search, advertising, and news. While it's early in our journey, we are reshaping daily search and web habits with our co-pilot for the web. This quarter, we introduced new AI-powered features, including multimodal capabilities with Visual Search and Bing Chat. We're expanding to businesses with Bing Chat Enterprise, which offers commercial data protection, providing an easy on-ramp for any organization looking to get the benefit of this next generation of AI today. Bing is also the default search experience for OpenAI's ChatGPT, bringing timely answers with links to our reputable sources to ChatGPT users. To date, Bing users have engaged in more than 1 billion chats and created more than 750 million images with Bing Image Creator, and Microsoft Edge took share for the ninth consecutive quarter. More broadly, we are growing our ad network, which is now available in 187 markets spanning search, display, native, retail media, video, and connected TV. Now on to gaming. Last week, we extended our Activision Blizzard merger agreement deadline to October. We continue to work through the regulatory approval process and remain confident about getting the deal done. We are committed to bringing more games to more players everywhere. Great content is key to our approach, and our pipeline has never been stronger. We announced our most ambitious lineup of games ever at our showcase last month, including 21 titles that will be available via Xbox Game Pass. And we're looking forward to the release of Starfield this fall, Bethesda's first new universe in 25 years. All up, we set new fourth-quarter highs for monthly active users driven by strength of console as well as monthly active devices. And we saw record fourth-quarter engagement across Game Pass with hours played up 22% year-over-year. And just last week, we announced Game Pass Core, bringing together online play from Xbox Live and content from Game Pass into a single offering. In closing, I'm energized about the opportunities ahead. We continue to innovate across the tech stack to help our customers thrive in the new era of AI. And with that, let me turn it over to Amy.