Microsoft Corporation

Greetings and welcome to the Microsoft Fiscal Year 2024 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.

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 Dolliver, Corporate Secretary and 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 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 and Best 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, Brett. It was a record third quarter powered by the continued strength of Microsoft Cloud, which surpassed $35 billion in revenue, up 23%. Microsoft Copilot and Copilot Stack, spanning everyday productivity, business process, and developer services to models, data, and infrastructure, are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry. Now I'll highlight examples walking up the stack, starting with AI infrastructure. Azure again took share as customers use our platforms and tools to build their own AI solutions. We offer the most diverse selection of AI accelerators, including the latest from NVIDIA, AMD, as well as our own first-party silicon. Our AI innovation continues to build on our strategic partnership with OpenAI. More than 65% of the Fortune 500 now use Azure OpenAI service. We also continue to innovate and partner broadly to bring customers the best selection of frontier models and open source models, LLMs and SLMs. With 5.3, which we announced earlier this week, we offer the most capable and cost-effective SLM available. It's already being trialed by companies like CallMiner, LTI, Mindtree, PwC, and TCS. Our models as a service offering makes it easy for developers to use LLMs and SLMs without having to manage any underlying infrastructure. Hundreds of paid customers from Accenture and EY to Schneider Electric are using it to take advantage of API access to third-party models, including as of this quarter, the latest from Cohere, Meta, and Mistral. And as part of a partnership announced last week, G42 will run its AI applications and services on our cloud, All up, the number of Azure AI customers continues to grow and average spend continues to increase. We also saw an acceleration of revenue from migrations to Azure. Azure Arc continues to help customers like Dick's Sporting Goods and World Bank streamline their cloud migrations. Arc now has 33,000 customers up over 2x year-over-year. and we are the hyperscale platform of choice for SAP and Oracle workloads, with Conduent and Medline moving their on-premise Oracle estates to Azure, and Kendrell and L'Oreal migrating their SAP workloads to Azure. Overall, we are seeing an acceleration in the number of large Azure deals from leaders across industries, including billion-dollar-plus multi-year commitments announced this month from Cloud Software Group and the Coca-Cola Company. The number of $100 million-plus Azure deals increased over 80% year-over-year, while the number of $10 million-plus deals more than doubled. Now on to data and analytics. Our Microsoft Intelligent Data Platform provides customers with the broadest capabilities spanning databases, analytics, business intelligence, governance, and AI. Over half of our Azure AI customers also use our data and analytics tools. Customers are building intelligent applications running on Azure, PostgreSQL, and Cosmos DB with deep integrations with Azure AI. TomTom is a great example. They've used Cosmos DB along with Azure OpenAI Service to build their own immersive in-car infotainment system. We are also encouraged by our momentum with our next-generation analytics platform, Microsoft Fabric. Fabric now has over 11,000 paid customers, including leaders in every industry from ABB, EDP, energy transfer to Equinor, Foot Locker, Etotude, and Lumen. And we are seeing increased usage intensity. Fabric is seamlessly integrated with Azure AI Studio, meaning customers can run models against enterprise data that's consolidated in Fabric's multi-cloud data lake, OneLake. And Power BI, which is also natively integrated with Fabric, provides business users with AI-powered insights. We now have over 350,000 paid customers. Now on to developers. GitHub Copilot is bending the productivity curve for developers. We now have 1.8 million paid subscribers with growth accelerating to over 35% quarter over quarter and continues to see increased adoption from businesses in every industry, including Itaewoo, Lufthansa Systems, Nokia, Pinterest, and Volvo Cars. Copilot is driving growth across the broader GitHub platform too. AT&T, Citigroup, and Honeywell all increased their overall GitHub usage after seeing productivity and code quality increases with Copilot. All up more than 90% of the Fortune 100 are now GitHub customers, and revenue accelerated over 45% year over year. Anyone can be a developer with new AI-powered features across our low-code, no-code tools, which makes it easier to build an app, automate workflow, or create a co-pilot using natural language. 30,000 organizations across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter over quarter. Cineplex, for example, built a Copilot for customer service agents, reducing query handling time from as much as 15 minutes to 30 seconds. All up over 330,000 organizations, including over half of Fortune 100, have used AI-powered capabilities in Power Platform. And Power Apps now has over 25 million monthly active users, up over 40% year over year. Now on to future work. We're seeing AI democratize expertise across the workforce. What inventory turns are to efficiency of supply chains, knowledge turns, the creation and diffusion of knowledge are to productivity of an organization. And Copilot for Microsoft 365 is helping increase knowledge turns. That's having a cascading effect, changing work, work artifacts and workflows and driving better decision making, collaboration and efficiency. This quarter, we made Copilot available to organizations of all types and sizes, from enterprises to small businesses. Nearly 60% of the Fortune 500 now use Copilot, and we have seen accelerated adoption across industries and geographies with companies like Amgen, BP, Cognizant, Koch Industries, Moody's, Nova Nordisk, NVIDIA, and TechMahindra are purchasing over 10,000 seats. We're also seeing increased usage intensity from early adopters, including a nearly 50% increase in the number of co-pilot-assisted interactions per user in teams, bridging group activity with business process workflows and enterprise knowledge. We're not stopping there. We're accelerating our innovation, adding over 150 co-pilot capabilities since the start of the year. With co-pilot in Dynamics 365, we're helping businesses transform every role and business function as we take share with our AI-powered apps across all categories. This quarter, we made our co-pilot for service and co-pilot for sales broadly available, helping customer service agents and sellers at companies like Land O'Lakes, Northern Trust, Rockwell Automation, and Toyota Group, generate role-specific insights and recommendations from across Dynamics 365 and Microsoft 365, as well as third-party platforms like Salesforce, ServiceNow, and Zendesk. With our co-pilot for finance, we are drawing context from Dynamics as well as ERP systems like SAP to reduce labor-intensive processes like collections and contract and invoice capture for companies like Dentsu and IDC. ISVs are also building their own Copilot integrations. For example, new integrations between Adobe Experience Cloud and Copilot will help marketeers access campaign insights in the flow of their work. When it comes to devices, Copilot in Windows is now available on nearly 225 million Windows 10 and Windows 11 PCs, up 2x quarter over quarter. With Copilot, we have an opportunity to create an entirely new category of devices, purpose-built for this new generation of AI. All of our largest OEM partners have announced AI PCs in recent months, and this quarter we introduced new Surface devices, which includes integrated NPUs, to power on-device AI experiences like auto-framing and live captions. And there's much more to come. In just a few weeks, we'll hold a special event to talk about our AI vision across Windows and devices. When it comes to Teams, we once again saw year-over-year usage growth. We're rolling out a new version, which is up to two times faster while using 50% less memory to all customers. We surpassed 1 million Teams rooms for the first time as we continue to make hybrid meetings better with new AI-powered features like automatic camera switching and speaker recognition. And Teams Phone continues to be the market leader in cloud calling, now with over 20 million PSTN users, up nearly 30% year over year. All of this innovation is driving growth across Microsoft 365, companies across the private and public sector, including Amadeus, BlackRock, Chevron, Ecolab, Kimberly-Clark, all chose our premium E5 offerings this quarter for advanced security, compliance, voice, and analytics. Now on to industry and cross-industry clouds. We are also bringing AI power transformation to every industry. In healthcare, Dax Co-Pilot is being used by more than 200 healthcare organizations, including Providence, Stanford Healthcare, and WellSpan Health. And in manufacturing this week at Hanover Massey, customers like BMW, Siemens, and Volvo Penta shared how they're using our cloud and AI solutions to transform factory operations. Now on to security. Security underpins every layer of the tech stack, and it's our number one priority. We launched our Secure Future initiative last fall for this reason, bringing together every part of the company to advance cybersecurity protection. And we are doubling down on this very important work, putting security above all else, before all other features and investments. We are focused on making continuous progress across the six pillars of this initiative as we protect tenants and isolate production systems, protect identities and secrets, protect networks, protect engineering systems, monitor and detect threats, and accelerate responses and remediation. We remain committed to sharing our learnings, tools, and innovation with customers. A great example is Copilot for Security, which we made generally available earlier this month, bringing together LLMs with domain-specific skills informed by our threat intelligence and 78 trillion daily security signals to provide security teams with actionable insights. Now let me talk about our consumer businesses, starting with LinkedIn. We continue to combine our unique data with this new generation of AI to transform the way members learn, sell, and get hired. Features like LinkedIn AI-assisted messages are seeing a 40% higher acceptance rate and accepted over 10% faster by job seekers, saving hirers time and making it easier to connect them to candidates. Our AI-powered collaborative articles, which have reached over 12 million contributions, are helping increase engagement on the platform, which reached a new record this quarter. New AI features are also helping accelerate LinkedIn premium growth, with revenue up 29% year-over-year. And we are also seeing strength across other businesses, with hiring taking share for the seventh consecutive quarter. Now on to search advertising in news. We once again took share across Bing and Edge as we continue to apply this new generation of AI to transform how people search and browse. Bing reached over 140 million daily active users, and we are particularly encouraged by our momentum in mobile. Our free Copilot apps on iOS and Android saw a surge in downloads after our Super Bowl ad and are among the highest rated in this category. We also rolled out Copilot to our ad platform this quarter, helping marketeers use AI to generate recommendations for product images, headlines, and descriptions. Now on to gaming. We are committed to meeting players where they are by bringing great games to more people on more devices. We set third-quarter records for game streaming hours, console usage, and monthly active devices. And last month, we added our first Activision Blizzard title, Diablo 4, to our Game Pass service. Subscribers played over 10 million hours within the first 10 days, making it one of our biggest first-party Game Pass launches ever. We were also encouraged by ongoing success of Call of Duty's Modern Warfare 3, which is attracting new gamers and retaining franchise loyalists. Finally, we are expanding our games to new platforms, bringing four of our fan favorite titles to Nintendo Switch and Sony PlayStation for the first time. In fact, earlier this month, we had seven games among the top 25 on the PlayStation Store, more than any other publisher. In closing, I'm energized about our opportunity ahead as we innovate to help people and businesses thrive in this new era. With that, let me turn it over to Amy.