Microsoft Corporation

Greetings and welcome to the Microsoft Fiscal Year 2025 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, 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 Jolla, 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. We have recast certain prior period amounts to reflect the FY25 changes to the composition of our segments announced in August 2024. Additional details, including FY23 and FY24 recast segment revenue, operating income, and product and service level revenue, can be found in the financial statements file on the Investor Relations website. More detailed outlook slides will also 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 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 business is 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 factors 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 statements. And with that, I'll turn the call over to Satya.

Thank you, Brett. We are off to a solid start to our fiscal year, driven by continued strength of Microsoft Cloud, which surpassed $38.9 billion in revenue, up 22%. AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business process, helping customers drive new growth and operating leverage. All up, our AI business is on track to surpass an annual revenue run rate of $10 billion next quarter, which will make it the fastest business in our history to reach this milestone. Now I'll highlight examples of our progress starting with infrastructure. Azure took share this quarter. We are seeing continued growth in cloud migration. Azure Arc now has over 39,000 customers across every industry, including American Tower, CTT, L'Oreal, up more than 80% year-over-year. We now have data centers in over 60 regions around the world, and this quarter we announced new cloud and AI infrastructure investments in Brazil, Italy, Mexico, and Sweden. as we expand our capacity in line with our long-term demand signals. At the silicon layer, our new Cobalt 100 VMs are being used by companies like Databricks, Elastic, Siemens, Snowflake, and Synapsys to power their general-purpose workloads at up to 50% better price performance than previous generations. On top of this, we are building out our next-generation AI infrastructure, innovating across the full stack to optimize our fleet for AI workloads. We offer the broadest selection of AI accelerators, including our first-party accelerator, Maya 100, as well as the latest GPUs from AMD and NVIDIA. In fact, we are the first cloud to bring up NVIDIA's Blackwell system with GB200-powered AI servers. Our partnership with OpenAI also continues to deliver results. We have an economic interest in a company that has grown significantly in value, and we have built differentiated IP and are driving revenue momentum. More broadly, with Azure AI, we are building an end-to-end app platform to help customers build their own co-pilots and agents. Azure OpenAI usage more than doubled over the past six months as both digital natives like Grammarly and Harvey, as well as established enterprises like Bajaj Finance, Hitachi, KT, and LG move apps from test to production. GE Aerospace, for example, used Azure OpenAI to build a new digital assistant for all 52,000 of its employees. In just three months, it has been used to conduct over 500,000 internal queries and process more than 200,000 documents. And this quarter, we added support for OpenAI's newest model family, O1. We're also bringing industry-specific models to Azure AI, including a collection of best-in-class multimodal models for medical imaging. And with GitHub models, we now provide access to our full model catalog directly within the GitHub developer workflow. Azure AI is also increasingly an on-ramp to our data and analytics services. As developers build new AI apps on Azure, we have seen an acceleration of Azure Cosmos DB and Azure SQL DB hyperscale usage as customers like Air India, Novo Nordisk, Telefonica, Toyota Motor North America, and Uniper take advantage of capabilities purpose-built for AI applications. And with Microsoft Fabric, we provide a single AI-powered platform to help customers like Chanel, EY, KPMG, Swiss Air, and Syndigo unify their data across clouds. We now have over 16,000 paid Fabric customers, over 70% of the Fortune 500. Now on to developers. GitHub Copilot is changing the way the world builds software. Copilot Enterprise customers increased 55% quarter over quarter as companies like AMD and Flutter Entertainment tailor Copilot to their own code base. And we are introducing the next phase of AI code generation, making GitHub Copilot agentic across the developer workflow. GitHub Copilot Workspace is a developer environment which leverages agents from start to finish, so developers can go from spec to plan to code, all in natural language. Copilot Autofix is an AI agent that helps developers at companies like Assyrian and Autogroup fix vulnerabilities in their code over three times faster than it would take them on their own. We're also continuing to build on GitHub's open platform ethos by making more models available via GitHub Copilot. And we're expanding the reach of GitHub to a new segment of developers, introducing GitHub Spark, which enables anyone to build apps in natural language. Already, we have brought generative AI to Power Platform to help customers use low-code, no-code tools to cut costs and development time. To date, nearly 600,000 organizations have used AI-powered capabilities in Power Platform up 4x year-over-year. Citizen developers at ZF, for example, built apps simply by describing what they need using natural language. And this quarter, we introduced new ways for customers to apply AI to streamline complex workflows with Power Automate. Now on to work. We launched the next wave of Microsoft 365 co-pilot innovation last month, bringing together web work and pages as a new design system for knowledge work. Pages is the first new digital artifact for the AI age, and it's designed to help you ideate with AI and collaborate with other people. We've also made Microsoft 365 co-pilot responses 2x faster and improved response quality by nearly 3x. This innovation is driving accelerated usage and the number of people using Microsoft 365 daily more than doubled quarter over quarter. We're also seeing increased adoption from customers in every industry as they use Microsoft 365 Copilot to drive real business value. Vodafone, for example, will roll out Microsoft 365 Copilot to 68,000 employees after a trial showed that, on average, they save three hours per person per week. And UBS will deploy 50,000 seats in our largest FinServ deal to date. And we continue to see enterprise customers coming back to buy more seats. All up, nearly 70% of the Fortune 500 now use Microsoft 365 Copilot, and customers continue to adopt it at a faster rate than any other new Microsoft 365 suite. Copilot is the UI for AI, and with Microsoft 365 Copilot, Copilot Studio, and agents, and now autonomous agents, we have built an end-to-end system for AI business transformation. With Copilot Studio, organizations can build and connect Microsoft 365 Copilot to autonomous agents, which then delegate to Copilot when there is an exception. More than 100,000 organizations from Ensure, Standard Bank, and Thomson Reuters to Virgin Money and Zurich Insurance have used Copilot Studio to date, up over 2x quarter over quarter. More broadly, we are seeing AI drive a fundamental change in the business applications market as customers shift from legacy apps to AI-first business processes. Dynamics 365 continues to take share as organizations like Evron, Heineken, and Lexmark chose our apps over other providers. And monthly active users of Copilot across our CRM and ERP portfolio increased over 60% quarter over quarter. Our Dynamics 365 Contact Center is also winning customers like Curry's, Le Corset, and RxO as it brings generative AI to every customer engagement channel. And just last week, we added 10 out-of-the-box autonomous agents to Dynamics 365 that helps customers automatically qualify sales leads, track suppliers, and work hand-in-hand with service reps to resolve issues. We're also bringing AI to industry-specific workflows. One year in, DAX Copilot is now documenting over 1.3 million physician-patient encounters each month at over 500 healthcare organizations like Baptist Medical Group, Baylor Scott & White, Great Baltimore Medical Center, Novant Health, and Overlake Medical Center. It is showing faster revenue growth than GitHub Copilot did in this first year. And new features extend DACs beyond notes, helping physicians automatically draft referrals after visit instructions and diagnostic evidence. On top of all this AI innovation, Microsoft Teams usage remains at all-time highs as people use it to streamline all their communications. Nearly 75% of our Teams enterprise customers now buy premium phone or rooms. When it comes to Windows, our new class of Copilot Plus PCs is winning new customers. They offer best-in-class AI capability, performance, and value. AMD, Intel, and Qualcomm now all support Copilot Plus PCs. This quarter, we also introduced new AI experience only available on co-pilot plus PCs like Click To Do, which places an interactive overlay over your desktop to suggest next best actions. As we approach the end of support for Windows 10 a year from now, we are well-positioned to transition our customers to Windows 11, ensuring they benefit from enhanced features and security improvements we've introduced over the past few years. Now on to security. We continue to prioritize security above all else. With our Secure Future initiative, we have dedicated the equivalent of 34,000 full-time engineers to address the highest priority security tasks. We have made significant progress to better protect tenants, identities, networks, and engineering systems, and we have created new processes to ensure security is prioritized at every level of the company. And we continue to take what we learn and turn it into innovations across our products. Security Copilot, for example, is being used by companies in every industry, including Clifford Chance, Intesa, San Paolo, and Shell to perform SecOps tasks faster and more accurately. And we are now helping customers protect their AI deployments too. Customers have used Defender to discover and secure more than 750,000 Gen AI app instances and used Purview to audit over a billion co-pilot interactions to meet their compliance obligations. In all up, we continue to take share across all major categories we serve and are consistently recognized by top analysts as a leader in 20 categories more than any other vendor. Now let me turn to our consumer businesses, starting with LinkedIn. Member growth continues to accelerate with markets in India and Brazil both growing at double digits. We're also seeing record engagement as we introduce new ways for our more than 1 billion members to connect, sell services, get hired, and share knowledge. Our investments in rich formats like video strengthen our leadership in B2B advertising and amplify the value we deliver to our customers. Weekly immersive video views increase 6x quarter over quarter, and total video viewership on LinkedIn is up 36% year over year. Our AI-powered tools also continue to transform how people sell, learn, and hire. In sales, new AI features help every team member perform at the level of top sellers and drive more profitable growth. In learning, just yesterday, we announced updates to our coaching experience, including personalized career development plans. LinkedIn's first agent, Hiring Assistant, will help hirers find qualified candidates faster by tackling the most time-consuming tasks. Already, hirers who use AI Assistant messages see a 44% higher acceptance rate compared to those who don't. And our hiring business continues to take share. now on to search advertising and news with copilot we're seeing the first step towards creating a new ai companion for everyone with new co-pilot experience we introduced earlier this month includes a refreshed design and tone along with improved speed and fluency across the web and mobile and it includes advanced capabilities like voice and vision that make it more delightful and useful and feel more natural You can both browse and converse with Copilot simultaneously because Copilot sees what you see. More broadly, AI is also transforming search, browsers, and digital advertising, and we continue to take share across Bing and Edge. Bing xStack revenue growth outpaced the search market. Now on to gaming. One year since we closed our acquisition of Activision Blizzard King, we are focused on building a business position for long-term growth driven by higher margin content and services. You already see this transformation in our results as we diversify the ways that gamers access our content. We set new records for monthly active users in the quarter as more players than ever play our games across devices and on the Xbox platform. Game Pass also set a new Q1 record for total revenue and average revenue per subscriber. And as we look ahead, our IP across our studios has never been stronger. Last week's launch of Black Ops 6 was the biggest Call of Duty release ever, setting a record for day one players as well as Game Pass subscriber ads on launch day. And unit sales on PlayStation and Steam were also up over 60% year over year. This speaks to our strategy of meeting gamers where they are by enabling them to play more games across the screens they spend their time on. In closing, we are rapidly innovating to expand our opportunity across our commercial and consumer businesses. In three weeks' time, we will hold our Ignite conference, and I look forward to sharing more then about how we are helping every business function use AI to drive growth in this new era. With that, let me turn it over to Amy.