Microsoft Corporation

Greetings and welcome to the Microsoft fiscal year 2025 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, 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. 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 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 and 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 factor section of our Form 10-K, Form 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. This quarter, we saw continued strength in Microsoft Cloud, which surpassed $40 billion in revenue for the first time, up 21% year-over-year. Enterprises are beginning to move from proof of concepts to enterprise-wide deployments to unlock the full ROI of AI. And our AI business has now surpassed an annual revenue run rate of $13 billion, up 175% year-over-year. Before I get into the details of the quarter, I want to comment on the core thesis behind our approach to how we manage our fleet and how we allocate our capital to compute. AI scaling laws continue to compound across both pre-training and inference time compute. We ourselves have been seeing significant efficiency gains in both training and inference for years now. On inference, we have typically seen more than 2x price performance gain for every hardware generation and more than 10x for every model generation due to software optimizations. And as AI becomes more efficient and accessible, we will see exponentially more demand. Therefore, much as we have done with the commercial cloud, we are focused on continuously scaling our fleet globally and maintaining the right balance across training and inference, as well as geo-distribution. From now on, it's a more continuous cycle governed by both revenue growth and capability growth, thanks to the compounding effects of software-driven AI scaling laws and Moore's Law. With that, I will walk through the progress we are making across every layer of the tech stack. Azure is the infrastructure layer for AI. We continue to expand our data center capacity in line with both near-term and long-term demand signals. We have more than doubled our overall data center capacity in the last three years, and we have added more capacity last year than any other year in our history. Our data centers, networks, racks, and silicon are all coming together as a complete system to drive new efficiencies to power both the cloud workloads of today and the next generation AI workloads. We continue to take advantage of Moore's Law and refresh our fleet as evidenced by our support of the latest from AMD, Intel, NVIDIA, as well as our first-party silicon innovation from Maya, Cobalt, Boost, and HSM. When it comes to cloud migrations, we continue to see customers like UBS move workloads to Azure. UBS alone migrated mainframe workloads encompassing nearly 400 billion records and two petabytes of data. And we remain the cloud of choice for customers' mission-critical Oracle, SAP, and VMware apps. At the data layer, we're seeing Microsoft Fabric breakout. We now have over 19,000 paid customers from Hitachi to Johnson Controls to Schaeffler. Fabric is now the fastest growing analytics product in our history. Power BI is also deeply integrated with Fabric with over 30 million monthly active users, up 40% since last year. Beyond Fabric, we are seeing new AI-driven data patterns emerge. If you look underneath ChatGPT or Copilot or Enterprise AI apps, you see the growth of raw storage, database services, and app platform services as these workloads scale. The number of Azure OpenAI apps running on Azure databases and Azure app services more than doubled year-over-year, driving significant growth in adoption across SQL Hyperscale and Cosmos DB. Now on to AI platform and tools. As we shared last week, we are thrilled OpenAI has made a new large Azure commitment. Through our strategic partnership, we continue to benefit mutually from each other's growth. And with OpenAI's APIs exclusively running on Azure, customers can count on us to get access to the world's leading models. And OpenAI has a lot more coming soon, so stay tuned. Azure AI Foundry features best-in-class tooling, runtimes to build agents, multi-agent apps, AI ops, API access to thousands of models. Two months in, we already have more than 200,000 monthly active users, and we are well-positioned with our support of both OpenAI's leading models and the best selection of open-source models and SLMs. DeepSeq's R1 launched today via the model catalog on Foundry and GitHub with automated red teaming, content safety integration, and security scanning. Our five family of SLMs has now been downloaded over 20 million times. And we also have more than 30 models from partners like Bayer, PageAI, Rockwell Automation, Siemens to address industry-specific use cases. With AI, how we build, deploy, and maintain code is fundamentally changing. And GitHub Copilot is increasingly the tool of choice for both digital natives like ASOS and Spotify, as well as world's largest enterprises like HP, HSBC, and KPMG. We've been delighted by the early response to GitHub Copilot in VS Code with more than a million signups in just the first week post-launch. All up, GitHub now is home to 150 million developers, up 50% over the past two years. Now on to the future of work. Microsoft 365 Copilot is the UI for AI. It helps supercharge employee productivity and provides access to a swarm of intelligent agents to streamline employee workflows. We are seeing accelerated customer adoption across all deal sizes as we renew Microsoft 365 Copilot customers and see the majority of existing enterprise customers come back to purchase more seats. When you look at customers who purchased Copilot during the first quarter of availability, they have expanded their seats collectively by more than 10x over the past 18 months. To share just one example, Novartis has added thousands of seats each quarter over the past year and now have 40,000 seats. Barclays, Carrier Group, Pearson, and University of Miami all purchased 10,000 or more seats this quarter. And overall, the number of people who use Copilot daily again more than doubled quarter over quarter. Employees are also engaging with Copilot more than ever. Usage intensity increased more than 60% quarter over quarter. And we are expanding our TAM with Copilot Chat, which was announced earlier this month. Copilot Chat along with Copilot Studio is now available to every employee to start using agents right in the flow of work. With Copilot Studio, we are making it as simple to build an agent as it is to create an Excel spreadsheet. More than 160,000 organizations have already used Copilot Studio, and they collectively created more than 400,000 custom agents in the last three months alone, up over 2x quarter-over-quarter. We've also introduced our own first-party agents to facilitate meetings, manage projects, resolve common HR and IT queries, and access SharePoint data. And we also continue to see partners like Adobe SAP ServiceNow and Workday build their third-party agents and integrate with Copilot. What is driving Copilot as the UI for AI, as well as our momentum with agents, is our rich data cloud, which is the world's largest source of organizational knowledge. Billions of emails, documents, and chats, hundreds of millions of Teams meetings, and millions of SharePoint sites are added each day. This is the enterprise knowledge cloud. It is growing fast, up over 25% year over year. More broadly, what we are seeing is co-pilot plus agents disrupting business applications. And we are leaning into this. With Dynamics 365, we took share as organizations like Ecolab, Lenovo, RTX, Total Energy, and Vizent switched to our AI-powered apps from legacy providers. In healthcare, Daxco pilots surpassed 2 million monthly physician-patient encounters, up 54% quarter over quarter. It is being used by top providers like Mass General Brigham, Michigan Medicine, Vanderbilt University Medical Center to increase productivity of their physicians. When it comes to windows, We are seeing momentum build as we approach end of support for Windows 10. Customers are choosing the latest Windows 11 devices for their enhanced security and advanced AI capabilities. 15% of premium-priced laptops in the U.S. this holiday were Copilot Plus PCs, and we expect the majority of the PCs sold in the next several years to be Copilot Plus PCs. We also see more and more developers from Adobe and CapCut to WhatsApp build apps that leverage built-in NPUs. And they will soon be able to run DeepSeek's R1 distal models locally on Copilot Plus PCs, as well as the vast ecosystem of GPUs available on Windows. And beyond Copilot Plus PCs, the most powerful AI workstation for local development is a Windows PC running WSL2 powered by NVIDIA RTX GPUs. Now on to security. We continue to make progress with our Secure Future initiative, and we are applying what we have learned, introducing over 80 new product capabilities over the past year. With security co-pilot organizations across private and public sector, like City of Johannesburg, Eastman, Intesa, National Australia Bank, NTT can resolve incidents 30% faster. Data governance is increasingly critical and customers now use Microsoft Purview to audit over 2 billion copilot interactions for safe and compliant use. Now on to our consumer businesses, starting with LinkedIn. More professionals than ever are engaging in high-value conversations on LinkedIn, with comments up 37% year-over-year. Short-form video continues to grow on the platform, with video creation all-up growing at twice the rate of other post formats. We're also innovating with agents to help recruiters and small businesses find qualified candidates faster, and our hiring business again took share in In subscriptions, LinkedIn premiums surpassed $2 billion in annual revenue for the first time this quarter. Subscriber growth has increased nearly 50% over the past two years, and nearly 40% of subscribers have used our AI features to improve their profiles. And LinkedIn marketing solution remains the leader in B2B advertising. Now on to search advertising and news. We once again took share across Bing and Edge. Edge surpassed 30% market share in the U.S. on Windows and has taken share for 15 consecutive quarters. The investments we have made in improving our ad rates are paying off, and advertisers increasingly see our network as an essential platform to optimize ROI. And our Copilot consumer app is seeing increased engagement and retention with its improved speed, unique personality, first-of-its-kind features like Copilot Vision. Just today, we made ThinkDeeper powered by O1 free for all co-pilot users globally. Now on to gaming. We are focused on improving the profitability of the business in order to position it for long-term growth driven by higher margin content and platform services. And we are delivering on this plan. Black Ops 6 was top-selling game on Xbox and PlayStation this quarter and saw more players in its launch quarter than any other paid release in the franchise history. And we saw rave reviews of Indiana Jones and The Great Circle, which has already been played by more than 4 million people. We also continue to see strong momentum for Xbox cloud gaming with a record 140 million hours streamed this quarter. All Up Game Pass set a new quarterly record for revenue and grew its PC subscriber base by over 30% as we focus on driving fully paid subscribers across endpoints. In closing, we continue to innovate across our tech stack to help our customers in this AI era, and I'm energized by the many opportunities ahead. With that, let me turn it over to Amy.