Microsoft Corporation

Greetings and welcome to the Microsoft Fiscal Year 2025 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jonathan Nielsen, Vice President of Investor Relations.

Good afternoon, and thank you for joining us today. On the call with me are Sachin Adela, Chairman and Chief Executive Officer, Amy Hood, Chief Financial Officer, Alex 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 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 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 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 juicy to update any forward-looking statement. And with that, I'll turn the call over to Satya. Thank you.

Thank you, Jonathan. It was a very strong close to what was a record fiscal year for us. All up, Microsoft Cloud surpassed $168 billion in annual revenue, up 23%. The rate of innovation and the speed of diffusion is unlike anything we have seen. To that end, we are building the most comprehensive suite of AI products and tech stack at massive scale. And to provide more context, I want to walk up the stack starting with Azure. Azure surpassed $75 billion in annual revenue, up 34% driven by growth across all workloads. We continue to lead the AI infrastructure wave and took share every quarter this year. We opened new DCs across six continents and now have over 400 data centers across 70 regions, more than any other cloud provider. There is a lot of talk in the industry about building the first gigawatt and multi-gigawatt data centers. We stood up more than two gigawatts of new capacity over the past 12 months alone, and we continue to scale our own data center capacity faster than any other competitor. Every Azure region is now AI first. All of our regions can now support liquid cooling, increasing the fungibility and the flexibility of our fleet. And we are driving and riding a set of compounding S-curves across silicon systems and models to continuously improve efficiency and performance for our customers. Take, for example, GBD4O family of models, which have the highest volume of inference tokens. Through software optimizations alone, we are delivering 90% more tokens for the same GPU compared to a year ago. Beyond the AI fleet, we continue to build our commercial cloud to address customers' unique data residency and sovereignty requirements. This quarter, we introduced the Microsoft Sovereign Cloud, the industry's most comprehensive solution spanning both public and private cloud deployments. All of this innovation is driving our strong results. We saw accelerating growth from migrations again this quarter. Nestle, for example, migrated more than 200 SAP instances, 10,000 plus servers, 1.2 petabytes of data to Azure with near zero business disruption. That makes it one of the largest and most successful migrations in business history. The next big accelerator in the cloud will be quantum. And I'm excited about our progress. In fact, earlier this month, we announced the world's first operational deployment of a level two quantum computer in partnership with Atom Computing. This is how we will continue to think and make investments with decade-long arcs while making progress every quarter. The next layer is data, which is foundational to every AI application. Microsoft Fabric is becoming the complete data and analytics platform for the AI era, spanning everything from SQL to NoSQL to analytics workloads. It continues to gain momentum with revenue up 55% year-over-year and over 25,000 customers. It's the fastest growing database product in our history. Fabric One Lake spans all databases and clouds, including semantic models from Power BI, and therefore it is the best source of knowledge and grounding for AI applications and context engineering. Azure Databricks and Snowflake on Azure both accelerated as well. Cosmos DB and Azure PostgreSQL are both powering mission-critical workloads at scale. OpenAI, for example, uses Cosmos DB in the hot path of every chat GPT interaction, storing chat history, user profiles, and conversational state. And Azure PostgreSQL stores metadata critical to the operation of chat GPT, as well as OpenAI's developer APIs. This year we launched Azure AI Foundry to help customers design, customize, and manage AI applications and agents at scale. Foundry features best-in-class tooling, management, observability, and built-in controls for trustworthy AI. Customers increasingly want to use multiple AI models to meet their specific performance, cost, and use case requirements. And with Foundry, they can provision inferencing throughput ones and apply it across more models than any other hyperscaler, including models from OpenAI, DeepSeq, Meta, XAI's Grok, and very soon Black Forest Labs and Mistral AI. We sim shipped 15 models from OpenAI alone on Foundry this year, providing a same-day access to state-of-the-art models deeply integrated with our infrastructure and tools. And we are seeing accelerated adoption of our new Foundry agent service, which is now being used by 14,000 customers to build agents that automate complex tasks. For example, NASDAQ is using Foundry to build agents that help customers prepare for board meetings, cutting prep time by up to 25%. All up 80% of Fortune 500 already use Foundry. And when we look narrowly at just the number of tokens served by Foundry APIs, we processed over 500 trillion this year, up over 7x. This is a good indicator of true platform diffusion beyond a few head apps and services. Talking about the app layer, these applications are becoming embedded in our daily work in life. Our family of co-pilot apps has surpassed 100 million monthly active users across commercial and consumer. And when you take a broader look at the engagement of AI features across our products, we have over 800 million monthly active users. Microsoft 365 Copilot is becoming the new way to organize work and workflow and work artifacts. We rolled out our biggest update to Microsoft 365 Copilot to date this quarter, bringing together chat, search, create, notebooks, as well as agents into one intuitive scaffolding. With this innovation and continued product improvements, we are seeing real momentum. Customers continue to adopt Copilot at a faster rate than any other new Microsoft 365 suite with strong usage intensity as shown by our week-over-week retention. And we saw the largest quarter of seat ads since launch with a record number of customers returning to buy more seats. Barclays, for example, will roll out Microsoft 365 Copilot to 100,000 employees globally following a successful initial deployment of 15,000. UBS is expanding its deployment to all of its employees after initially rolling it out to 55,000 of them. And Adobe, KPMG, Pfizer, Wells Fargo all purchased over 25,000 seats this quarter. Tens of thousands of organizations have already used our researcher and analyst deep reasoning agents in the first weeks of availability, and we have introduced group-level agents in teams like Facilitator and Interpreter, which generate real-time translation and notes in meetings. Hundreds of partners like Adobe, SAP, ServiceNow, and Workday have built their own third-party agents that integrate with Copilot and Teams. We are also seeing more customers use Copilot Studio to extend Microsoft 365 Copilot and build their own agents. This year, customers created 3 million agents using SharePoint and Copilot Studio. And with Copilot tuning, they can easily create agents fine-tuned on their company's data, workflow, and style that reflect their unique tone, language, and expertise. We're also seeing great traction among specific roles and functions, starting with developers. GitHub Copilot continues to have great momentum in IDE with agent mode and new form factors like coding agent, which is capable of asynchronously executing developer tasks. We have 20 million GitHub Copilot users. GitHub Copilot Enterprise customers increased 75% quarter over quarter as companies tailor Copilot to their own code bases. And 90% of the Fortune 100 now use GitHub Copilot. More broadly, GitHub usage and repos are seeing explosive growth because of AI. AI projects on GitHub more than doubled over the last year. The surge in wide coding projects and AI coding agents, whether it is Cloud Code, Codex, Cursor, or GitHub Copilot, are generating more pull requests and more repos on GitHub. And our code review agent is being used heavily across the platform, performing millions of code reviews each month. In healthcare, we had a breakout year for Dragon Co-Pilot. Customers used our ambient AI solutions to document over 13 million physician-patient encounters this quarter, up nearly 7x year-over-year. For example, at Mercy Health System, more than 1,000 physicians are already using Copilot to reduce administrative burden so that they can focus on providing better care. They have saved more than 100,000 hours to date and plan to expand to all 5,000 providers. As one physician put it, the best thing to happen to my practice in 10 years. And in security, we were the first in the industry to introduce agents to help defenders autonomously handle high-volume security and IT tasks. More broadly, AI is driving a fundamental change in the biz apps market as customers shift from legacy systems to agentic business applications. Dynamics 365 took share this year, and we're winning customers in every industry, like Verizon with sales, Domino's Pizza Group with ERP, 1-800-Flowers with Contact Center. When it comes to consumer apps, we are innovating across all surfaces. In fact, on Monday, we introduced Copilot Mode in Edge. It's especially exciting to see the innovation coming back to browsers. Copilot Mode brings together Copilot Composer, Chat, Discover, Search, and Actions to build the next generation of browser for the AI age. Our Copilot consumer app also continue to see strong growth in engagement and successful sessions. And we are bringing Copilot to every Windows 11 PC. With Copilot Vision, you can share your screen with Copilot and get real-time insights and assistance on anything. And we are well positioned as we approach Windows 10 end of support in October, thanks to Windows 11 and Copilot Plus PCs, which offer customers compelling security as well as AI value. Talking about security, it underlies our cloud and AI infrastructure as well as our copilots and agents. We have launched over 100 new capabilities over the past year. Just last week, we added a modern data lake to our SIEM, Microsoft Sentinel, bringing together customer data across our first-party tools as well as third-party ecosystem over 350 connectors. We're also extending the systems customers already use for governance, identity, security, and management to protect every AI agent. Entra now extends identity permissions, policies, and access controls to agents. Defender secures nearly 2 million general AI apps. Purview is used by three-quarters of the Microsoft 365 co-pilot customers to protect their data. And all up, we now have nearly 1.5 million security customers and continue to take share across all major categories we serve. Before I wrap, I want to talk about two consumer businesses of ours with massive end-user reach, LinkedIn and Xbox. LinkedIn is home to 1.2 billion members with four consecutive years of double-digit member growth. All-up comments on LinkedIn rose over 30% and video uploads increased over 20% this year. We continue to bring AI to every part of LinkedIn experience, introducing agents across hiring as well as sales. When it comes to gaming, we have 500 million monthly active users across platforms and devices. We are now the top publisher on both Xbox and PlayStation this quarter with successful launches of Forza Horizon 5 and Oblivion Remastered. The Call of Duty franchise has never been stronger. 50 million people have played Black Ops 6. Total hours surpassed 2 billion. Minecraft saw record monthly active usage and revenue this quarter, thanks in large part to the success of the Minecraft movie. and we have nearly 40 games in development, so much, much more to come. We surpassed over 500 million hours of gameplay streamed via the cloud this year, and Game Pass annual revenue was nearly $5 billion for the first time. In closing, we are going through a generational tech shift with AI, and I have never been more confident in Microsoft's opportunity to drive long-term growth and define what the future looks like. With that, let me turn it over to Amy to walk through our financial results as well as the outlook.

Thank you, Satya, and good afternoon, everyone. This year, we delivered over $281 billion in revenue, up 15% year-over-year, which reflects the broad strength of our products and services. Operating income was over $128 billion, up 17% year over year, as we invested against the expansive opportunity ahead. And in our largest quarter of the year, we significantly exceeded expectations with strong execution by our sales and partner teams. As Satya shared, we're innovating faster than ever to deliver new value to our customers. This quarter, revenue was $76.4 billion of 18% and 17% in constant currency. Gross margin dollars increased 16% and 15% in constant currency, while operating income increased 23% and 22% in constant currency. And earnings per share was $3.65, an increase of 24% and 22% in constant currency. For the first time, commercial bookings were over $100 billion, increasing 37% and 30% in constant currency on a strong prior year comparable. Strong execution across our core annuity sales motions, including healthy renewals, as well as an increase in the number of $10 million and $100 million plus contracts for both Azure and Microsoft 365 helped drive these results. Commercial remaining performance obligation increased to $368 billion, up 37% and 35% in constant currency. Roughly 35% will be recognized in revenue in the next 12 months, up 21% year over year. The remaining portion, recognized beyond the next 12 months, increased 49%. And this quarter, our annuity mix was again 98%. FX was roughly in line with expectations on total company revenue, segment-level revenue, COGS, and operating expense growth. Microsoft Cloud revenue was $46.7 billion ahead of expectations and grew 27% and 25% in constant currency. Microsoft Cloud gross margin percentage was slightly better than expected at 68%, down two points year-over-year from the impact of scaling our AI infrastructure, partially offset by continued efficiency gains in Azure and M365 commercial cloud. Company gross margin percentage was 69%, down one point year-over-year, driven by sales mixed shift to Azure and the lower Microsoft Cloud gross margin noted earlier. Operating expenses increased 6% and 5% in constant currency, and operating margins increased two points year-over-year to 45%. Better-than-expected revenue growth, coupled with a focus on operating efficiently, drove the margin expansion. At a total company level, headcount at the end of June was relatively unchanged year-over-year. Now to our segment results. Revenue from productivity and business processes was $33.1 billion, and and grew 16% and 14% in constant currency, better than expected, driven by M365 commercial products and cloud services and M365 consumer products and cloud services. M365 commercial cloud revenue was ahead of expectations and increased 18% and 16% in constant currency with two points of benefit from end-period revenue recognition. Business trends remained relatively stable to the prior quarter when excluding the end-period revenue recognition. with ARPU growth again driven by E5 and M365 co-pilot. Paid M365 commercial seats grew 6% year-over-year, with install-based expansion across all customer segments, though primarily in our small and medium business and frontline worker offerings. M365 commercial products revenue increased 9% and 7% in constant currency, ahead of expectations, due to higher-than-expected Office 2024 transactional purchasing. M365 consumer cloud revenue was better than expected, increasing 20%, driven by ARPU growth following the January price increase and subscriber growth of 8%. LinkedIn revenue increased 9% and 8% in constant currency, with growth across all businesses, though Talent Solutions continues to be impacted by weakness in the hiring market. Dynamics 365 revenue increased 23% and 21% in constant currency, with strong execution in our core annuity sales motions. leading to growth across all workloads. Segment gross margin dollars increased 16% and 15% in constant currency, and gross margin percentage increased slightly, driven by the efficiency gains noted earlier, even as we deliver more AI features across our products and scale our AI infrastructure. Operating expenses increased 7% and 6% in constant currency, and operating income increased 21% and 19% in constant currency. Next, the intelligent cloud segment Revenue was $29.9 billion and grew 26% and 25% in constant currency ahead of expectations driven by Azure and our on-premises server business. In Azure and other cloud services, revenue grew 39%, significantly ahead of expectations driven by accelerated growth in our core infrastructure business, primarily from our largest customers. As a reminder, New cloud and AI workloads are built and scaled using the breadth of our services. Revenue from Azure AI services was generally in line with expectations. And while we brought additional data center capacity online this quarter, demand remains higher than supply. In our on-premises server business, revenue decreased 2% and 3% in constant currency ahead of expectations, primarily driven by transactional purchasing, which also has higher end-period revenue recognition. Enterprise and partner services revenue increased 7% and 6% in constant currency, with growth in enterprise support services partially offset by a decline in industry solutions. Segment gross margin dollars increased 17% and 16% in constant currency, and gross margin percentage decreased four points year over year, driven by scaling our AI infrastructure, partially offset by Azure efficiency gains noted earlier. Operating expenses increased 6% and 4% in constant currency, and operating income grew 23%. Now to more personal computing. Revenue was $13.5 billion and grew 9%, exceeding expectations primarily due to Windows OEM, as well as Xbox content and services. Windows OEM and devices revenue increased 3% year-over-year, ahead of expectations, as inventory levels remained elevated. Search and news advertising revenue XTAC increased 21% and 20% in constant currency, driven by continued growth in both volume and revenue per search. as well as roughly eight points of favorable impact from third-party partnerships, including the benefit of a low prior year comparable. And in gaming, revenue increased 10%. Xbox content and services revenue increased 13% and 12% in constant currency, driven by better-than-expected performance from first-party content and Xbox Game Pass. Segment gross margin dollars increased 15%. Gross margin percentage increased three points year-over-year with improvement across all businesses. Operating expenses increased 4% and 3% in constant currency. Operating income increased 34% and 33% in constant currency, driven by continued prioritization of higher margin opportunities. Now, back to total company results. Capital expenditures were $24.2 billion, including $6.5 billion of financed leases, where we recognize the full value at the time of lease commencement. Cash paid for PP&E was $17.1 billion. The difference is primarily due to finance leases. More than half our spend was on long-lived assets that will support monetization over the next 15 years and beyond. The remaining spend was primarily for servers, both CPUs and GPUs, and driven by strong demand signals. Cash flow from operations was $42.6 billion, up 15%, driven by strong cloud billings and collections, partially offset by higher supplier payments. And this quarter, free cash flow was $25.6 billion. Other income and expense was negative $1.7 billion, primarily due to losses on investments accounted for under the equity method. Our effective tax rate was approximately 17%. And finally, we return $9.4 billion to shareholders through dividends and share repurchases, bringing our total cash return to shareholders to over $37 billion for the full fiscal year. Now, moving to our outlook. My commentary for both the full year and next quarter is on a U.S. dollar basis, unless specifically noted otherwise. Let me start with some full-year commentary for FY26. First, FX. Assuming current rates remain stable, we expect FX to increase full-year revenue growth and COGS growth by approximately two points and to increase operating expense growth by one point. Next, building on the strong momentum we saw this past year, we expect to deliver another year of double-digit revenue and operating income growth in FY26. We will continue to invest against the expansive opportunity ahead across both capital expenditures and operating expenses and given our leadership position in commercial cloud, strong demand signals for our cloud and AI offerings, and significant contracted backlog. Capital expenditure growth, as we shared last quarter, will moderate compared to FY25 with a greater mix of short-lived assets. Due to the timing of delivery of additional capacity in H1, including large finance lease sites, we expect growth rates in H-1 will be higher than in H-2. We remain focused on delivering revenue growth and increasing our operational agility, and as a result, we expect operating margins to be relatively unchanged year over year. And finally, we expect our FY26 effective tax rate to be between 19 and 20 percent. Now to our outlook for the first quarter. Based on current rates, we expect FX to increase total revenue growth by two points. Within the segments, we expect FX to increase revenue growth by roughly three points in productivity and business processes and roughly one point in intelligent cloud and more personal computing. We expect FX to increase COGS and operating expense growth by roughly one point. In commercial bookings, we expect healthy growth on a growing expiry base. Booking's growth will again be driven by strong execution across our core annuity sales motions and long-term commitments to our platform. As a reminder, larger long-term Azure contracts, which are more unpredictable in their timing, drive increased quarterly volatility in our Booking's growth rate. Microsoft Cloud gross margin percentage should be roughly 67%, down year over year, driven by the impact of continuing to scale our AI infrastructure. We expect Q1 capital expenditures to be over $30 billion, driven by the continued strong demand signals we see. As a reminder, there can be quarterly spend variability from cloud infrastructure build-outs and the timing of delivery of finance leases. Next, to segment guidance. In productivity and business processes, we expect revenue of 32.2 to 32.5 billion U.S. dollars, or growth of 14 to 15 percent, with roughly three points of benefit from FX, as noted earlier. In M365 Commercial Cloud, we expect revenue growth to be between 13 and 14 percent in constant currency, with business trends that remain relatively stable compared to the prior quarter. ARPU growth will again be driven by E5 and M365 Copilot. M365 commercial products revenue growth should be in the mid to high single digits. As a reminder, M365 commercial products includes both the Windows commercial on-premises components of M365 suites and office transactional purchasing, both of which can be variable due to end-period revenue recognition dynamics. M365 consumer cloud revenue growth should be in the low 20s, driven by the January price increase. For LinkedIn, we expect revenue growth in the high single digits. And in Dynamics 365, we expect revenue growth to be in the high teens with continued growth across all workloads. For Intelligent Cloud, we expect revenue of $30.1 to $30.4 billion U.S. dollars or growth of 25 to 26 percent with roughly one point of benefit from FX, as noted earlier. Revenue will continue to be driven by Azure, which can have quarterly variability in year-on-year growth rates, depending on the timing of capacity delivery and when it comes online, as well as from in-period revenue recognition, depending on the mix of contracts. In Azure, we expect Q1 revenue growth of approximately 37% in constant currency, driven by strong demand for our portfolio of services on a significant base. Even as we continue bringing more data center capacity online, We currently expect to remain capacity constrained through the first half of our fiscal year. In our on-premises server business, we expect revenue to decline in the low to mid single digits with the ongoing customer shift to cloud offerings. In more personal computing, we expect revenue to be 12.4 to 12.9 billion U.S. dollars. Windows OEM and devices revenue should decline in the mid to high single digits. We expect the elevated inventory levels at the end of Q4 to come down through the quarter in Windows OEM, although the range of potential outcomes remains wider than normal. Devices revenue should decline. Search and news advertising ex-tech revenue growth should be in the low to mid-teens, down sequentially as growth rates normalize, following the benefit from third-party partnerships noted earlier. Growth will continue to be driven by volume and revenue per search across Edge and Bing. Overall search and news advertising revenue growth should be in the low double digits. And in gaming, we expect revenue to decline in the mid to high single digits. Against a strong prior year comparable, we expect Xbox content and services revenue to decline in the mid single digits. Now back to company guidance. We expect COGS of $24.3 to $24.5 billion U.S. dollars or growth of 21 to 22 percent. An operating expense of $15.7 to $15.8 billion U.S. dollars or growth of 5 to 6 percent. Other income and expense is estimated to be negative $1.3 billion, primarily due to investments accounted for under the equity method. As a reminder, we do not recognize mark-to-market gains or losses on equity method investments. And lastly, we expect our Q1 effective tax rate to be between 19 and 20%. In closing, we finished the year with double-digit revenue and operating income growth and exceeded the FY25 operating margin commitment we shared a year ago. Our focus remains on investing in security, quality, and AI platform and product innovation that delivers value and opportunity to our customers. We are excited for FY26. With that, let's go to Q&A, Jonathan.

Thanks, Amy. We'll now move over to Q&A. Out of respect for those on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions?

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. and the confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed.

Thank you guys for taking the question, and congratulations on a fantastic end to FY25. I've been covering Microsoft for a while. I don't think I've ever seen a quarter where everything came together this well. So congratulations on that, X.

Thank you for calling Income Conferencing. The next available operator will be with you momentarily. Thank you for calling Income Conferencing. The next available operator will be with you momentarily.

So these are workload results that are invaluable for us to learn, to build both the products as well as the platform. And then broadly, you know, or rather over time, there will be broad diffusion. In fact, one of the things that Amy and I track is not just the head app usage, but also what's the sort of all the tier two applications that are being built. I don't understand. Audio is not music. So that speaks a little bit, Keith, to I think your question, is as long as we have head apps shaping the platform, and then after that we have the broad diffusion happen, which in some sense with both of those is what we're seeing. So I feel very good about being in standing going forward. Thanks, Keith.

Operator, next question, please.

The next question comes from the line of Mark Mortler with Bernstein Research. Please proceed.

Thank you. I also give you my congratulations. Amazing. I didn't know how you were going to beat last quarter, and you did it, so congratulations. And thank you for taking my question. Satya and Amy, we're now two-plus years into the Jenea Revolution, and adoption is still early and ramping. What do you think is the best way that software companies are going to be able to monetize AI for SaaS? Do you believe there are differences in monetization for horizontal, more general apps like M365 Copilot or Dynamics CRM Copilot versus very targeted capacities on the agentic side? And also, how should you think about the trajectory of SaaS AI margins over the long term? Thank you.

Yeah. I'll start, and Amy, you should feel free to add. I mean, if I just broaden out beyond just SaaS as a category, I think just like the server-to-cloud transition was an expansion of essentially usage of servers. That is essentially what happened with the cloud, right, which is we did a bunch of servers, except that the expertise required, the capital required, the time required to bring up servers, build it out, scale it, was just all And so, therefore, the market was a certain size, whereas with the cloud, you could sort of buy it with flexibility. You could burst and you could spin up and spin down. The expertise required came down. So it was just, you know, orders of magnitude. That's what's happening. So if you sort of even subscribe to this point of view that intelligence is basically log of compute, that means compute's going to grow, and you've got to use it as efficiently as possible to just keep creating intelligence. Now, how does it manifest beyond just the infrastructure? I kind of, you know, to Keith's earlier question, I talked a little bit about how the infrastructure is getting shaped, data layer is getting shaped, the app server is getting built. These are all classic categories of infrastructure that will continue, but there will be an order or two of magnitude more. So literally, like, in fact, one of the other things we track is every GPU requires storage and compute, that ratio. is another thing that is really exponential for infrastructure growth. So when you go to the app layer, the SaaS apps themselves are now building in effectively agentic and chat interfaces with intelligence, and they're also building autonomous agents. Agents are kind of like applications, like a database application perhaps, but they are being used increasingly inside of a user interaction. I think a good example is GitHub Copilot. It got started as code completions on an IDE. Then we added the chat interface to it. Then we added the agent mode to it. And now we have an autonomous agent, which in fact works completely asynchronously. So all those four things are now part of essentially GitHub. And by the way, it also turns out that every other tool that is also doing any form of coding is adding more and more GitHub repos. So if I had to think about GitHub monetization, we have an opportunity around just monetizing GitHub Enterprise, and then we have the ability to think about GitHub Copilot, and GitHub Copilot as with all these form factors. And so that's exactly the same thing that's happening with Microsoft 365. That's the same thing that's happening with Dynamics 365. So you have to be very open to taking your data tier, your business logic tier, and your UI tier and sort of being more expansive in it. As long as you do that, it's just that usage goes up, and that's what I think shows up in the results.

And I think, Mark, if you wanted to think about, you know, all the things in the layers that you talked about is really we're seeing very similar monetization tools exist in this transition, too. Right? There's a per-user logic. There's tiers of per-user. Sometimes those tiers relate to consumption. Sometimes there's pure consumption models. I think you'll continue to see a blending of these, especially as the AI model capability grows. You'll end up with ways that teams are going to want to throttle that usage, use the best models for the best job. And I think the blending of these models will continue to be something we see on the go-forward basis.

Thank you. I appreciate it. Thanks, Mark. Operator, next question, please.

The next question comes from the line of Carl Kirsten with UBS. Please proceed.

Okay. Thanks, Satya and Amy. This is the second quarter in a row of pretty material Azure upside from what sounds like an acceleration in on-prem to Azure migration activity. I'm just wondering if you can comment on the plethora of customer conversations you've had, whether there are a couple of two or three specific catalysts that are driving that migration, and how durable a trend do you think that is? Thank you.

Yeah, just three things are really happening. One is the migrations. A good example would be what I referenced in my remarks with Nestle with the SAP instances. They moved along with a lot of the data that's associated with it and a bunch of servers. So that's kind of a classic example, I think, whether it's VMware migrations or migrations of SAP or even just our own server migrations, they're pretty healthy. And, you know, it turns out that we're still not anywhere close to the finish line, if at best maybe in the middle innings of that. The second thing that's also happening is cloud native applications that are scaling. This is even excluding all of the AI stuff, just the classic cloud native e-commerce company, let's say. These are scaling in a big way. And some of those customers were not on Azure previously, but now they're increasingly there because they have come for AI perhaps, but they now stay for more than AI. And so to me, that's another thing you see in overall what's happening across the Azure number. And then, of course, there are the new AI workloads. So those are three things that are all, in some sense, building on each other. But that's kind of what's driving our growth.

Got it. Thank you.

Thanks, Carl. Operator, next question, please.

The next question comes from the line of Brent Bills with Jefferies. Please proceed.

Satya, back to the strength across the board in the quarter. Was there anything that jumped out at you or surprised you that you didn't think you were going to see but you did see in the quarter? The magnitude of upside, I think, had shocked many here.

Yeah, I don't know, Brad, if anything really surprised us, but I think what we are noticing in our own build-out of these AI applications and in general is the platforms becoming more than here's a model and here's an API, you know, make some calls, right? I mean, that in some sense was a bit of a state-of-the-art maybe even a year ago, whereas now you have essentially these very stateful app patterns that are emerging that require quite a bit of rethinking of even the app stack. I mean, take even the storage tier stuff, right? The degree of sophistication you have in, hey, how much of an index do you really want to build by pre-processing so that your prompt engineering or context engineering, as I call it, can be better and higher quality. So I think all of that is emerging. So when I look at a product like Azure Search, Fabric, and Cosmos DB, All of the things, the frameworks around it are just becoming robust to build serious applications. And so that's what I feel great about is the learning curve inside the company, outside the company, the diffusion of this tech. the speed with which that's emerging, that you can build applications is much faster, right? You know, I always go back and say, hey, when a relational database came out, it took a while for people to build an ERP system, let's say. And this thing, we're kind of building pretty sophisticated applications at a very, very fast clip based on, I think, the degree of maturity that's emerging.

Thanks, Brent. Operator, next question, please.

The next question comes from the line of Ramo Lencho with Barclays. Please proceed.

Perfect. Thank you. Congrats from me as well. I had one question around Copilot, and I'm obviously a happy user here at Barclays. If you think about it, the one thing that we're all realizing is that Copilot is is the AI part, but data is becoming more and more important. And then from there on, we can start thinking about agents. Where is the, what are you seeing in your customer conversations, Satya, about like that understanding that co-pilot is actually just the starting point. And then from there on, you know, it's becoming like much, much broader. Thank you.

Yeah, I think that that's right. Even inside of Copilot, I'm sure you're seeing it, right? You now have analysts and researchers who just talk about two examples, and, of course, people, all the third-party agents. So, yeah, there is a lot more of just not request-response. It's about spawning, essentially... applications that then go to work and come back. But the UI still remains very important. Even for asynchronous work, to instruct the asynchronous work, you need UI. And to monitor asynchronous work, you need UI. It may be different. It may not be a chat interface. And of course, you need a way to then inspect what the asynchronous work is. So even take the example I was giving on GitHub. Even if you're not using GitHub Copilot to create the code check-in or the pull request, interestingly enough, we're seeing massive increase to GitHub Copilot code review agent, even if you used maybe cloud code or whatever else to write the code. So that's, I think, what's happening across all of these systems. So you're absolutely right that It starts with some kind of a UI that's more chat-focused, but it quickly goes beyond it, and you see it in M365, you see it in Dynamics 365, and you see it in GitHub.

Thank you.

Thanks, Raimo. Operator, next question, please.

The next question comes from the line of Cash Rangan with Goldman Sachs. Please proceed.

Thank you very much, Amy. I want to acknowledge that I think a few quarters ago you said that you'll reach a point in time where you can accelerate Azure while slowing down CapEx, so you did it. But what is the outlook when I look at the CapEx guidance for the upcoming quarter? Certainly, I would view that as a positive indicator of the book of business you have for your cloud services. But how should we think about the shape of the curve of CapEx vis-a-vis Azure growth rate in the years ahead, particularly as we listen to Satya's comments on the AI stack consuming more and more infrastructure. Are we at a point where we're going to have to continue to do this and we magically wait for inference and applications to kick in and therefore create a richer growth margin mix? Thank you so much for your comments and congrats on the quarter.

Thanks, Hash. Let me back up and first say, you know, when you think about the full-year comments I've made on CapEx, as well as the Q1 guidance of over $30 billion, you first have to ground yourself in the fact that we have $368 billion of contracted backlog we need to deliver, not just across Azure, but across the breadth of the Microsoft Cloud. So in terms of feeling good about the ROI and the growth rates and the correlation, I feel very good that the spend that we're making is correlated to basically contracted on the books business that we need to deliver and we need the teams to execute at their very best to get the capacity in place as quickly and effectively as they can. And so when you look, And we've talked about the growth rate will decline year over year. But at its core, our investments, particularly in short-lived assets like servers, GPUs, CPUs, networking storage, is just really correlated to the backlog we see and the curve of demand. And, you know, I talked about it, my gosh, in January and said I thought we'd be in better supply-demand shape next by June. And now I'm saying I hope I'm in better shape by December. And that's not because we slowed CapEx. Even with accelerating the spend and trying to pull leases in and get CPUs and GPUs in the system as quickly as we can, we are still seeing demand improve. And so I am not as focused, Cash, on trying to pick a date at which revenue growth and CapEx growth will meet and cross. I'm focused on building backlog, building business, and delivering capacity, which we are seeing has a good ROI today in terms of our ability to get that done. So I don't want people to get overly focused on a pivot point because when you're in sort of these expansive moments, picking a data point usually means you're going to pick to be too conservative in terms of market share gain and in terms of winning. And so I tend to put my energy more there.

Yeah, I think one of the other things, Cassius, that I think I said this in a previous earnings as well, which is the difference between a hoster and a hyperscaler is software. And the same is going to be true here. That GPD 4.0 example I gave is all software, right? The optimization even in the last year. So we know how to use the software skills to take any piece of hardware and make it, you know, multiple X better. And so that's kind of where the yield will come. But as Amy said, while you're really going and building out the plant, you don't want to sort of serialize it. You just want to go in parallel on all of these fronts, and that's sort of what will compound over time.

And I do think it's important when Plessa talks about The software layer, he's talking about in his comments to connect this back to the compounding S-curves. And so I would remind people that is something that we saw through the prior cloud transition. It's how we operated through that one. And the same sort of skills and logic done at an even faster pace is what will apply this same transition.

Sounds very encouraging. Thank you so much.

Thanks, Cash. Operator, next question, please.

The next question comes from the line of Michael Turin with Wells Fargo. Please proceed.

Hey, great. Thanks very much for taking the questions, and congrats for me as well on the metrics working in concert here. Amy, maybe on margin, impressive to hear expectations for flat operating margin in the upcoming year as you absorb some of the mix shift towards Azure and some of the more AI-focused offerings. Can you speak in more detail just around your ability to manage those tradeoffs and offset offerings some of the mix shift. And I'm wondering specifically just on any productivity gains you're seeing from leveraging AI internally that you'd highlight or anything else you just mentioned in underpinning the full year expectation there. Thank you.

Thanks, Michael. I think really the area to focus on is when you think about margin. I think sometimes people get a lot of energy around cost control as a driver of margin. The other driver... is to focus on making sure you deliver great product that's competitive and innovative and can take share because that drives revenue. And revenue itself and revenue growth, as you all know better, even perhaps than I do, is a durable way to see margin improvement. It builds on itself. That being said, the second thing I would point to is really what I talked to Cash a little bit about before, Satya and I both mentioned it, is equity. applying all of our skill set here to deliver efficiencies, whether that's whatever layer of the stack that exists. The S-curves compound, and we are doing that work, and we're focused on it. At the same time, we're doing the build-out. So you'll see improvements there even as we continue to invest. And then, of course, it's about continuing to have great talent here, focus on products and opportunities where we have the biggest markets. and the most likelihood of success. And so when we have those three things happen and the energy is right and the focus is there, it gives me confidence in terms of margin delivery. But make no mistake, it starts and ends really with product, which is what we're really focused on here and delivering that to customers.

That all sounds pretty good. Thanks very much.

Thanks, Michael. That wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with you all soon.

Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.