Microsoft Corporation

Greetings and welcome to the Microsoft Fiscal Year 2026 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 Jonathan Nielsen, 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 Oliver, 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 relates 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 rates 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 duty to update any forward-looking statement. And with that, I'll turn the call over to Satya.

Thank you very much, Jonathan. This quarter, the Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year-over-year, reflecting the strength of our platform and accelerating demand. We are in the beginning phases of AI diffusion and its broad GDP impact. Our TAM will grow substantially across every layer of the tech stack as this diffusion accelerates and spreads. In fact, even in these early innings, we have built an AI business that is larger than some of our biggest franchises that took decades to build. Today, I'll focus my remarks across the three layers of our stack, cloud and token factory, agent platform, and high-value agentic experiences. When it comes to our cloud and token factory, the key to long-term competitiveness is shaping our infrastructure to support new high-scale workloads. We're building this infrastructure out for the heterogeneous and distributed nature of these workloads, ensuring the right fit with the geographic and segment-specific needs for all customers, including the long tail. The key metric we're optimizing for is tokens per watt per dollar, which comes down to increasing utilization and decreasing TCO using silicon systems and software. A good example of this is the 50% increase in throughput we were able to achieve in one of our highest volume workloads, OpenAI inferencing, powering our co-pilots. Another example was the unlocking of new capabilities and efficiencies for our Fairwater data centers. In this instance, we connected both Atlanta and Wisconsin sites through an AI WAN to build a first-of-its-kind AI super factory. Fairwater's two-story design and liquid cooling allow us to run higher GPU densities and thereby improve both performance and latencies for high-scale training. All up, we added nearly one gigawatt of total capacity this quarter alone. At the silicon layer, we have NVIDIA and AMD and our own Maya chips delivering the best all-up fleet performance, cost and supply across multiple generations of hardware. Earlier this week, we brought online our Maya 200 accelerator. Maya 200 delivers 10 plus petaflops at FP4 precision with over 30% improved TCO compared to the latest generation hardware in our fleet. We will be scaling this, starting with inferencing and synthetic data gen for our super intelligence team, as well as doing inferencing for Copilot and Foundry. And given AI workloads are not just about AI accelerators, but also consume large amounts of compute, we are pleased with the progress we are making on the CPU side as well. Cobalt 200 is another big leap forward, delivering over 50% higher performance compared to our first custom-built processor for cloud-native workloads. Sovereignty is increasingly top of mind for customers, and we are expanding our solutions and global footprint to match. We announced DC investments in seven countries this quarter alone, supporting local data residency needs. And we offer the most comprehensive set of sovereignty solutions across public, private, and national partner clouds so customers can choose the right approach for each workload with the local control they require. Next, I want to talk about the agent platform. Like in every platform shift, all software is being rewritten. A new app platform is being born. You can think of agents as the new apps. And to build, deploy, and manage agents, customers will need a model catalog, tuning services, harness for orchestration, services for context engineering, AI safety, management, observability, and security. It starts with having broad model choice. Our customers expect to use multiple models as part of any workload that they can fine tune and optimize based on cost, latency, and performance requirements. And we offer the broadest selection of models of any hyperscaler. This quarter, we added support for GPT-5.2 as well as Cloud 4.5. Already, over 1,500 customers have used both anthropic and open AI models on Foundry. We are seeing increasing demand for region-specific models, including Mistral and Cohere, as more customers look for sovereign AI choices. And we continue to invest in our first-party models, which are optimized to address the highest value customer scenarios, such as productivity, coding, and security. As part of Foundry, we also give customers the ability to customize and fine-tune models. Increasingly, customers want to be able to capture the tacit knowledge they possess inside of model weights as their core IP. This is probably the most important sovereign consideration for firms as AI diffuses more broadly across our GDP and every firm needs to protect their enterprise value. For agents to be effective, they need to be grounded in enterprise data and knowledge. That means connecting their agents to systems of record and operational data, analytical data, as well as semi-structured and unstructured productivity and communications data. and this is what we are doing with our unified IQ layer spanning Fabric, Foundry, and data powering Microsoft 365. In the world of context engineering, Foundry knowledge and Fabric are gaining momentum. Foundry knowledge delivers better context with automated source routing and advanced agentic retrieval while respecting user permissions, and Fabric brings together end-to-end operational real-time and analytical data. Two years since it became broadly available, Fabric's annual revenue run rate is now over $2 billion with over 31,000 customers, and it continues to be the fastest growing analytics platform on the market with revenue up 60% year over year. All up, the number of customers spending $1 million plus per quarter on Foundry grew nearly 80%, driven by strong growth in every industry. And over 250 customers are on track to process over 1 trillion tokens on Foundry this year. There are many great examples of customers using all of this capability on Foundry to build their own agentic systems. Alaska Airlines is creating natural language flight search. BMW is speeding up design cycles. Land O' Lakes is enabling precision farming for co-op members. And Symphony AI is addressing bottlenecks in the CPG industry. And of course, Foundry remains a powerful on-ramp for the entire cloud. The vast majority of Foundry customers use additional Azure solutions like developer services, app services, databases as they scale. Beyond Fabric and Foundry, we're also addressing agent building by knowledge workers with Copilot Studio and Agent Builder. Over 80% of the Fortune 500 have active agents built using these low-code, no-code tools. As agents proliferate every customer will need new ways to deploy, manage and protect them. We believe this creates a major new category and significant growth opportunity for us. This quarter, we introduced Agent 365, which makes it easy for organizations to extend their existing governance, identity, security, and management to agents. That means the same controls they already use across Microsoft 365 and Azure now extend to agents they build and deploy on our cloud or any other cloud. And partners like Adobe, Databricks, GenSpark, Glean, NVIDIA, SAP, ServiceNow, and Workday are already integrating Agent 365. We are the first provider to offer this type of agent control plane across clouds. Now let's turn to the high-value agentic experiences we are building. AI experiences are intent-driven and are beginning to work at task scope. We are entering an age of macro delegation and micro steering across domains. Intelligence using multiple models is built into multiple form factors. You see this in chat, in new agent inbox apps, co-workers scaffoldings, agent workflows embedded in applications and IDEs that are used every day, or even in our command line with file system access and skills. That's the approach we are taking with our first-party family of Copilot spanning key domains. In consumer, for example, Copilot experiences span chat, news, feed, search, creation, browsing, shopping, and integrations into the operating system, and it's gaining momentum. Daily users of our Copilot app increase nearly 3x year-over-year, and with Copilot Checkout, we are partnered with PayPal, Shopify, and Stripe so customers can make purchases directly within the app. With Microsoft 365 Co-Pilot, we are focused on organization-wide productivity. WorkIQ takes the data underneath Microsoft 365 and creates the most valuable stateful agent for every organization. It delivers powerful reasoning capabilities over people, their roles, their artifacts, their communications, and their history and memory, all within an organization's security boundary. Microsoft 365 Copilot's accuracy and latency powered by WorkIQ is unmatched, delivering faster and more accurate work grounded results than competition. And we have seen our biggest quarter over quarter improvement in response quality to date. This has driven record usage intensity with average number of conversations per user doubling year over year. Microsoft 365 Copilot also is becoming true daily habit with daily active users increasing 10x year over year. We're also seeing strong momentum with Researcher Agent, which supports both OpenAI and Cloud, as well as Agent Mode in Excel, PowerPoint, and Word. All up, it was a record quarter for Microsoft 365 Co-Pilot seat ads, up over 160 percent year-over-year. We saw accelerating seat growth quarter-over-quarter and now have 15 million paid Microsoft 365 Co-Pilot seats and multiples more enterprise chat users. And we are seeing larger commercial deployments. The number of customers with over 35,000 seats tripled year over year. Pfizer, ING, NASA, University of Kentucky, University of Manchester, U.S. Department of Interior, and Westpac all purchased over 35,000 seats. Publicis alone purchased over 95,000 seats for nearly all its employees. We are also taking share in Dynamics 365 with built-in agents across the entire suite. A great example of this is how Visa is turning customer conversations data into knowledge articles with our customer knowledge management agent in Dynamics. and how Sandvik is using our sales qualification agent to automate lead qualification across tens and thousands of potential customers. In coding, we are seeing strong growth across all paid GitHub co-pilot. Co-pilot pro plus subs for individual devs increased 77% quarter over quarter, and all up now we have 4.7 million paid co-pilot subscribers up 75% year over year. Siemens, for example, is going all in on GitHub, adopting the full platform to increase developer productivity after a successful copilot rollout to 30,000 plus developers. GitHub Agent HQ is the organizing layer for all coding agents like Anthropic, OpenAI, Google, Cognition, and XAI in the context of customers' GitHub repos. With Copilot CLI and VS Code, we offer developers the full spectrum of form factors and models they need for AI-first coding workflows. And when you add WorkIQ as a skill or an MCP to our developer workflow, it's a game changer, surfacing more context like emails, meetings, docs, projects, messages, and more. You can simply ask the agent to plan and execute changes to your code base based on an update to a spec in SharePoint or using the transcript of your last engineering and design meeting in Teams. And we're going beyond that with GitHub Copilot SDK. Developers can now embed the same runtime behind Copilot CLI, multi-model, multi-step planning, tools, MCP integration, auth, streaming directly into their applications. In security, we added a dozen new and updated security copilot agents across Defender, Entra, Intune, and Purview. For example, iCertis, a SOC team, used security copilot agent to reduce manual triage time by 75%, which is a real game changer in an industry facing a severe talent shortage. To make it easier for security teams to onboard, we are rolling out security co-pilot to all our E5 customers, and our security solutions are also becoming essential to manage organizations' AI deployments. 24 billion co-pilot interactions were audited by Purview this quarter, up 9x year over year. Finally, I want to talk about two additional high-impact agentic experiences. First in healthcare, Dragon Co-Pilot is the leader in its category, helping over 100,000 medical providers automate their workflows. Mount Sinai Health is now moving to a system-wide Dragon Co-Pilot deployment for providers after a successful trial with its primary care physicians. All up, we helped document 21 million patient encounters this quarter, up 3x year-over-year. And second, when it comes to science and engineering, companies like Unilever and Consumer Goods and Synopsys and EDA are using Microsoft Discovery to orchestrate specialized agents for R&D end-to-end. They're able to reason over scientific literature and internal knowledge, formulate hypotheses, spin up simulations, and continuously iterate to drive new discoveries. Beyond AI, we continue to invest in all our core franchises and meet the needs of our customers and partners, and we are seeing strong progress. For example, when it comes to cloud migrations, our new SQL Server has over 2x the IaaS adoption of the previous version. In security, we now have 1.6 million security customers, including over a million who use four or more of our workloads. Windows reached a big milestone, 1 billion Windows 11 users, up over 45% year over year. and we had share gains this quarter across Windows, Edge, and Bing. Double-digit member growth in LinkedIn with 30 percent growth in paid video ads. In gaming, we are committed to delivering great games across Xbox, PC, Cloud, and every other device, and we saw record PC players and paid streaming hours on Xbox. In closing, we feel very good about how we're delivering for customers today and building the full stack to capture the opportunity ahead. With that, let me turn it over to Amy to walk through our financial results and outlook, and I look forward to rejoining for your questions.