Microsoft Corporation

Greetings, and welcome to the Microsoft Fiscal Year 2026 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 Neilson, 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 Brian Defoe, Deputy General Counsel and Corporate Secretary. On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck. Thank you very much. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency, when available, as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth 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, 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 statements. And with that, I'll turn the call over to Satya.

Thank you very much, Jonathan. It was a very strong close to what was a record fiscal year for us. All up, our annual revenues surpassed $331 billion, up 18%. Microsoft Cloud surpassed $214 billion, up 27%. And Azure surpassed $100 billion, up 41%. Going forward, we have two goals. First, ensuring AI empowers every person, amplifying their agency and ambition. And second, empowering every organization to build their own continuous learning loop and ensuring that they don't outsource their core IP. Now let's talk about how we're delivering this across our stack, starting with our AI platform and infrastructure. We added 31 new data centers across five continents this quarter, bringing the total to 88 this year as we expand our footprint in response to accelerating demand. We're also bringing capacity online faster than ever. Over the last fiscal year, we've reduced doctor-like times for new GPUs in our largest regions by nearly 50%. All up we add in another gigawatt of capacity this quarter and remain on track to roughly double our overall capacity in just two years. We're also getting more from the infrastructure we already have by optimizing across silicon systems and software. For example, we increased the throughput for co-pilot workloads 4x since the start of the year. AI sovereignty is increasingly top of mind for our customers, and we are expanding our offerings to meet that need. Just last week, we announced a partnership with Mistral to bring its models to Microsoft's sovereign cloud, enabling customers to run them across public, customer-controlled, and fully disconnected environments. We also continue to modernize our fleet with our own silicon innovation alongside the latest from NVIDIA and AMD. Maya 200 continues to scale. It delivers 30% better performance per dollar than the latest generation hardware in our fleet and is now supporting both OpenAI and MAI models. And we will be among the first cloud providers to deploy next-generation rack-scale AI infrastructure based on AMD Helios and NVIDIA Vera Rubin. Thank you for watching. Now let me turn to the end-to-end platform we're building on this infrastructure to run, govern and distribute apps and agents. It starts with model choice. Every customer wants the right model for each task based on quality, latency, cost and compliance. We offer the broadest model catalog in the cloud with over 11,000 models including the latest from OpenAI, Anthropic, Mistral, XAI as well as our own MAI family. Since the start of the year, we have seen 5x increase in the number of customers building with models from multiple providers. Levi Strauss & Co., for example, is using models from OpenAI and Anthropic on Foundry as it brings more than 1,000 domain-specific agents into a unified enterprise AI platform. We're also accelerating our own model development. We announced more than a dozen new models across image, voice, transcription, coding, security, including our first reasoning model, MAI Thinking 1, all with cost efficient inference at the core for the enterprise use cases. We are co-designing these models with our silicon and we are seeing 40% better performance per watt when running MAI models on Maya 200. But more importantly, we are building a new model system where the harness, context, memory, and action space are separate from any one model family, thereby moving the frontier on the cost to outcome curve. And it's not just about cost. It also has the added benefit of business continuity and resilience because every model is substitutable. This is the system we're using in our products with great results. For example, millions of developers have used MAI Code One Flash on GitHub Copilot achieving higher code acceptance rates and 10% lower median token usage while still having access to frontier capabilities from OpenAI and Anthropic. In Excel, MAI Code One Flash is delivering comparable quality to GPT-56 for the most common tasks while operating at significantly lower costs. In security, MAI Cyber One Flash achieves better performance than much larger mythos model, but at half the cost when combined with our multi-agent security harness. More broadly, across our model implementations, we are seeing significant efficiency gains, including 89% reduction of GPU costs in Dynamics 365 with MAI Voice 2 Flash and up to 84% reduced GPU costs in PowerPoint with MAI Image 2.5. And this system is available to any company to use as part of Foundry. The next layer is the enterprise data and context. The data estate is evolving from primarily supporting apps used by people to supporting agents. Customers are rapidly adopting our AI optimized databases like Cosmos DB and PostgreSQL to give agents fast, secure access to real-time data and context they need for memory and retrieval. PostgreSQL revenue was up 55% accelerating for the third consecutive quarter. Also, the number of PostgreSQL customers also using Foundry increased 80% as customers increasingly choose it as the database for AI workloads. And we are going further with HorizonDB, our new fully managed PostgreSQL service on Azure, which delivers three times the throughput of self-managed deployments. When it comes to analytics, we now have over 40,000 paid Fabric customers up more than 60% year-over-year, and over 17,000 customers now use Foundry and Fabric up 60% year-over-year as enterprises connect agents to real-time operational, analytical, and unstructured data in Fabric. This quarter, we also introduced Rayfin, the agent-first SDK that delivers a backend as a service for building apps in Fabric. More than 2,500 customers have already used Rayfin and is now powering the backends for apps created with Replit2. On top of this data estate, we are building an IQ layer that combines data with model capabilities to deliver the right context at the right time. Tens of thousands of customers, including nearly 90% of the Fortune 500, are already grounding their agents in enterprise context with foundry, fabric, and work IQ. And this quarter, we introduced Web IQ, which gives agents access to real-world intelligence from across the web. It is already being used by the most popular AI assistants, including ChatGPT. Beyond model choice, data and context, we are building Foundry as the complete app and agent stack. It gives agents access to the IQ layer, the tools they use, along with durable state and memory, secure sandboxes, rubrics and evals, and even their own self-improvement loops. We now have 100,000 Foundry customers and revenue more than doubled year over year. Telefonica, for example, adopted Foundry as the foundation of its corporate agent platform with its first wave of agents tackling mission-critical network operations. All up the number of Foundry customers at 1 trillion tokens annualized run rate increased 4x year over year. and finally with Agent 365, we offer a control plane that extends companies existing governance, identity, security and management frameworks to agents they build. Just two months in, Agent 365 now has nearly 40 million agents registered across tens of thousands of companies. Now let me turn to the apps and agents we are building on top of this platform for individuals and organizations. When it comes to knowledge work, we now have over 30 million paid Microsoft 365 Copilot seats, with net seat ads more than doubling quarter over quarter. Copilot is evolving rapidly from chat to co-work to autopilots. Last month, we made co-work generally available, helping customers complete multi-step tasks grounded in their work data while meeting enterprise security and compliance requirements. This quarter, we also introduced Autopilot's autonomous long-running agents with full enterprise compliance, including always-on personal agent powered by OpenClaw. And this quarter, we are bringing these co-pilot experiences together, including code in one super app, spanning both consumer and commercial experiences. This is a major step forward, and I look forward to sharing more soon. More broadly, we have steadily been improving the quality and performance of Copilot and have been delighted by the recent customer feedback. Over the last three quarters, user satisfaction scores have doubled and are now at an all-time high, and this quarter alone, we cut latency by 25%. These quality improvements, together with continued product innovation, are driving record usage intensity. The number of conversations per user nearly doubled year over year. Average weekly engagement is on par with Outlook and Teams. And the time from deployment to what we think of as high usage, meaning monthly active usage, about 80% across a customer's user base has fallen from months to just days over the past year. The number of customers with more than 50,000 seats increased over 7x year over year. and the number of enterprise customers deploying Copilot to the majority of their information workers grew nearly 75% quarter over quarter, a signal of how central Copilot has become to their operations. NHS England, for example, is rolling out Copilot to 505,000 clinicians and staff, the largest healthcare deployment of its kind after a trial showed it saved employees an average of 43 minutes per day. KPMG is expanding its deployment across its global workforce of more than 276,000 professionals and HSBC committed to 200,000 seats to accelerate its workforce transformation. AstraZeneca, Boeing, Infosys, Coke Inc, Procter & Gamble, Salantis, Tata Consulting Service, University of Pittsburgh Medical Center, Wells Fargo, and Wipro each purchased 60,000 or more. and we have been encouraged by the response to our new E7 suite as customers increasingly go all in on an integrated AI offering that brings together Copilot, E5, Entra and Agent 365. Just two months after launch, hundreds of enterprise customers have already purchased millions of seats and this quarter EY deployed E7 to 400,000 employees in our largest win to date. In addition to this, we are also evolving our business model beyond per seat to per seat plus consumption, further expanding our TAM and delivering more customer value. Earlier this month, we added usage-based billing to co-work with thousands of customers already paying for and actively using it. In Biz Apps, we have been reinventing Dynamics 365 for an agent-first world. We are exposing over 650,000 MCP actions across sales, finance, supply chain, HR, and customer service so that agents can now access business context and take action using the same data models, rules, permissions, security guardrails, and audit trails as any application user. and we are also moving from seats to seats plus consumption model. Customer service is at the forefront of this transformation with usage-based credit consumption in this category up 4x quarter over quarter with customers like Northern Trust using our tools to drive proactive intelligence. When it comes to developers, GitHub Copilot now has 50 million users. This quarter we introduced usage-based billing and have continued to see business and enterprise seed growth and also significant consumption revenue after the new model went into effect. Copilot revenue accelerated over 60% quarter over quarter. All up GitHub now has 225 million users as organizations across every industry, including over 90% of the Fortune 500 choose GitHub for their AI-powered development. The agentic era is being built on GitHub. Every major coding agent runs on the platform and one in three pull requests on GitHub now involves an agent. In security, we are helping customers both secure their AI deployments and use AI to strengthen their security posture. To date, Purview has audited over 15 billion co-pilot interactions to meet compliance obligations up nearly 360% year over year. and earlier this week we introduced Project Perception, a complete multi-modal agentic security system that brings together teams of agents to simulate attacks, investigate threats and drive remediation. As Perception moves beyond private preview, we expect to bring it to customers through a consumption-based offering. In healthcare, we are on pace to automate over 100 million patient encounters this calendar year, including 28 million this quarter, up 2x year-over-year. Mass General Brigham rolled out Dragon Co-Pilot to over 4,000 providers and after a study found ambient AI reduced burnout by 21%. And in science, Microsoft Discovery, now broadly available, provides a comprehensive platform for building and governing agentic workflows for science and engineering. Early customers include BHP, GSK, Pacific Northwest National Lab. Across both our high-value agentic experiences and the AI platform and infrastructure, we are focused on helping customers turn AI into measurable outcomes. The most comprehensive and valuable data in the world is inside each of the customer tenants, and therefore there is a tremendous opportunity to turn customers' workflows, domain knowledge, and accumulated judgment into AI systems that that learn and improve with every usage. To help customers capture that opportunity this month, we launched Microsoft Frontier Core, the largest outcome-driven engineering organization in the industry. We will embed 6,000 industrial engineering experts with customers to co-design, co-innovate, and continuously improve AI systems at scale. We've been testing this model over the past year completing over 330 projects across 164 customers including many of the world's leading companies across industries. For example, our FDE teams worked with Novo Nordisk to build an agent that helps analyze clinical data while meeting its strict compliance requirements. And we partnered with LSEC to embed AI into LSEC workspace, helping finance professionals ask complex questions and quickly find answers across structured and unstructured financial content. Finally, let me talk about devices and consumer. When it comes to Xbox, we are making the necessary decisions required across our content portfolio, platform and operations to reset the business for long-term growth. We have the best IP in the industry and talented studios around the world and believe we can bring these strengths together and expect to return the business to growth in fiscal 2027. In Windows, we are investing to ensure that it has the best quality and fundamentals while also ensuring it's the best place to run secure edge AI. We see significant opportunity for Windows to become the offload for unmetered intelligence, combining powerful on-device compute with enterprise-grade security. In search and advertising, Bing and Edge have both taken share for five straight years. and LinkedIn continues to see strong engagement across the platform with double-digit member growth for the fifth consecutive year. Recruiters at over 20,000 companies are now using our AI-powered solutions to reduce time to hire and improve candidate matching. Seats increased 140% quarter over quarter. In closing, I'm energized by the opportunities ahead. I've never been more confident in Microsoft's opportunity to drive durable long-term growth and ensure the benefits of AI flow broadly. With that, let me turn it over to Amy to walk through our financial results and outlook.