Microsoft Corporation

Greetings and welcome to the Microsoft Fiscal Year 2027 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, 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, Investor Relations.

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. 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 first quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency when available as a framework for assessing how our underlying business 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 subjects 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. It was a fast start to our fiscal year. Microsoft Cloud revenue surpassed $63 billion with growth accelerating to 30% year over year. We are focused on three things, designing AI to empower people, ensuring every organization has sovereignty over its own learning, and building trust with controls that ensure agent safety and security. Now let's talk about how we are making progress on those goals as we build a new tech stack starting with Copilot. We announced our biggest update to Copilot to date this quarter, bringing together chat, cowork, autopilot, and code into one unified experience. It's one product experience across commercial and consumer and comes with all of office built in. We think of Copilot as the new OS for work. Customers are increasingly turning to Copilot to get real work done. Automated tasks has nearly doubled since July. Daily users are up nearly 50% quarter over quarter and over 5x year over year. User satisfaction improved nearly 20% quarter over quarter to another all-time high. And 90% of co-pilot queries use auto mode, which dynamically rounds tasks across models optimizing for quality, speed, and cost. These improvements are translating into larger purchases. The number of customers with more than 50,000 co-pilot seats increased over 8x year over year, including Capgemini, HCL Tech, Hitachi Group, Truist Financial, and UK Revenue and Customs Department. And just last week, Volkswagen announced plans to deploy co-pilot to more than 330,000 employees, one of the largest deployments to date in Europe. We're also seeing strong momentum with E7, which brings together co-pilot E5, Entra, and Agent 365. Thousands of customers in every industry have purchased the suite to date, including Amadeus, BlackRock, Pfizer, and New South Wales Health Department and ZEISS. Our business model is expanding from per-seat subscriptions to include consumption, expanding our TAM and ARPU. The subscription brings increasingly capable everyday intelligence to every user. Typically, IT funds this, consolidating frontier advances for everyone across the organization. and as agents take on higher value work, consumption opens up business funded demand with spending tied directly to the value these agents deliver. The number of co-pilot customers actively consuming credits through usage-based billing grew over 75% over the quarter. When it comes to software development, all major coding agents have shown up to work on GitHub. Agent-generated PRs have increased 6x over the past six months, and agents now open more than a third of all PRs on the platform. We are very hard at work on reliability as agentic activity on GitHub source. At GitHub Universe this morning, we shared how we are expanding capacity and rebuilding the core Git architecture for the agentic wave. Also at Universe, we announced broad availability of Copilot Fusion, which is all about bringing multi-model orchestration to software development. It delivers frontier-level quality up to 40% faster and at up to 77% lower cost. Credit consumption from agentic features on GitHub has more than doubled since usage-based billing went into effect, and we're also helping developers secure their code and turn AI-generated code into high-quality software. GitHub Advanced Security Revenue increased over 50% year-over-year as customers use its AI capabilities to scan entire repos and fix vulnerabilities in real time. In the business application space, we are extending this vision of Copilot as the new OS for work, bringing the business logic and capabilities of Dynamics 365 directly into Copilot and helping every organization stand up their own infinite SaaS factory. This quarter, we introduced 30 new Copilot skills across Dynamics 365, which enables customers to access CRM and ERP capabilities directly in the flow of work. In recruiting, more than 10 million LinkedIn members use our LinkedIn AI powered job search daily and 25,000 customers are using our agentic hiring solutions. Recruiters using hiring assistant are finding interview quality applicants 33% faster while reviewing 83% fewer profiles to find qualified match. In healthcare, we automated 30 million patient encounters this quarter, up 70% year over year, helping clinicians spend less time on administrative work and more time with patients. 10 providers including Advocate Health, Mass General Brigham, Mercy, Intermountain Health and others have used our solutions to document over 1 million encounters, each since the beginning of the calendar year. And in science, our FDE teams are working with customers to use discovery to accelerate scientific progress. A great example is Saint-Gobain, which used discovery to accelerate the development of low-carbon construction materials. Underneath our first-party agentic experience is the common platform. It starts with Foundry, which is becoming an increasingly important driver of our growth. Foundry helps organizations build learning loops grounded in their business context and deploy agents safely at scale. We now have over 120,000 Foundry customers with revenue more than tripling year over year. Foundry's model choice and feature set coupled with its deep integration across our stack is driving differentiation. Azure OpenAI directly benefited in the last quarter with big advances in OpenAI models. And when you couple this with our model choice built into Foundry, customers are able to build solutions optimizing across quality, cost, and performance. In fact, the number of customers building agentic solutions with multiple models increased 5x year over year, and revenue from open source models on Foundry increased 10x. We also continue to make rapid progress with our first party models. Our goal is to advance the cost to outcome frontier, which means delivering capabilities comparable to leading models within three to six months of their release at a fraction of the training cost, thereby allowing us to transfer those cost benefits to customers. and you see this in our products today. MAI Cyber now powers over 40% of the scans in our agentic M-Dash code scanner at 18% lower cost per scan. MAI Transcribe is the most accurate and cheapest transcription model in the world, supporting Dragon Copilot's multilingual workflow. MAI CodeFlash has 3 million users in GitHub Copilot last month alone, helping developers get more out of their AI credits. Microsoft Decision One is our new model for structured decision making, outperforming both LLMs and other decision models in latency and quality. Over 4,000 customers, including Atos Group, Equinor, and RBI, have already used it in the first month since its release. and we recently completed pre-training MAI base 2 which outperforms other open-weight models we tested with 4 to 12 times greater training compute efficiency. This base model will be used in the upcoming MAI models across thinking, code and cyber. Beyond models, we're making the harness behind our own co-pilot experience available to customers in Foundry. It gives customers a Microsoft-managed way to build agents that reason, use tools, complete complex long-running work while preserving their choice of model. Another critical layer is data. We now have 44,000 paid Fabric customers up more than 50% year over year. We are bringing Foundry and Fabric closer together so you can build your own agents right next to data. Over 19,000 customers now use Foundry and Fabric as enterprises connect and operate agents over real-time operational, analytical, and unstructured data. Customers are also rapidly deploying our AI-optimized databases, including PostgreSQL, SQL DB, Hyperscale, Cosmos DB, to give agents fast, secure access to the data and context they need. PostgreSQL growth accelerated for the fourth consecutive quarter, and the number of PostgreSQL customers also using Foundry accelerated to 90% year over year. We also have one of the most important databases for any enterprise, which is the knowledge underneath Microsoft 365 spanning people, their relationships, documents, emails, meetings, chats, projects, and other artifacts. WorkIQ makes this context available to every agentic workload. And with Microsoft IQ, we're bringing together WorkIQ, FabricIQ, and Foundry IQ as a unified context for agentic systems. Nearly 60,000 customers are accessing context across Microsoft IQ up 25% quarter over quarter. As enterprises deploy more agents, they also need to govern them at scale. With Agent 365, we provide a platform for AI observability, enabling customers to manage, secure, and optimize the performance and cost of their agents. Over 50 million agents are now in the registry, up over 30% quarter over quarter. And finally, as agents gain greater access to To enterprise data and system security becomes even more critical. Our approach is to separate intelligence from authority, enforcing identity, permissions, monitoring, and containment outside the model itself. Last week, we expanded perception with new capabilities to help customers secure and contain agentic insiders, including expanded agent discovery across local and cloud environments, dynamic permissions that enforce least privileged access for each task, and continuous risk assessment. We also introduced teams of guardian agents that continuously monitor agent activity to help prevent unsafe actions before they occur. and we are seeing encouraging feedback on perception overall from preview customers including KPMG, Nationwide Building Society, Northern Trust, Salantis. More broadly, we are helping customers secure and govern AI use across the enterprise. Customers have used Microsoft Purview to audit over 7.6 billion agent activities to date, up 5x quarter over quarter. Underlying everything I've talked about so far is our infrastructure. We are building against a growing book of business with a fungible fleet that allows us to dynamically allocate capacity to the highest value opportunities across compute data, foundry, and co-pilot. Accelerating demand led to us adding 24 new data centers across five continents this quarter. and we are bringing capacity online faster, reducing dock-to-live times by about 20% quarter over quarter for new GB300s in our biggest regions, which make up the majority of the GPU deployments. At the same time, we continue to get more from the infrastructure we already have by optimizing across the data center design, silicon systems, software, and models. For example, we increased the throughput for co-pilot workloads by over 50% quarter over quarter. We continue to scale our fleet with the latest innovations from NVIDIA AMD alongside our own Maya systems. We have docked our first NVIDIA Vero Rubin GPUs and are very excited about it. Maya 200 is already delivering up to 1.7 times more tokens per watt across the AI experiences in Teams and Copilot, and Maya 300 will drive further gains delivering 40% more tokens per watt compared to the leading GPU-based systems. Our growth extends beyond GPUs. We continue to see strong adoption of our cloud-native COBOL CPUs, improving price performance for general-purpose cloud workloads. All-up Azure growth was broad-based across both enterprises and small and medium business segments and spanning both core cloud services and AI infrastructure. Finally, let me turn to devices and consumer. In Windows, we are executing on our vision to bring hybrid intelligence to every desk and every home, making every PC a secure agent box. As more capable models run locally, we see an opportunity to make more intelligence effectively unmetered. We are working with the broader hardware ecosystem to bring these capabilities to a new generation of PCs across AMD's Ryzen AI 400 series, Intel Core Ultra Series 3, Qualcomm Snapdragon X2 series, and earlier this month we also announced new PCs powered by Nvidia's RTX Spark and DGX Station for Windows. With these new devices, you can run last year's Frontier models on your laptop and last quarter's model at your desk. We are bringing together Windows and Agent 365. So agents can work with secure boundaries on device. We introduced Microsoft Execution Containers, a policy-driven execution layer that governs and contains agents across Windows and other platforms integrated with Agent 365 for governance and observability. Agents like OpenAI Codex, Anthropic Cloud Code, Meta Muse are adopting MXC, and customers like Meta are starting to deploy it across their enterprise environments. In search and advertising, Bing and Edge once again took share. In LinkedIn, engagement continues to deepen across our more than 1.4 billion members, with time spent viewing content in the feed up 15% year over year. And finally in gaming, we remain focused on building great games and reaching players wherever they choose to play across console, PC, mobile, and cloud. Minecraft delivered a record quarter, reaching all-time highs in both engagement and revenue, while World of Warcraft had its largest beta in franchise history. We enter the holiday season with one of our strongest first and third party lineups in years, including Modern Warfare 4, which launched last week, to the best reviews for a Call of Duty game in more than a decade, and Grand Theft Auto VI, which is coming to Xbox next month. In closing, based on the demand we see, the strength of our products, and the efficiency we are driving across the stack, I've never been more confident in the long-term returns for our investments. With that, let me turn it over to Amy.