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      "content": "You are a financial research assistant. Prepare a concise memo from the retrieved historical source packet. Cite document labels and PDF pages or transcript speakers. Distinguish reported results, management forecasts, and your own inferences. Preserve units, reporting periods, and qualifications. Do not import later events or assign a credit rating."
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      "content": "Prepare a research memo as of July 30, 2024 on how Microsoft's AI investment story evolved from FY23 Q4 through FY24 Q4. Use the FY23 Q4 and FY24 Q2 prepared remarks and the full FY24 Q3 and Q4 calls. Explain how AI's contribution to Azure growth, capital spending, and capacity constraints changed. Distinguish cash purchases of property and equipment from capital expenditures including finance leases. Assess whether management described a demand problem or a capacity problem, without treating all Azure growth as AI or management's outlook as an accomplished result. Keep the memo to about one page and identify the relevant calls."
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      "role": "assistant",
      "content": "I'll read the four historical call sections in date order, compare the reported AI contribution and investment measures, and check the later Q&A for qualifications to the capacity narrative."
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      "content": "DOCUMENT: Microsoft FY23 Q4 earnings call (2023-07-25)\nDOCUMENT ID: msft_2023_q4\nSOURCE URL: https://www.microsoft.com/en-us/investor/events/fy-2023/earnings-fy-2023-q4\nSECTION: FY23 Q4 prepared remarks\n\nBRETT IVERSEN:Good afternoon and thank you for joining us today. On the call with me are Satya Nadella, chairman and chief executive officer, Amy Hood, chief financial officer, Alice Jolla, chief accounting officer, and Keith Dolliver, deputy general counsel.\n\nOn 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.\n\nOn 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.\n\nAll 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 rate only.\n\nWe 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.\n\nDuring 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.\n\nAnd with that, I’ll turn the call over to Satya.\n\nSATYA NADELLA: Thank you very much, Brett.\n\nWe had a solid close to our fiscal year.\n\nThe Microsoft Cloud surpassed $110 billion in annual revenue, up 27% in constant currency, with Azure all-up accounting for more than 50% of the total for the first time.\n\nEvery customer I speak with is asking not only how, but how fast, they can apply next generation AI to address the biggest opportunities and challenges they face – and to do so safely and responsibly.\n\nTo that end, we remain focused on three key priorities:\n\nFirst, helping customers use the breadth and depth of Microsoft Cloud to get the most value out of their spend.\n\nSecond, investing to lead in the new AI platform shift by infusing AI across every layer of the tech stack.\n\nAnd, third, driving operating leverage.\n\nNow, I’ll highlight examples of our progress, starting with infrastructure.\n\nAzure continues to take share, as customers migrate their existing workloads and invest in new ones.\n\nWe continue to see more cloud migrations, as it remains early when it comes to long-term cloud opportunity.\n\nWe are also seeing increasing momentum with Azure Arc, which now has 18,000 customers, up 150% year-over-year, including Carnival Corp., Domino’s, Thermo Fisher.\n\nAnd Azure AI is ushering in new, born-in-the cloud AI-first workloads, with the best selection of frontier and open models, including Meta’s recent announcement supporting Llama on Azure and Windows, as well as OpenAI.\n\nWe have great momentum across Azure OpenAI Service.\n\nMore than 11,000 organizations across industries, including Ikea, Volvo Group, Zurich Insurance, as well as digital natives like Flipkart, Humane, Kahoot, Miro, Typeface, use the service.\n\nThat’s nearly 100 new customers added every day this quarter.\n\nMercedes-Benz, for example, is bringing ChatGPT via Azure OpenAI to more than 900,000 vehicles in the United States, making its in-car voice assistant more intuitive. And Moody’s built its own internal copilot to improve productivity of its 14,000 employees.\n\nWe are also partnering broadly to scale this next generation of AI to more customers.\n\nSnowflake, for example, will increase its Azure spend as it builds new integrations with Azure OpenAI. And, KPMG has announced a multi-billion-dollar commitment to our cloud and AI services to transform professional services.\n\nNow, on to data.\n\nEvery AI app starts with data, and having a comprehensive data and analytics platform is more important than ever.\n\nOur Intelligent Data Platform brings together operational databases, analytics, and governance so organizations can spend more time creating value and less time integrating their data estate.\n\nWe introduced Microsoft Fabric this quarter, which unifies compute, storage, and governance, with a disruptive business model.\n\nOne month in, we are encouraged by early interest and usage. Over 8,000 customers have signed up to trial the service and are actively using it. And over 50% are using four or more workloads.\n\nAll-up, we once again took share with our analytics solutions, with customers like Bridgestone, Chevron, and Equinor turning to our stack.\n\nNow, on to developers.\n\nNew Azure AI Studio is becoming the tool of choice for AI development in this new era, helping organizations ground, fine-tune, evaluate, and deploy models – and do so responsibly.\n\nVS Code and GitHub Copilot are category-leading products when it comes to how developers code every day.\n\nNearly 90% of GitHub Copilot sign-ups are self-service, indicating strong organic interest and pull through.\n\nMore than 27,000 organizations – up 2X quarter-over-quarter – have chosen GitHub Copilot for Business to increase the productivity of their developers, including Airbnb, Dell, and Scandinavian Airlines.\n\nWe’re also applying AI across low-code/no-code toolchain to help domain experts automate workflows, create apps and web pages, build virtual agents, or analyze data, using just natural language.\n\nCopilot in Power BI combines the power of large language models with an organization’s data to generate insights faster. And Copilot in Power Pages makes it easier to create secure, low-code business websites.\n\nOne of our tools that has really taken off is Copilot in Power Virtual Agents, which is delivering one of the biggest benefits of this new era of AI: helping customer service agents be significantly more productive.\n\nHP and Virgin Money, for example, have both built custom chatbots with Copilot in Power Virtual Agents that were trained to answer complex customer inquiries.\n\nAll-up, more than 63,000 organizations have used AI-powered capabilities in Power Platform, up 75% quarter-over-quarter.\n\nFinally, Power Automate now has 10 million monthly active users at companies like Jaguar Land Rover, Repsol, Rolls-Royce, up 55% year-over-year.\n\nAnd we’re going further with new process mining capabilities in Power Automate, which are helping organizations optimize business processes – and in turn build their AI advantage.\n\nNow, on to business applications.\n\nWe are taking share in every category, as we help organizations across the private and public sector – from Avis, to Albertsons Companies, to Breville, to Equinox, and the U.S. Department of Veterans Affairs – transform their mission-critical business processes.\n\nAll-up, Dynamics surpassed $5 billion in revenue over the past fiscal year, with our customer experience, service, and finance & supply chain businesses all surpassing $1 billion in annual sales.\n\nThis quarter, we brought Dynamics 365 Copilot to our ERP portfolio, including finance, project operations, and supply management.\n\nAnd with our new Microsoft Sales Copilot sellers can ground their customer interactions with data from CRM systems – including both Salesforce and Dynamics – to personalize customer interactions and close more deals.\n\nNow, on to our industry and cross-industry clouds.\n\nOur Microsoft Cloud for Sustainability is helping customers like Costco, Land O’Lakes, and REI take action to meet their environmental goals.\n\nAnd, in healthcare, hundreds of organizations are using our Nuance DAX ambient intelligence solution to automatically document patient encounters at the point of care.\n\nThis quarter, we expanded our collaboration with Epic to integrate Nuance DAX Express directly into their industry leading EHR system.\n\nNow, on to future of work.\n\nAcross industries, customers like Ahold Delhaize, Deutsche Bank, Novartis, Siemens, Wells Fargo are choosing Microsoft 365 premium offerings for differentiated security, compliance, voice, and analytics value.\n\nAnd four months ago, we introduced a new pillar of customer value with Microsoft 365 Copilot.\n\nWe are now rolling out Microsoft 365 Copilot to 600 paid customers through our early access program, and feedback from organizations like Emirates NBD, General Motors, Goodyear, and Lumen is that it’s a game changer for employee productivity.\n\nWe continue to build momentum in Microsoft Teams across collaboration, chat, meetings, and calling.\n\nWe now have more than 1,900 apps in Teams app store. And companies in every industry, from British Airways, to Dentsu, to Eli Lilly and Manulife, have built over 145,000 custom line of business apps, bringing business process directly into the flow of work.\n\nFive months in, Teams Premium has already surpassed 600,000 seats, as companies like BNY Mellon, Clifford Chance, PepsiCo, and Starbucks, chose the add-on for advanced features like end-to-end encryption and real-time translation.\n\nTeams Phone is the market leader in cloud calling, with more than 17 million PSTN users, up 45% year-over-year.\n\nTeams Rooms is used by more than 70% of the Fortune 500 – including L’Oreal, United Airlines, and US Bank. And revenue more than doubled year-over-year this quarter.\n\nAnd with Microsoft Viva, we are creating a new market category for employee experience. Viva now has 35 million monthly active users, as companies like CBRE, Fujitsu, and Unisys turn to the platform to build data-driven, high-performance organizations.\n\nNow, on to Windows.\n\nThe number of devices running Windows 11 has more than doubled in the last year, and we are seeing continued growth in Windows 11 commercial deployments worldwide by companies like AT&T, Krones, and Westpac.\n\nWe are also transforming how Windows is experienced and managed for enterprise customers with Azure Virtual Desktop and Windows 365, which together surpassed $1 billion in revenue for the first time over the past 12 months.\n\nEnbridge, Eurowings, Marriott International, and TD Bank Group, for example, all chose cloud-delivered Windows this quarter.\n\nWindows 11 is also rapidly becoming a powerful new canvas in this new era of AI.\n\nWe introduced Windows Copilot this quarter, helping every Windows 11 user become a power user with just natural language, and are excited to put it in the hands of more people in the coming months.\n\nNow, on to Security.\n\nMore than one million organizations now count on our comprehensive, AI-powered solutions to protect their digital estate across clouds and endpoint platforms, up 26% year-over-year.\n\nMore than 60% – including leading enterprises like ABN AMRO, Dow, and HEINEKEN – use 4 or more of our security products, up 33% year-over-year, underscoring our end-to-end differentiation.\n\nAnd we once again took share across all major categories we serve, as we innovate to protect customers.\n\nIn identity, Microsoft Entra ID has more than 610 million monthly active users.\n\nAnd we are adding SSE to our Entra product family to complement our leading identity solution, and secure access to any app or resource, from anywhere.\n\nFinally, our Security Copilot – the first product to apply this next generation of AI to SecOps – will be available to customers via a paid early access program this fall.\n\nNow, on to LinkedIn.\n\nLinkedIn’s revenue surpassed $15 billion for the first time this fiscal year and membership growth has now accelerated for eight quarters in a row, a testament to how mission critical the platform has become to help more than 950 million members connect, learn, sell, and get hired.\n\nOur Talent Solutions business surpassed $7 billion in revenue for the first time over the past 12 months, and our hiring business took share for the fourth consecutive quarter.\n\nWe continue to use AI to help our members and customers connect to opportunities and tap into experiences of experts on the platform. Our AI-powered collaborative articles are now the fastest-growing traffic driver to LinkedIn.\n\nAnd finally, we’re helping LinkedIn stay trusted and authentic. More than 7 million members have verified who they are or where they work, many using new integrations with Microsoft Entra, as well as CLEAR and Hyperverge.\n\nNow, on to search, advertising, and news.\n\nWhile it’s early in our journey, we are reshaping daily search and web habits with our Copilot for the web.\n\nThis quarter, we introduced new AI-powered features, including multimodal capabilities with visual search in Bing Chat.\n\nWe’re expanding to businesses, with Bing Chat Enterprise, which offers commercial data protection, providing an easy on-ramp for any organization looking to get the benefit of this next generation of AI today.\n\nBing is also the default search experience for OpenAI’s ChatGPT, bringing timelier answers with links to reputable sources to ChatGPT users.\n\nTo date, Bing users have engaged in more than one billion chats and created more than 750 million images with Bing Image Creator. And Microsoft Edge took share for the ninth consecutive quarter.\n\nMore broadly, we’re growing our ad network, which is now available in 187 markets, spanning search, display, native, retail media, video, and connected TV.\n\nNow, on to gaming.\n\nLast week we extended our Activision Blizzard merger agreement deadline to October. We continue to work through the regulatory approval process and remain confident about getting the deal done.\n\nWe are committed to bringing more games to more players everywhere.\n\nGreat content is key to our approach, and our pipeline has never been stronger.\n\nWe announced our most ambitious line up of games ever at our showcase last month, including 21 titles that will be available via Xbox Game Pass.\n\nAnd we’re looking forward to the release of Starfield this fall, Bethesda’s first new universe in 25 years.\n\nAll-up, we set new fourth quarter highs for monthly active users, driven by strength off-console, as well as monthly active devices. And we saw record fourth quarter engagement across Game Pass, with hours played up 22% year-over-year.\n\nAnd just last week, we announced Game Pass Core, bringing together online play from Xbox Live and content from Game Pass into a single offering.\n\nIn closing, I am energized about the opportunities ahead.\n\nWe continue to innovate across the tech stack to help our customers thrive in the new era of AI.\n\nAnd with that, let me turn it over to Amy.\n\nAMY HOOD: Thank you, Satya, and good afternoon everyone. This quarter, revenue was $56.2 billion, up 8% and 10% in constant currency. Earnings per share was $2.69 and increased 21% and 23% in constant currency.\n\nIn our largest quarter of the year, results exceeded expectations with focused execution by our sales and partner teams. These execution efforts led to share gains again this quarter in Azure, Dynamics, Security, and Edge.\n\nIn our commercial business, we continued to see healthy renewal strength which includes our upsell and attach motions, particularly with Microsoft 365 E5. Growth of new business continued to be moderated for products sold outside the Microsoft 365 suite including standalone Office 365, EMS, and Windows Commercial products. As expected in Azure, we saw a continuation of the optimization and new workload trends from the prior quarter.\n\nIn our consumer business, the PC market overall was in line with expectations although the early timing of back-to-school inventory builds benefitted Windows OEM. Advertising spend was slightly lower than anticipated which impacted Search and news advertising and LinkedIn Marketing Solutions.\n\nCommercial bookings decreased 2% and 1% in constant currency, in line with expectations, against a prior year comparable that was our largest commercial bookings quarter ever. In addition to the healthy execution across our renewal sales motions mentioned earlier, we saw a record number of 10-million-dollar-plus contracts for both Azure and Microsoft 365. And, the average annualized value for our large, long-term Azure contracts was the highest it’s ever been, driven by customer demand for our innovative cloud solutions today as well as the interest in AI opportunities ahead.\n\nCommercial remaining performance obligation increased 19% and 18% in constant currency to $224 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 13% year-over-year. The remaining portion, which will be recognized beyond the next 12 months, increased 22%. And this quarter, our annuity mix increased to 97%.\n\nFX impact on total company revenue, segment level revenue, and operating expense growth was as expected. FX decreased COGS growth by 1 point, 1 point favorable to expectations.\n\nMicrosoft Cloud revenue was $30.3 billion and grew 21% and 23% in constant currency, slightly ahead of expectations.\n\nMicrosoft Cloud gross margin percentage increased roughly 3 points year-over-year to 72%, also slightly ahead of expectations. Excluding the impact of the change in accounting estimate for useful lives, Microsoft Cloud gross margin percentage increased slightly driven by improvements in Office 365, partially offset by lower Azure margin and the impact of scaling our AI infrastructure to meet growing demand.\n\nCompany gross margin dollars increased 11% and 13% in constant currency, including 2 points due to the change in accounting estimate. Gross margin percentage increased year-over-year to 70%. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly driven by improvements in Office 365.\n\nOperating expense increased 2%, in line with expectations, as savings across the company from our focus on prioritization and efficiency were offset by the charge related to the Irish Data Protection Commission matter. At a total company level, headcount at the end of June was flat compared to a year ago.\n\nOperating income increased 18% and 21% in constant currency, including 4 points due to the change in accounting estimate. Operating margins increased roughly 4 points year-over-year to 43%. Excluding the impact of the change in accounting estimate, operating margins increased roughly 2 points driven by improved operating leverage through disciplined cost management.\n\nNow to our segment results.\n\nRevenue from Productivity and Business Processes was $18.3 billion and grew 10% and 12% in constant currency, ahead of expectations with better-than-expected results in Office Commercial, partially offset by LinkedIn.\n\nOffice commercial revenue grew 12% and 14% in constant currency. Office 365 commercial revenue increased 15% and 17% in constant currency, a bit better than expected with particular strength in E5 upsell at renewal noted earlier. Paid Office 365 commercial seats grew 11% year-over-year with installed base expansion across all workloads and customer segments. Seat growth was again driven by our small and medium business and frontline worker offerings.\n\nOffice commercial licensing declined 20% and 18% in constant currency with better-than-expected transactional purchasing.\n\nOffice consumer revenue increased 3% and 6% in constant currency with continued momentum in Microsoft 365 subscriptions, which grew 12% to 67 million.\n\nLinkedIn revenue increased 5% and 7% in constant currency, driven by growth in Talent Solutions with some continued bookings impact from the weaker hiring environment in key verticals. Growth was partially offset by a decline in Marketing Solutions due to the lower ad spend noted earlier.\n\nDynamics revenue grew 19% and 21% in constant currency driven by Dynamics 365, which grew 26% and 28% in constant currency with continued healthy growth across all workloads.\n\nSegment gross margin dollars increased 14% and 16% in constant currency and gross margin percentage increased roughly 3 points year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 1 point driven by improvements in Office 365. Operating expenses decreased slightly, and operating income increased 25% and 29% in constant currency, including 3 points due to the change in accounting estimate.\n\nNext, the Intelligent Cloud segment. Revenue was $24 billion, increasing 15% and 17% in constant currency, slightly ahead of expectations.\n\nOverall, server products and cloud services revenue increased 17% and 18% in constant currency. Azure and other cloud services revenue grew 26% and 27% in constant currency, including roughly 1 point from AI services, as expected.\n\nIn our per-user business, the enterprise mobility and security installed base grew 11% to over 256 million seats with impact from the continued growth trends in new business noted earlier.\n\nIn our on-premises server business, revenue decreased 1% and was relatively unchanged in constant currency, driven by a slight decrease in new annuity contracts which carry higher in-period revenue recognition.\n\nEnterprise Services revenue grew 4% and 5% in constant currency, with better-than-expected performance across Enterprise Support Services and Industry Solutions.\n\nSegment gross margin dollars increased 16% and 17% in constant currency and gross margin percentage increased slightly. Excluding the impact of the change in accounting estimate, gross margin percentage declined roughly 2 points driven by sales mix shift to Azure and the lower Azure margin noted earlier. Operating expenses increased 10%. Operating income grew 20% and 22% in constant currency, with roughly 6 points from the change in accounting estimate.\n\nNow to More Personal Computing. Revenue was $13.9 billion, decreasing 4% and 3% in constant currency, above expectations driven by better-than-expected performance in Windows partially offset by Gaming.\n\nWindows OEM revenue decreased 12% year-over-year, ahead of expectations due to 7 points of benefit from early back-to-school inventory builds, while the overall PC market was as expected.\n\nDevices revenue decreased 20% and 18% in constant currency, roughly in line with expectations.\n\nWindows commercial products and cloud services revenue increased 2% and 3% in constant currency, ahead of expectations due to the renewal strength noted earlier even with the moderated growth of new business in standalone offerings.\n\nSearch and news advertising revenue ex-TAC increased 8%, a bit behind expectations due to lower ad spend noted earlier. Higher search volumes, share gains again this quarter for our Edge browser, and the benefit from the Xandr acquisition were partially offset by the impact from third party partnerships.\n\nAnd in Gaming, revenue increased 1% and 2% in constant currency, lower than expected due to weakness in first-party and third-party content performance. Xbox content and services revenue increased 5% and 6% in constant currency and Xbox hardware revenue declined 13%.\n\nSegment gross margin dollars declined 2% and were relatively unchanged in constant currency and gross margin percentage increased roughly 1 point year-over-year driven by sales mix shift to higher margin businesses. Operating expenses declined 9% and 8% in constant currency. Operating income increased 4% and 6% in constant currency.\n\nNow back to total company results.\n\nCapital expenditures including finance leases were $10.7 billion to support cloud demand, including investments in AI infrastructure. Cash paid for P, P, and E was $8.9 billion.\n\nCash flow from operations was $28.8 billion, up 17% year-over-year as strong cloud billings and collections were partially offset by a tax payment related to the R&D capitalization provision. Free cash flow was $19.8 billion, up 12% year-over-year. Excluding the impact of this tax payment, cash flow from operations increased 22% and free cash flow increased 19%.\n\nThis quarter, other income and expense was $473 million, higher than anticipated driven by net gains on foreign currency remeasurement.\n\nOur effective tax rate was approximately 19%.\n\nAnd finally, we returned $9.7 billion to shareholders through share repurchases and dividends, bringing our total cash returned to shareholders to over $38 billion for the full fiscal year.\n\nNow, let’s turn to next fiscal year and start with a few reminders.\n\nFirst, the change in accounting estimate for the useful life of server and network equipment resulted in $3.7 billion of depreciation expense shifting from FY23 to future periods. Our FY23 operating income and margins benefited from this change in accounting estimate and that will be a headwind to growth in FY24 as the benefit reduces to $2.1 billion.\n\nNext, my outlook commentary, for both the full year and next quarter, is on a US dollar basis unless specifically noted otherwise.\n\nAnd, my outlook does not include any impact from the Activision acquisition, which we continue to work towards closing, subject to obtaining required regulatory approvals.\n\nNow for some thoughts on the full year of FY24.\n\nWith the weaker US dollar and assuming current rates remain stable, we expect FX to increase full year revenue growth by approximately 1 point with no impact to COGS or operating expense growth. The impact in H1 is expected to be greater than H2.\n\nAt a total company level, revenue growth from our commercial business will continue to be driven by the Microsoft Cloud and will again outpace the growth from our consumer business. Even with strong demand and a leadership position, growth from our AI services will be gradual as Azure AI scales and our copilots reach general availability dates. So, for FY24, the impact will be weighted towards H2.\n\nTo support our Microsoft Cloud growth and demand for our AI platform, we will accelerate investment in our cloud infrastructure. We expect capital expenditures to increase sequentially each quarter through the year as we scale to meet demand signals.\n\nWe are committed to driving operating leverage and therefore we will manage our total cost growth across COGS and operating expense in line with the demand signals we see as well as revenue growth. Increased capital spend will drive higher COGS growth than in FY23, and FY24 operating expense growth will remain low as we prioritize our spend. Therefore, we expect full year operating margins to remain flat year-over-year, even with the headwind from the change in accounting estimate.\n\nAnd finally, we expect our FY24 tax rate to be around 19%.\n\nNow, to the outlook for the first quarter.\n\nFirst, FX. Based on current rates, we expect FX to increase total revenue and operating expense growth by approximately 1 point with no impact to COGS growth. Within the segments, we expect FX to increase revenue growth in Intelligent Cloud by 1 point with no impact to Productivity and Business Processes or More Personal Computing.\n\nIn commercial bookings, strong execution across our core annuity sales motions, including our renewal and upsell motions, along with long term Azure commitments should drive healthy growth on a growing expiry base.\n\nMicrosoft Cloud gross margin percentage should decrease roughly 1 point year-over-year driven by the accounting estimate change headwind noted earlier. Excluding that impact, Q1 cloud gross margin percentage will be up roughly 1 point primarily driven by improvements in Azure and Office 365, partially offset by sales mix shift to Azure and the impact of scaling our AI infrastructure to meet growing demand.\n\nWe expect capital expenditures to increase sequentially on a dollar basis, as noted earlier, driven by investments in our AI infrastructure. Reminder there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.\n\nNext to segment guidance.\n\nIn Productivity and Business Processes, we expect revenue to grow between 9 and 11% or $18 to $18.3 billion US dollars.\n\nIn Office Commercial, revenue growth will again be driven by Office 365 with seat growth across customer segments and ARPU growth thru E5. We expect Office 365 revenue growth to be roughly 16% in constant currency. In our on-premises business, we expect revenue to decline in the low 20s.\n\nIn Office consumer, we expect revenue growth in the low to mid-single digits, driven by Microsoft 365 subscriptions.\n\nFor LinkedIn, we expect revenue growth in the low to mid-single digits. Even with share gains in our hiring business, growth will continue to be impacted by the overall markets for recruiting and advertising, especially in the technology industry where we have significant exposure.\n\nAnd in Dynamics, we expect revenue growth in the mid to high-teens driven by continued growth in Dynamics 365.\n\nFor Intelligent Cloud we expect revenue to grow between 15 and 16%, or 14 and 15% in constant currency. Revenue should be $23.3 to $23.6 billion US dollars.\n\nRevenue will continue to be driven by Azure which, as a reminder, can have quarterly variability primarily from our per-user business and from in-period revenue recognition depending on the mix of contracts.\n\nIn Azure, we expect revenue growth to be 25 to 26% in constant currency, including roughly 2 points from all Azure AI services. Growth continues to be driven by our Azure consumption business and we expect the trends from Q4 to continue into Q1. Our per-user business should continue to benefit from Microsoft 365 suite momentum, though we expect continued moderation in growth rates given the size of the installed base.\n\nIn our on-premises server business, we expect revenue to decline low to mid-single digits against a prior year comparable that benefited from annuity purchasing ahead of the SQL Server 2022 launch.\n\nAnd in Enterprise Services, revenue should decline low to mid-single digits year-over-year as growth in Enterprise Support Services will be more than offset by a decline in Industry Solutions.\n\nIn More Personal Computing, we expect revenue of $12.5 to $12.9 billion US dollars.\n\nWindows OEM revenue should decline low to mid-teens, including 5 points of negative impact from the earlier back-to-school inventory builds that were pulled into the fourth quarter. Our guide assumes no significant changes to the PC demand environment.\n\nIn Devices, revenue should decline in the mid-30s due to the overall PC market and adjustments we made in our portfolio with an increased focus on our higher margin premium products.\n\nIn Windows commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the mid to high-single digits.\n\nSearch and news advertising ex-TAC revenue growth should be mid to high-single digits, roughly 5 points higher than overall Search and news advertising revenue, driven by continued volume strength supported by Edge browser share gains. Growth will continue to be impacted by the advertising spend environment and third-party partnerships mentioned earlier. We continue to be excited by Bing usage signals and the longer term opportunity as we invest in AI.\n\nAnd in Gaming, we expect revenue growth in the mid-single digits. We expect Xbox content and services revenue growth in the mid to high-single digits driven by first-party and third-party content as well as Xbox Game Pass.\n\nNow back to company guidance.\n\nWe expect COGS between $16.6 to $16.8 billion US dollars and operating expense of $13.5 to $13.6 billion US dollars. Together, total cost growth should be around 6%.\n\nOther income and expense should be roughly $300 million as interest income is expected to more than offset interest expense. Two reminders, this does not include any impact from Activision on interest income and expense and we are required to recognize mark-to-market gains or losses on our equity portfolio, which can increase quarterly volatility.\n\nWe expect our Q1 effective tax rate to be around 19%.\n\nAnd finally, as a reminder for Q1 cash flow, we expect to make a $2.7 billion cash tax payment related to the TCJA transition tax. We do not expect a payment related to the R&D capitalization provision in Q1.\n\nIn closing, as a company, we delivered on the FY23 financial commitments we discussed a year ago on revenue and operating margin. A focus on operational excellence allowed us to achieve these targets while we delivered near term value to customers and prioritized our investments to continue to lead in the future. As we start FY24, we are excited for the opportunities ahead, and remain focused on delivering the three key priorities Satya mentioned. We’ll maintain our lead as the top commercial cloud by helping customers use the breadth and depth of the Microsoft Cloud. We’ll continue to invest in our cloud and AI infrastructure while scaling with growing demand so we can lead the AI platform wave. And finally, we’ll align our costs with growth as we are committed to driving operating leverage.\n\nWith that, let’s go to Q&A, Brett."
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      "content": "DOCUMENT: Microsoft FY24 Q2 earnings call (2024-01-30)\nDOCUMENT ID: msft_2024_q2\nSOURCE URL: https://www.microsoft.com/en-us/investor/events/fy-2024/earnings-fy-2024-q2\nSECTION: FY24 Q2 prepared remarks\n\nBRETT IVERSEN:\n\nGood afternoon and thank you for joining us today. On the call with me are Satya Nadella, chairman and chief executive officer, Amy Hood, chief financial officer, Alice Jolla, chief accounting officer, and Keith Dolliver, corporate secretary and deputy general counsel.\n\nOn 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.\n\nMicrosoft completed the acquisition of Activision Blizzard this quarter, and we are reporting its results in our More Personal Computing segment, beginning on October 13th, 2023. Accordingly, our Xbox content and services revenue growth investor metric includes the net impact of Activision. Additionally, our press release and slide deck contain supplemental information regarding the net impact of the Activision acquisition on our financial results.\n\nOn 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.\n\nAll 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 rate only.\n\nWe 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.\n\nDuring 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.\n\nAnd with that, I’ll turn the call over to Satya.\n\nSATYA NADELLA: Thank you, Brett.\n\nIt was a record quarter, driven by the continued strength of the Microsoft Cloud, which surpassed $33 billion in revenue, up 24%.\n\nWe’ve moved from talking about AI to applying AI at scale.\n\nBy infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains.\n\nNow, I’ll highlight examples of our momentum and progress, starting with Azure.\n\nAzure again took share this quarter, with our AI advantage.\n\nAzure offers the top performance for AI training and inference and the most diverse selection of AI accelerators, including the latest from AMD and NVIDIA, as well as our own first party silicon, Azure Maia.\n\nAnd, with Azure AI, we provide access to the best selection of foundation and open-source models, including both LLMs and SLMs, all integrated deeply with infrastructure, data, and tools on Azure.\n\nWe now have 53,000 Azure AI customers. Over one-third are new to Azure over the past 12 months.\n\nOur new “models as a service” offering makes it easy for developers to use LLMs from our partners like Cohere, Meta, and Mistral on Azure without having to manage underlying infrastructure.\n\nWe’ve also built the world’s most popular SLMs, which offer performance comparable to larger models but are small enough to run on a laptop or mobile device. Anker, Ashley, AT&T, EY, and Thomson Reuters, for example, are all already exploring how to use our SLM Phi for their applications.\n\nAnd we have great momentum with our Azure OpenAI Service. This quarter, we added support for OpenAI’s latest models, including GPT-4 Turbo, GPT-4 with Vision, Dall-E 3, as well as fine-tuning.\n\nWe are seeing increased usage from AI-first startups like Moveworks, Perplexity, SymphonyAI, as well as some of the world’s largest companies. Over half of the Fortune 500 use Azure OpenAI today, including Ally Financial, Coca-Cola, and Rockwell Automation.\n\nFor example, at CES this month Walmart shared how it’s using Azure OpenAI Service, along with its own proprietary data and models, to streamline how more than 50,000 associates work, and transform how its millions of customers shop.\n\nMore broadly, customers continue to choose Azure to simplify and accelerate their cloud migrations.\n\nOverall, we are seeing larger and more strategic Azure deals, with an increase in the number of billion-dollar-plus Azure commitments.\n\nVodafone, for example, will invest $1.5 billion in cloud and AI services over the next 10 years as it works to transform the digital experience of more than 300 million customers worldwide.\n\nNow, on to data.\n\nWe’re integrating the power of AI across the entire data stack.\n\nOur Microsoft Intelligent Data Platform brings together operational databases, analytics, governance, and AI to help organizations simplify and consolidate their data estates.\n\nCosmos DB is the go-to database to build AI-powered apps at any scale, powering workloads for companies in every industry, from AXA and Coles, to Mitsubishi and TomTom.\n\nKPMG, for example, has used Cosmos DB, including its built-in native vector search capabilities, along with Azure OpenAI Service, to power an AI assistant, which it credits with driving an up to 50% increase in productivity for its consultants.\n\nAll-up, Cosmos DB data transactions increased 42% year-over-year.\n\nAnd, for those organizations who want to go beyond in-database vector search, Azure AI Search offers the best hybrid search solution. OpenAI is using it for retrieval augmented generation as part of ChatGPT.\n\nAnd this quarter, we made Microsoft Fabric generally available, helping customers like Milliman and PwC go from data, to insights, to action—all within the same unified SaaS solution.\n\nData stored in Fabric’s multi-cloud data lake, OneLake, increased 46% quarter-over-quarter.\n\nNow, on to developers.\n\nFrom GitHub to Visual Studio, we have the most comprehensive and loved developer tools for the era of AI.\n\nGitHub revenue accelerated to over 40% year-over-year, driven by all-up platform growth and adoption of GitHub Copilot, the world’s most widely deployed AI developer tool.\n\nWe now have over 1.3 million paid GitHub Copilot subscribers, up 30% quarter-over-quarter.\n\nAnd more than 50,000 organizations use GitHub Copilot Business to supercharge the productivity of their developers, from digital natives like Etsy and HelloFresh, to leading enterprises like Autodesk, Dell Technologies, and Goldman Sachs. Accenture alone will roll out GitHub Copilot to 50,000 of its developers this year.\n\nAnd, we’re going further, making Copilot ubiquitous across the entire GitHub platform, and new AI-powered security features, as well as Copilot Enterprise, which tailors Copilot to an organization’s codebase and allows developers to converse with it in natural language.\n\nWe’re also the leader in low-code/no-code development, helping everyone create apps, automate workflows, analyze data—and now build custom copilots.\n\nMore than 230,000 organizations have already used AI capabilities in Power Platform, up over 80% quarter-over-quarter.\n\nAnd with Copilot Studio, organizations can tailor Copilot for Microsoft 365 or create their own custom copilots. It has already been used by over 10,000 organizations, including An Post, Holland America, PG&E.\n\nIn just weeks, for example, both PayPal and Tata Digital built copilots to answer common employee queries, increasing productivity and reducing support costs.\n\nWe’re also using this AI moment to redefine our role in business applications.\n\nDynamics 365 once again took share, as organizations use our AI-powered apps to transform their marketing, sales, service, finance, and supply chain functions.\n\nAnd we are expanding our TAM by integrating Copilot into third-party systems too.\n\nIn Sales, our Copilot has helped sellers at more than 30,000 organizations—including Lumen Technologies and Schneider Electric—to enrich their customer interactions using data from Dynamics 365 or Salesforce.\n\nAnd, with our new Copilot for Service, employees at companies like Northern Trust can resolve client queries faster. It includes out-of-the-box integrations to apps like Salesforce, ServiceNow, and Zendesk.\n\nWith our industry and cross-industry clouds, we’re tailoring our solutions to meet the needs of specific industries.\n\nIn healthcare, DAX Copilot is being used by more than 100 healthcare systems, including Lifespan, UNC Health, and UPMC, to increase physician productivity and reduce burnout.\n\nAnd, our Cloud for Retail was front and center at NRF, with retailers—from Canadian Tire Corporation, to Leatherman and Ralph Lauren—sharing how they will use our solutions across the shopper journey to accelerate time to value.\n\nNow, on to the future of work.\n\nA growing body of evidence makes clear the role AI will play in transforming work.\n\nOur own research, as well as external studies, show as much as a 70% improvement in productivity using generative AI for specific work tasks. And, overall, early Copilot for Microsoft 365 users were 29% faster in a series of tasks like searching, writing, and summarizing.\n\nTwo months in, we’ve seen faster adoption than either our E3 or E5 suites as enterprises like Dentsu, Honda, Pfizer all deploy Copilot to their employees.\n\nAnd, we’re expanding availability to organizations of all sizes.\n\nWe’re also seeing a Copilot ecosystem begin to emerge. ISVs like Atlassian, Mural, and Trello, as well as customers like Air India, Bayer, and Siemens, have all built plugins for specific lines of business that extend Copilot’s capabilities.\n\nWhen it comes to Teams, we again saw record usage as organizations brought together collaboration, chat, meetings, and calling on one platform.\n\nAnd Teams has also become a new entry point for us. More than two-thirds of our enterprise Teams customers buy Phone, Rooms, or Premium.\n\nAll this innovation is driving growth across Microsoft 365.\n\nWe now have more than 400 million paid Office 365 seats.\n\nAnd organizations like BP, Elanco, ING Bank, Mediaset, WTW all chose E5 this quarter to empower their employees with our best-in-class productivity apps, along with advanced security, compliance, voice, and analytics.\n\nNow, on to Windows.\n\nIn 2024, AI will become a first class part of every PC.\n\nWindows PCs with built-in neural processing units were front and center at CES, unlocking new AI experiences to make what you do on your PC easier and faster—from searching for answers and summarizing e-mails, to optimizing performance and battery efficiency.\n\nCopilot in Windows is already available on more than 75 million Windows 10 and Windows 11 PCs. And with our new Copilot key, the first significant change to the Windows keyboard in 30 years, we’re providing one-click access.\n\nWe also continue to transform how Windows is experienced and managed with Azure Virtual Desktop and Windows 365, introducing new features that make it simpler for employees to access and IT teams to secure their cloud PCs.\n\nUsage of cloud-delivered Windows increased over 50% year-over-year.\n\nAnd, all up, Windows 11 commercial deployments increased 2X year-over-year as companies like HPE and Petrobas rolled out the operating system to employees.\n\nNow, on to Security.\n\nRecent security attacks—including the nation-state attack on our corporate systems we reported a week and a half ago—have highlighted the urgent need for organizations to move even faster to protect themselves from cyber threats.\n\nIt’s why last fall, we announced a set of engineering priorities under our Secure Future Initiative, bringing together every part of the company to advance cybersecurity protection across both new products and legacy infrastructure.\n\nAnd it’s why we continue to innovate across our security portfolio, as well as our operational security posture, to help customers adopt a Zero Trust security architecture.\n\nOur industry-first Unified Security Operations Platform brings together our SIEM Microsoft Sentinel, our XDR Microsoft Defender, and Copilot for Security to help teams manage an increasingly complex security landscape.\n\nAnd with Copilot for Security, we’re now helping hundreds of early access customers, including Cemex, Dow, LTIMindtree, McAfee, Nucor Steel, significantly increase their SecOps teams’ productivity. This quarter, we extended Copilot to Entra, Intune, and Purview.\n\nAll-up, we have over one million customers, including more than 700,000 who use four or more of our security products, like Arrow Electronics, DXC Technology, Freeport-McMoRan, Insight Enterprises, JB Hunt, and The Mosaic Company.\n\nNow, on to LinkedIn.\n\nLinkedIn is now helping over one billion members learn, sell, and get hired.\n\nWe continue to see strong global membership growth, driven by member sign-ups in key markets like Germany and India.\n\nIn an ever-changing job market, members are staying competitive through skill-building and knowledge-sharing. Over the last twelve months, members have added 680 million skills to their profiles, up 80% year-over-year.\n\nOur new AI-powered features are transforming the LinkedIn member experience, everything from how people learn new skills, to how they search for jobs and engage with posts.\n\nNew AI features—including more personalized InMails—also continue to increase business ROI on the platform, and our hiring business took share for the sixth consecutive quarter.\n\nAnd, more broadly, AI is transforming our search and browser experience.\n\nWe’re encouraged by the momentum. Earlier this month, we achieved a new milestone with 5 billion images created and 5 billion chats conducted to date, both doubling quarter-over-quarter. And both Bing and Edge took share this quarter.\n\nWe also introduced Copilot as a standalone destination across all browsers and devices, as well as a Copilot app on iOS and Android.\n\nAnd, just two weeks ago, we introduced Copilot Pro, providing access to the latest models for quick answers and higher-quality image creation, and access to Copilot for Microsoft 365 Personal and Family subscribers.\n\nNow, on to gaming.\n\nThis quarter, we set all-time records for monthly active users on Xbox, PC, as well as mobile—where we now have over 200 million monthly active users alone, inclusive of Activision Blizzard King.\n\nWith our acquisition, we’ve added hundreds of millions of gamers to our ecosystem, as we execute on our ambition to reach more gamers on more platforms.\n\nWith cloud gaming, we continue to innovate to offer players more ways to experience the games they love, where, when, and how they want. Hours streamed increased 44% year-over-year.\n\nGreat content is key to our growth, and across our portfolio, I’ve never been more excited about our lineup of upcoming games.\n\nEarlier this month, we shared exciting new first party titles coming this year to Xbox, PC, and Game Pass, including Indiana Jones.\n\nAnd we’ve also announced launching significant updates this calendar year to many of our most durable franchises, which bring in millions of players each month, including Call of Duty, Elder Scrolls Online, and Starfield.\n\nIn closing, we’re looking forward to how AI-driven transformation will benefit people and organizations in 2024.\n\nWith that, I’ll hand it over to Amy.\n\nAMY HOOD:\n\nThank you, Satya, and good afternoon everyone.\n\nThis quarter, revenue was $62 billion, up 18% and 16% in constant currency. When adjusted for the prior year Q2 charge, operating income increased 25% and 23% in constant currency, and earnings per share was $2.93 – which increased 26% and 23% in constant currency.\n\nResults exceeded expectations and we delivered another quarter of double-digit top and bottom-line growth. Strong execution by our sales teams and partners drove share gains again this quarter across many of our businesses as Satya referenced.\n\nIn our commercial business, strong demand for our Microsoft Cloud offerings, including AI services, drove better than expected growth in large, long-term Azure contracts. Microsoft 365 suite strength contributed to ARPU expansion for our Office Commercial business, while new business growth continued to be moderated for standalone products sold outside the Microsoft 365 suite.\n\nCommercial bookings were ahead of expectations and increased 17% and 9% in constant currency on a low expiry base. The strength in long-term Azure contracts mentioned earlier along with strong execution across our core annuity sales motions, including healthy renewals, drove our results.\n\nCommercial remaining performance obligation increased 17% and 16% in constant currency to $222 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 15% year-over-year. The remaining portion, recognized beyond the next 12 months, increased 19%. And this quarter, our annuity mix was 96%.\n\nIn our consumer business, the PC and advertising markets were generally in line with our expectations. PC market volumes continued to stabilize at pre-pandemic levels. The gaming console market was a bit smaller.\n\nAs a reminder, my Q2 commentary includes the net impact of Activision from the date of acquisition, inclusive of purchase accounting, integration, and transaction-related expenses. The net impact includes adjusting for the movement of Activision content from our prior relationship as a third-party partner to first-party. At a company level, Activision contributed approximately 4 points to revenue growth, was a 2 point drag on adjusted operating income growth, and a negative 5 cent impact to earnings per share. This impact includes $1.1 billion from purchase accounting adjustments, integration, and transaction-related costs such as severance-related charges related to last week’s announcement.\n\nFX was roughly in line with our expectations on total company revenue, segment level revenue, COGS, and operating expense growth.\n\nMicrosoft Cloud revenue was $33.7 billion, ahead of expectations, and grew 24% and 22% in constant currency.\n\nMicrosoft Cloud gross margin percentage was 72%, relatively unchanged year-over-year. Excluding the impact of the change in accounting estimate for useful lives, gross margin percentage increased roughly 1 point driven by improvement in Azure and Office 365, partially offset by the impact of scaling our AI infrastructure to meet growing demand.\n\nCompany gross margin dollars increased 20% and 18% in constant currency and gross margin percentage increased year-over-year to 68%. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 2 points even with the impact of $581 million from purchase accounting adjustments, integration, and transaction-related costs from the Activision acquisition. Growth was driven by improvement in devices as well as the improvement in Azure and Office 365 just mentioned.\n\nOperating expenses increased 3% with 11 points from the Activision acquisition, partially offset by 7 points of favorable impact from the prior year Q2 charge. The Activision impact includes $550 million from purchase accounting adjustments, integration, and transaction-related costs. At a total company level, headcount at the end of December was 2% lower than a year ago.\n\nOperating margins increased roughly 5 points year-over-year to 44%. Excluding the impact of the change in accounting estimate, operating margins increased roughly 6 points driven by the higher gross margin noted earlier, the favorable impact from the prior year Q2 charge, and improved operating leverage through disciplined cost control.\n\nNow to our segment results.\n\nRevenue from Productivity and Business Processes was $19.2 billion and grew 13% and 12% in constant currency, ahead of expectations primarily driven by better-than-expected results in LinkedIn.\n\nOffice commercial revenue grew 15% and 13% in constant currency. Office 365 commercial revenue increased 17% and 16% in constant currency, in line with expectations, driven by healthy renewal execution and ARPU growth from continued E5 momentum. Paid Office 365 commercial seats grew 9% year-over-year to over 400 million with installed base expansion across all customer segments. Seat growth was again driven by our small and medium business and frontline worker offerings offset by the continued growth trends in new standalone business noted earlier.\n\nOffice commercial licensing declined 17% and 18% in constant currency, with continued customer shift to cloud offerings.\n\nOffice consumer revenue increased 5% and 4% in constant currency with continued momentum in Microsoft 365 subscriptions, which grew 16% to 78.4 million.\n\nLinkedIn revenue increased 9% and 8% in constant currency, ahead of expectations driven by slightly better-than-expected performance across all businesses. In our Talent Solutions business, bookings growth was again impacted by weaker hiring environment in key verticals.\n\nDynamics revenue grew 21% and 19% in constant currency driven by Dynamics 365, which grew 27% and 24% in constant currency with continued growth across all workloads. Bookings growth was impacted by weaker new business, primarily in Dynamics 365 ERP and CRM workloads.\n\nSegment gross margin dollars increased 14% and 12% in constant currency and gross margin percentage increased slightly year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 1 point primarily driven by improvement in Office 365.\n\nOperating expenses decreased 5% and 6% in constant currency, with 5 points of favorable impact from the prior year Q2 charge. Operating income increased 26% and 24% in constant currency.\n\nNext, the Intelligent Cloud segment. Revenue was $25.9 billion, increasing 20% and 19% in constant currency, ahead of expectations with better-than-expected results across all businesses.\n\nOverall, server products and cloud services revenue grew 22% and 20% in constant currency. Azure and other cloud services revenue grew 30% and 28% in constant currency, including 6 points of growth from AI services. Both AI and non-AI Azure services drove our outperformance.\n\nIn our per-user business, the enterprise mobility and security installed base grew 11% to over 268 million seats with continued impact from the growth trends in new standalone business noted earlier.\n\nIn our on-premises server business, revenue increased 3% and 2% in constant currency, ahead of expectations driven primarily by better-than-expected demand related to Windows Server 2012 end of support.\n\nEnterprise and partner services revenue increased 1% and was relatively unchanged in constant currency, with better-than-expected performance across Enterprise Support Services and Industry Solutions.\n\nSegment gross margin dollars increased 20% and 18% in constant currency and gross margin percentage was relatively unchanged. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 1 point driven by the improvement in Azure noted earlier, partially offset by the impact of scaling our AI infrastructure to meet growing demand. Operating expenses decreased 8% and 9% in constant currency, with 9 points of favorable impact from the prior year Q2 charge. Operating income grew 40% and 37% in constant currency.\n\nNow to More Personal Computing. Revenue was $16.9 billion, increasing 19% and 18% in constant currency, in line with expectations overall. Growth included 15 points of net impact from the Activision acquisition.\n\nWindows OEM revenue increased 11% year over year, ahead of expectations, driven by slightly better performance in higher monetizing consumer markets.\n\nWindows commercial products and cloud services revenue increased 9% and 7% in constant currency, below expectations primarily due to lower in-period revenue recognition from the mix of contracts. Annuity billings growth remains healthy.\n\nDevices revenue decreased 9% and 10% in constant currency, ahead of expectations due to stronger execution in the commercial segment.\n\nSearch and news advertising revenue ex-TAC increased 8% and 7% in constant currency, relatively in line with expectations, driven by higher search volume offset by negative impact from a third-party partnership.\n\nAnd in Gaming, revenue increased 49% and 48% in constant currency, with 44 points of net impact from the Activision acquisition. Total Gaming revenue was in line with expectations as stronger-than-expected performance from Activision was offset by the weaker-than-expected console market noted earlier. Xbox content and services revenue increased 61% and 60% in constant currency, driven by 55 points of net impact from the Activision acquisition. Xbox hardware revenue grew 3% and 1% in constant currency.\n\nSegment gross margin dollars increased 34% and 32% in constant currency, with 17 points of net impact from the Activision acquisition. Gross margin percentage increased roughly 6 points year-over-year driven by higher Devices gross margin and sales mix shift to higher margin businesses. Operating expenses increased 38% with 48 points from the Activision acquisition, partially offset by 6 points of favorable impact from the prior year Q2 charge. Operating income increased 29% and 26% in constant currency.\n\nNow back to total company results.\n\nCapital expenditures including finance leases were $11.5 billion, lower than expected due to delivery for a third-party capacity contract shifting from Q2 to Q3. Cash paid for P, P, and E was $9.7 billion. These data center investments support our cloud demand inclusive of needs to scale our AI infrastructure.\n\nCash flow from operations was $18.9 billion, up 69% driven by strong cloud billings and collections on a prior year comparable that was impacted by lower operating income. Free cash flow was $9.1 billion, up 86 percent year-over-year, reflecting the timing of cash paid for property and equipment.\n\nThis quarter, other income and expense was in line with expectations at negative $506 million driven by interest expense and net losses on investments, partially offset by interest income.\n\nOur effective tax rate was approximately 18%.\n\nAnd finally, we returned $8.4 billion to shareholders through dividends and share repurchases.\n\nNow, moving to our Q3 outlook, which unless specifically noted otherwise, is on a US dollar basis.\n\nFirst, FX. Based on current rates, we expect FX to increase total revenue and segment level revenue growth by less than one point, and we expect no impact to COGS and operating expense growth.\n\nIn commercial bookings, strong execution across our core annuity sales motions, including healthy renewals, along with long term Azure commitments should drive healthy growth on a growing expiry base.\n\nMicrosoft Cloud gross margin percentage should decrease roughly one point year-over-year. Excluding the impact from the accounting estimate change, Q3 cloud gross margin percentage will be relatively flat as improvement in Office 365 and Azure will be offset by sales mix shift to Azure as well as the impact of scaling our AI infrastructure to meet growing demand.\n\nWe expect capital expenditures to increase materially on a sequential basis driven by investments in our cloud and AI infrastructure and the slip of a delivery date from Q2 to Q3 from a third-party provider noted earlier. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.\n\nNext to segment guidance.\n\nIn Productivity and Business Processes, we expect revenue of $19.3 to $19.6 billion or growth between 10% and 12%.\n\nIn Office Commercial, revenue growth will again be driven by Office 365 with seat growth across customer segments and ARPU growth thru E5. We expect Office 365 revenue growth to be approximately 15% in constant currency. While it’s early days for Microsoft 365 Copilot, we’re excited by the adoption we’ve seen to date, and continue to expect revenue to grow over time. In our on-premises business, we expect revenue to decline in the low 20s.\n\nIn Office consumer, we expect revenue growth in the mid to high single digits, driven by Microsoft 365 subscriptions.\n\nFor LinkedIn, we expect revenue growth in the mid to high single digits driven by continued growth across all businesses.\n\nAnd in Dynamics, we expect revenue growth in the mid-teens driven by Dynamics 365.\n\nFor Intelligent Cloud we expect revenue of $26 to $26.3 billion or growth between 18% and 19%.\n\nRevenue will continue to be driven by Azure which, as a reminder, can have quarterly variability primarily from our per-user business and from in-period revenue recognition depending on the mix of contracts.\n\nIn Azure, we expect Q3 revenue growth in constant currency to remain stable to our stronger than expected Q2 result. Growth will be driven by our Azure consumption business with continued strong contribution from AI. Our per-user business should see benefit from Microsoft 365 suite momentum, though we expect continued moderation in seat growth rates given the size of the installed base.\n\nIn our on-premises server business, we expect revenue growth in the low to mid-single digits with continued hybrid demand, including licenses running in multi-cloud environments.\n\nAnd in Enterprise and partner services, revenue should decline approximately 10% on a high prior year comparable for Enterprise Support Services.\n\nIn More Personal Computing, we expect revenue of $14.7 to $15.1 billion US dollars or growth between 11% and 14%.\n\nWindows OEM revenue growth should be relatively flat as PC market unit volumes continue at pre-pandemic levels.\n\nIn Windows commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the mid-teens. As a reminder, our quarterly revenue growth can have variability primarily from in-period revenue recognition depending on the mix of contracts.\n\nIn Devices, revenue should decline in the low double digits as we continue to focus on our higher margin premium products.\n\nSearch and news advertising ex-TAC revenue growth should be in the mid to high single digits, about 8 points higher than overall Search and news advertising revenue, driven by continued volume strength.\n\nAnd in Gaming, we expect revenue growth in the low 40s, including approximately 45 points of net impact from the Activision acquisition. We expect Xbox content and services revenue growth in the low to mid-50s, driven by approximately 50 points of net impact from the Activision acquisition. Hardware revenue will decline year over year.\n\nNow back to company guidance.\n\nWe expect COGS between $18.6 to $18.8 billion US dollars, including approximately $700 million of amortization of acquired intangible assets from the Activision acquisition.\n\nWe expect operating expense of $15.8 to $15.9 billion US dollars, including approximately $300 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition.\n\nOther income and expense should be roughly negative $600 million as interest income will be more than offset by interest expense and other losses. As a reminder, we are required to recognize gains or losses on our equity investments, which can increase quarterly volatility.\n\nWe expect our Q3 effective tax rate to be in line with our full year rate, which we now expect to be approximately 18%.\n\nNow some additional thoughts on the full fiscal year.\n\nFirst, FX. Assuming current rates remain stable, we now expect FX to increase Q4 and full year revenue growth by less than one point. We continue to expect no meaningful impact to full year COGS or operating expense growth.\n\nSecond, Activision. For the full year FY24, we expect Activision to be accretive to operating income when excluding purchase accounting, integration and transaction-related costs.\n\nAt a total company level, we delivered strong results in H1 and demand for our Microsoft Cloud continues to drive the growth in our outlook for H2. Our commitment to scaling our cloud and AI investment is guided by customer demand and the substantial market opportunity. As we scale these investments, we remain focused on driving efficiencies across every layer of our tech stack and disciplined cost management across every team.\n\nTherefore, we expect full-year operating margins to be up 1 to 2 points year-over-year even as AI capital investments drive COGS growth. This operating margin expansion includes the impact from the Activision acquisition and the headwind from the change in useful lives last year.\n\nIn closing, we are focused on execution so our customers can realize the benefits of AI productivity gains as we invest to lead this AI platform wave.\n\nWith that, let’s go to Q&A, Brett."
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      "content": "DOCUMENT: Microsoft FY24 Q3 earnings call (2024-04-25)\nDOCUMENT ID: msft_2024_q3\nSOURCE URL: https://www.microsoft.com/en-us/investor/events/fy-2024/earnings-fy-2024-q3\nSECTION: FY24 Q3 full transcript, including Q&A\n\nBRETT IVERSEN:\n\nGood afternoon and thank you for joining us today. On the call with me are Satya Nadella, chairman and chief executive officer, Amy Hood, chief financial officer, Alice Jolla, chief accounting officer, and Keith Dolliver, corporate secretary and deputy general counsel.\n\nOn 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.\n\nOn 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 third quarter performance in addition to the impact these items and events have on the financial results.\n\nAll 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 rate only.\n\nWe 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.\n\nDuring 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.\n\nAnd with that, I’ll turn the call over to Satya.\n\nSATYA NADELLA: Thank you, Brett.\n\nIt was a record third quarter, powered by the continued strength of the Microsoft Cloud, which surpassed $35 billion in revenue, up 23%.\n\nMicrosoft Copilot and Copilot stack—spanning everyday productivity, business process, and developer services, to models, data, and infrastructure—are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry.\n\nNow, I’ll highlight examples, walking up the stack, starting with AI infrastructure.\n\nAzure again took share, as customers use our platforms and tools to build their own AI solutions.\n\nWe offer the most diverse selection of AI accelerators, including the latest from NVIDIA, AMD, as well as our own first-party silicon.\n\nOur AI innovation continues to build on our strategic partnership with OpenAI. More than 65% of the Fortune 500 now use Azure OpenAI Service.\n\nWe also continue to innovate and partner broadly to bring customers the best selection of frontier models and open source models, LLMs and SLMs.\n\nWith Phi-3, which we announced earlier this week, we offer the most capable and cost-effective SLM available. It’s already being trialed by companies like CallMiner, LTIMindtree, PwC, and TCS.\n\nOur “Models as a Service” offering makes it easy for developers to use LLMs and SLMs without having to manage any underlying infrastructure.\n\nHundreds of paid customers, from Accenture and EY, to Schneider Electric, are using it to take advantage of API access to third-party models, including as of this quarter the latest from Cohere, Meta, and Mistral.\n\nAnd, as part of a partnership announced last week, G42 will run its AI applications and services on our cloud.\n\nAll-up, the number of Azure AI customers continues to grow—and average spend continues to increase.\n\nWe also saw an acceleration of revenue from migrations to Azure.\n\nAzure Arc continues to help customers like DICK’S Sporting Goods and World Bank streamline their cloud migrations.\n\nArc now has 33,000 customers, up over 2X year-over-year.\n\nAnd, we are the hyperscale platform of choice for SAP and Oracle workloads, with Conduent and Medline moving their on-premises Oracle estates to Azure, and Kyndryl and L’Oreal migrating their SAP workloads to Azure.\n\nOverall, we are seeing an acceleration in the number of large Azure deals from leaders across industries, including billion-dollar-plus multi-year commitments announced this month from Cloud Software Group and The Coca-Cola Company.\n\nThe number of 100 million dollar-plus Azure deals increased over 80% year-over-year, while the number of 10 million dollar-plus deals more than doubled.\n\nNow, on to data and analytics.\n\nOur Microsoft Intelligent Data Platform provides customers with the broadest capabilities spanning databases, analytics, business intelligence, governance, and AI.\n\nOver half of our Azure AI customers also use our data and analytics tools.\n\nCustomers are building intelligent applications running on Azure PostgreSQL and Cosmos DB, with deep integrations with Azure AI.\n\nTomTom is a great example. They’ve used Cosmos DB, along with Azure OpenAI Service to build their own immersive in-car infotainment system.\n\nWe’re also encouraged by our momentum with our next generation analytics platform Microsoft Fabric.\n\nFabric now has over 11,000 paid customers, including leaders in every industry, from ABB, EDP, and Energy Transfer, to Equinor, Foot Locker, Itochu, and Lumen, and we’re seeing increased usage intensity.\n\nFabric is seamlessly integrated with Azure AI Studio, meaning customers can run models against enterprise data that is consolidated in Fabric’s multi-cloud data lake, OneLake.\n\nAnd, Power BI, which is also natively integrated with Fabric, provides business users with AI-powered insights. We now have over 350,000 paid customers.\n\nNow, on to developers.\n\nGitHub Copilot is bending the productivity curve for developers.\n\nWe now have 1.8 million paid subscribers, with growth accelerating to over 35% quarter-over-quarter, and continue to see increased adoption from businesses in every industry, including Itaú, Lufthansa Systems, Nokia, Pinterest, and Volvo Cars.\n\nCopilot is driving growth across the broader GitHub platform too. AT&T, Citigroup, and Honeywell, all increased their overall GitHub usage after seeing productivity and code quality increases with Copilot.\n\nAll-up, more than 90% of the Fortune 100 are now GitHub customers. And revenue accelerated over 45% year-over-year.\n\nAnyone can be a developer with new AI-powered features across our low-code/no-code tools, which make it easier to build an app, automate workflows, or create a copilot using natural language.\n\n30,000 customers across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter-over-quarter.\n\nCineplex, for example, built a copilot for customer service agents, reducing query handling time from as much as 15 minutes to 30 seconds.\n\nAll up, over 330,000 organizations—including over half of the Fortune 100—have used AI-powered capabilities in Power Platform.\n\nAnd Power Apps now has over 25 million monthly active users, up over 40% year-over-year.\n\nNow, on to the future of work.\n\nWe’re seeing AI democratize expertise across the workforce.\n\nWhat inventory turns are to efficiency of supply chains, knowledge turns —the creation and diffusion of knowledge—are to the productivity of an organization.\n\nAnd Copilot for Microsoft 365 is helping increase knowledge turns.\n\nThat’s having a cascading effect, changing work, work artifacts, and workflows, and driving better decision-making, collaboration, and efficiency.\n\nThis quarter, we made Copilot available to organizations of all types and sizes—from enterprises to small businesses.\n\nNearly 60% of the Fortune 500 now use Copilot, and we’ve seen accelerated adoption across industries and geographies, with companies like Amgen, BP, Cognizant, Koch Industries, Moody’s, Novo Nordisk, NVIDIA, and Tech Mahindra purchasing over 10,000 seats.\n\nWe’re also seeing increased usage intensity from early adopters, including a nearly 50% increase in the number of Copilot-assisted interactions per user in Teams, bridging group activity with business process workflows and enterprise knowledge.\n\nAnd we’re not stopping there.\n\nWe’re accelerating our innovation, adding over 150 Copilot capabilities since the start of the year.\n\nWith Copilot in Dynamics 365, we’re helping businesses transform every role and business function, as we take share with our AI-powered apps across all categories.\n\nThis quarter, we made our Copilot for Service and Copilot for Sales broadly available, helping customer service agents and sellers at companies like Land O’Lakes, Northern Trust, Rockwell Automation, and Toyota Group generate role-specific insights and recommendations from across Dynamics 365 and Microsoft 365, as well as third-party platforms like Salesforce, ServiceNow, and Zendesk.\n\nAnd with our Copilot for Finance, we’re drawing context from Dynamics, as well as ERP systems like SAP, to reduce labor-intensive processes like collections and contract and invoice capture for companies like Dentsu and IDC.\n\nISVs are also building their own Copilot integrations. For example, new integrations between Adobe Experience Cloud and Copilot will help marketers access campaign insights in the flow of their work.\n\nWhen it comes to devices, Copilot in Windows is now available on nearly 225 million Windows 10 and Windows 11 PCs, up 2X quarter-over-quarter.\n\nWith Copilot, we have an opportunity to create an entirely new category of devices purpose-built for this new generation of AI.\n\nAll of our largest OEM partners have announced AI PCs in recent months. And this quarter, we introduced new Surfaces, which include integrated NPUs to power on-device AI experiences like auto framing and live captions.\n\nAnd there’s much more to come.\n\nIn just a few weeks, we’ll hold a special event to talk about our AI vision across Windows and devices.\n\nWhen it comes to Teams, we once again saw year-over-year usage growth.\n\nWe are rolling out a new version—which is up to two times faster while using 50% less memory—to all customers.\n\nWe surpassed one million Teams Rooms for the first time, as we continue to make hybrid meetings better with new AI-powered features like automatic camera switching and speaker recognition.\n\nAnd Teams Phone continues to be the market leader in cloud calling, now with over 20 million PSTN users, up nearly 30% year-over-year.\n\nAll this innovation is driving growth across Microsoft 365.\n\nCompanies across the private and public sector, including Amadeus, BlackRock, Chevron, Ecolab, Kimberly-Clark, all chose our premium E5 offerings this quarter for advanced security, compliance, voice, and analytics.\n\nNow, on to industry and cross-industry clouds.\n\nWe’re also bringing AI-powered transformation to every industry.\n\nIn healthcare, DAX Copilot is being used by more than 200 healthcare organizations, including Providence, Stanford Health Care, and WellSpan Health.\n\nAnd in manufacturing, this week at Hannover Messe, customers like BMW, Siemens, and Volvo Penta shared how they’re using our cloud and AI solutions to transform factory operations.\\\n\nNow, on to security.\n\nSecurity underpins every layer of our tech stack, and it’s our number one priority.\n\nWe launched our Secure Future Initiative last fall for this reason, bringing together every part of the company to advance cybersecurity protection, and we are doubling down on this very important work, putting security above all else—before all other features and investments.\n\nWe are focused on making continuous progress across the six pillars of this initiative as we protect tenants and isolate production systems, protect identities and secrets, protect networks, protect engineering systems, monitor and detect threats, and accelerate response and remediation.\n\nWe remain committed to sharing our learnings, tools, and innovation with customers.\n\nA great example is Copilot for Security, which we made generally available earlier this month, bringing together LLMs with domain-specific skills informed by our threat intelligence and 78 trillion daily security signals, to provide security teams with actionable insights.\n\nNow, let me talk about our consumer businesses, starting with LinkedIn.\n\nWe continue to combine our unique data with this new generation of AI to transform the way members learn, sell, and get hired.\n\nFeatures like LinkedIn AI-assisted messages are seeing a 40% higher acceptance rate and are accepted over 10% faster by job seekers, saving hirers time and making it easier to connect them to candidates.\n\nOur AI-powered collaborative articles, which have reached over 12 million contributions, are helping increase engagement on the platform, which reached a new record this quarter.\n\nNew AI features are also helping accelerate LinkedIn Premium growth, with revenue up 29% year-over-year.\n\nAnd we are also seeing strength across our other businesses, with hiring taking share for the seventh consecutive quarter.\n\nNow, on to Search, Advertising and News.\n\nWe once again took share across Bing and Edge, as we continue to apply this new generation of AI to transform how people search and browse.\n\nBing reached over 140 million daily active users.\n\nAnd, we are particularly encouraged by our momentum in mobile. Our free Copilot apps on iOS and Android saw a surge in downloads after our Super Bowl ad and are among the highest rated in this category.\n\nWe also rolled out Copilot to our ad platform this quarter, helping marketers use AI to generate recommendations for product images, headlines, and descriptions.\n\nNow, on to gaming.\n\nWe are committed to meeting players where they are by bringing great games to more people on more devices.\n\nWe set third quarter records for game streaming hours, console usage, and monthly active devices.\n\nAnd last month we added our first Activision Blizzard title, Diablo IV, to our Game Pass service. Subscribers played over 10 million hours within the first 10 days, making it one of our biggest first party Game Pass launches ever.\n\nWe’ve also been encouraged by the ongoing success of Call of Duty’s Modern Warfare III, which is attracting new gamers and retaining franchise loyalists.\n\nFinally, we’re expanding our games to new platforms, bringing four of our fan-favorite titles to Nintendo Switch and Sony PlayStation for the first time.\n\nIn fact, earlier this month, we had 7 games among the top 25 on the PlayStation store, more than any other publisher.\n\nIn closing, I am energized about our opportunity ahead, as we innovate to help people and businesses thrive in this new era.\n\nWith that, let me turn it over to Amy.\n\nAMY HOOD:\n\nThank you, Satya, and good afternoon everyone. Our third quarter revenue was $61.9 billion, up 17% and earnings per share was $2.94, up 20%.\n\nResults exceeded expectations and we delivered another quarter of double-digit top and bottom-line growth with continued share gains across many of our businesses. In our commercial business, bookings increased 29% and 31% in constant currency, significantly ahead of expectations driven by Azure commitments with an increase in average deal size and deal length, as well as strong execution across our core annuity sales motions.\n\nIn Microsoft 365, suite strength contributed to ARPU expansion for our Office Commercial business, although new business growth continued to moderate for standalone products sold outside the Microsoft 365 suite.\n\nCommercial remaining performance obligation increased 20% and 21% in constant currency to $235 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 20% year-over-year. The remaining portion, recognized beyond the next 12 months, increased 21%. And this quarter, our annuity mix increased to 97%.\n\nIn our consumer business, PC market demand was slightly better than we expected, benefiting Windows OEM, while advertising spend landed relatively in line with our expectations. In Gaming, we also saw better-than-expected performance of Activision titles, benefiting Xbox content and services.\n\nAt a company level, Activision contributed a net impact of approximately 4 points to revenue growth, was a 2 point drag on operating income growth, and had a negative 4 cent impact to earnings per share. A reminder that this net impact includes adjusting for the movement of Activision content from our prior relationship as a third-party partner to first-party, and also includes $935 million from purchase accounting adjustments, integration, and transaction-related costs.\n\nFX did not have a significant impact on our results and was roughly in line with our expectations on total company revenue, segment level revenue, COGS, and operating expense growth.\n\nMicrosoft Cloud gross margin percentage decreased slightly year-over-year to 72%, a bit better than expected. Excluding the impact of the change in accounting estimate for useful lives, gross margin percentage increased slightly driven by improvement in Azure and Office 365, even with the impact of scaling our AI infrastructure, partially offset by sales mix shift to Azure.\n\nCompany gross margin dollars increased 18% and gross margin percentage increased slightly year-over-year to 70%. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 1 point, even with the impact from purchase accounting adjustments, integration, and transaction-related costs from the Activision acquisition. Growth was driven by the improvement in Azure and Office 365 just mentioned as well as sales mix shift to higher margin businesses.\n\nOperating expenses increased 10% with 9 points from the Activision acquisition.\n\nAt a total company level, headcount at the end of March was 1% lower than a year ago.\n\nOperating income increased 23% and operating margins increased roughly 2 points year-over-year to 45%. Excluding the impact of the change in accounting estimate, operating margins increased roughly 3 points driven by the higher gross margin noted earlier and improved operating leverage through continued cost discipline.\n\nNow to our segment results.\n\nRevenue from Productivity and Business Processes was $19.6 billion and grew 12% and 11% in constant currency, in line with expectations.\n\nOffice commercial revenue grew 13% and 12% in constant currency. Office 365 commercial revenue increased 15%, in line with expectations, driven by healthy renewal execution, ARPU growth from continued E5 momentum, and early Copilot for Microsoft 365 progress. Paid Office 365 commercial seats grew 8% year-over-year with installed base expansion across all customer segments. Seat growth was again driven by our small and medium business and frontline worker offerings, although growth continued to moderate in SMB.\n\nOffice commercial licensing declined 20% and 18% in constant currency, with continued customer shift to cloud offerings.\n\nOffice consumer revenue increased 4%, slightly below expectations. Microsoft 365 subscriptions grew 14% to 80.8 million.\n\nLinkedIn revenue increased 10% and 9% in constant currency, ahead of expectations driven by slightly better-than-expected performance in our Premium Subscriptions and Talent Solutions businesses. However, in Talent Solutions, bookings growth continues to be impacted by the weaker hiring environment in key verticals.\n\nDynamics revenue grew 19% and 17% in constant currency, ahead of expectations. Growth was driven by Dynamics 365, which grew 23% and 22% in constant currency with continued growth across all workloads and better-than-expected new business, though bookings growth remains moderated.\n\nSegment gross margin dollars increased 11% and gross margin percentage decreased slightly year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly driven by improvement in Office 365.\n\nOperating expenses increased 1%, and operating income increased 17% and 16% in constant currency.\n\nNext, the Intelligent Cloud segment. Revenue was $26.7 billion, increasing 21%, ahead of expectations with better-than-expected results across all businesses.\n\nOverall, server products and cloud services revenue grew 24%. Azure and other cloud services revenue grew 31%, ahead of expectations, while our AI services contributed 7 points of growth as expected. In the non-AI portion of our consumption business, we saw greater-than-expected demand broadly across industries and customer segments as well as some benefit from a greater-than-expected mix of contracts with higher in-period recognition.\n\nIn our per-user business, the enterprise mobility and security installed base grew 10% to over 274 million seats with continued impact from the growth trends in new standalone business noted earlier.\n\nIn our on-premises server business, revenue increased 6%, ahead of expectations driven by better-than-expected renewal strength, particularly for contracts with higher in-period revenue recognition.\n\nEnterprise and partner services revenue decreased 9% on a strong prior year comparable for Enterprise Support Services.\n\nSegment gross margin dollars increased 20% and gross margin percentage decreased slightly year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly primarily driven by the improvement in Azure noted earlier, even with the impact of scaling our AI infrastructure, partially offset by sales mix shift to Azure. Operating expenses increased 1% and operating income grew 32%.\n\nNow to More Personal Computing. Revenue was $15.6 billion, increasing 17%, with 15 points of net impact from the Activision acquisition. Results were above expectations driven by better-than-expected performance in Gaming and Windows OEM.\n\nWindows OEM revenue increased 11% year-over-year, ahead of expectations primarily driven by the slightly better PC market noted earlier as well as mix shift to higher monetizing markets.\n\nWindows commercial products and cloud services revenue increased 13% and 12% in constant currency, below expectations with impact from the growth trends in new standalone business noted earlier as well as lower in-period revenue recognition from the mix of contracts.\n\nDevices revenue decreased 17% and 16% in constant currency as we remain focused on our higher margin premium products. Overall Surface demand was slightly lower than expected.\n\nSearch and news advertising revenue ex-TAC increased 12%, ahead of expectations with continued volume growth and increased engagement on Bing and Edge.\n\nAnd in Gaming, revenue increased 51% and 50% in constant currency, with 55 points of net impact from the Activision acquisition. Results were ahead of expectations primarily driven by Call of Duty. Xbox content and services revenue increased 62% and 61% in constant currency, with 61 points of net impact from the Activision acquisition. Xbox hardware revenue decreased 31% and 30% in constant currency.\n\nSegment gross margin dollars increased 27% and 26% in constant currency, with 13 points of net impact from the Activision acquisition. Gross margin percentage increased roughly 4 points year-over-year primarily driven by sales mix shift to higher margin businesses.\n\nOperating expenses increased 41% with 43 points from the Activision acquisition. Operating income increased 16% and 15% in constant currency.\n\nNow back to total company results.\n\nCapital expenditures including finance leases were $14 billion to support our cloud demand inclusive of the need to scale our AI infrastructure. Cash paid for P, P, and E was $11 billion.\n\nCash flow from operations was $31.9 billion, up 31% driven by strong cloud billings and collections. Free cash flow was $21 billion, up 18% year-over-year, reflecting higher capital expenditures to support our cloud and AI offerings.\n\nThis quarter, other income and expense was negative $854 million, lower than anticipated driven by losses on investments accounted for under the equity method.\n\nOur effective tax rate was approximately 18%.\n\nAnd finally, we returned $8.4 billion to shareholders through dividends and share repurchases.\n\nNow, moving to our Q4 outlook, which unless specifically noted otherwise, is on a US dollar basis.\n\nFirst, FX. Based on current rates which reflect the recent strengthening of the US dollar, we now expect FX to decrease total revenue and segment level revenue growth by less than one point. When compared to our January guide for Q4 FX, this is a decrease to total revenue of roughly $700 million. We expect FX to decrease COGS growth by approximately one point and operating expense growth by less than one point.\n\nIn commercial bookings, we expect solid growth on a relatively flat expiry base driven by continued strong commercial sales execution. As a reminder, larger long-term Azure contracts, which are more unpredictable in their timing, can drive increased quarterly volatility in our bookings growth rate.\n\nMicrosoft Cloud gross margin percentage should decrease roughly two points year-over-year. Excluding the impact from the change in accounting estimate, Q4 cloud gross margin percentage will be down slightly as improvement in Azure, inclusive of scaling our AI infrastructure, will be offset by sales mix shift to Azure.\n\nWe expect capital expenditures to increase materially on a sequential basis driven by cloud and AI infrastructure investments. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout and the timing of finance leases. We continue to bring capacity online as we scale our AI investments with growing demand. Currently, near-term AI demand is a bit higher than our available capacity.\n\nNext to segment guidance.\n\nIn Productivity and Business Processes, we expect revenue to grow between 9% and 11% in constant currency, or $19.9 and $20.2 billion.\n\nIn Office Commercial, revenue growth will again be driven by Office 365 with seat growth across customer segments and ARPU growth primarily through E5. We expect Office 365 revenue growth to be approximately 14% in constant currency. We continue to progress with adoption of Copilot for Microsoft 365 and remain excited for the long-term growth opportunity. In our on-premises business, we expect revenue to decline in the mid to high teens.\n\nIn Office consumer, we expect revenue growth in the low to mid-single digits, driven by Microsoft 365 subscriptions.\n\nFor LinkedIn, we expect revenue growth in the mid to high single digits driven by continued growth across all businesses.\n\nAnd in Dynamics, we expect revenue growth in the low to mid-teens driven by Dynamics 365.\n\nFor both LinkedIn and Dynamics, the continued bookings growth moderation noted earlier is a headwind to Q4 revenue growth.\n\nFor Intelligent Cloud we expect revenue to grow between 19% and 20% in constant currency, or $28.4 to $28.7 billion.\n\nRevenue will continue to be driven by Azure which, as a reminder, can have quarterly variability primarily from our per-user business and in-period revenue recognition depending on the mix of contracts.\n\nIn Azure, we expect Q4 revenue growth to be 30% to 31% in constant currency, or similar to our stronger-than-expected Q3 result. Growth will be driven by our Azure consumption business and continued contribution from AI with some impact from the AI capacity availability noted earlier. Our per-user business should see benefit from Microsoft 365 suite momentum, though we expect continued moderation in seat growth rates given the size of the installed base.\n\nIn our on-premises server business, we expect revenue growth in the low to mid-single digits with continued hybrid demand, including licenses running in multi-cloud environments.\n\nAnd in Enterprise and partner services, revenue should decline in the mid to high single digits on a high prior year comparable for Enterprise Support Services.\n\nIn More Personal Computing, we expect revenue to grow between 10% and 13% in constant currency, or $15.2 to $15.6 billion.\n\nWindows OEM revenue growth should be in the low to mid-single digits as PC market unit volumes continue at pre-pandemic levels.\n\nIn Windows commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the mid-single digits. As a reminder, our quarterly revenue growth can have variability primarily from in-period revenue recognition depending on the mix of contracts.\n\nIn Devices, revenue should decline in the mid-teens as we continue to focus on our higher margin premium products.\n\nSearch and news advertising ex-TAC revenue growth should be in the low to mid-teens driven by continued volume strength. This will be higher than overall Search and news advertising revenue growth, which we expect to be relatively flat.\n\nAnd in Gaming, we expect revenue growth in the low to mid-40s, including approximately 50 points of net impact from the Activision acquisition. We expect Xbox content and services revenue growth in the high 50s, driven by approximately 60 points of net impact from the Activision acquisition. Hardware revenue will decline again year-over-year.\n\nNow back to company guidance.\n\nWe expect COGS between $19.6 to $19.8 billion, including approximately $700 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition.\n\nWe expect operating expense of $17.15 to $17.25 billion, including approximately $300 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition.\n\nTherefore, we now expect full-year FY24 operating margins to be up over 2 points year-over-year even with our cloud and AI investments, the impact from the Activision acquisition, and the headwind from the change in useful lives last year. This operating margin expansion reflects the hard work across every team to drive efficiencies and maintain disciplined cost management knowing we will continue to grow our cloud and AI investments next year.\n\nOther income and expense should be roughly negative $850 million as interest income will be more than offset by interest expense and losses on investments accounted for under the equity method. As a reminder, we are required to recognize gains or losses on our equity investments, which can increase quarterly volatility.\n\nWe expect our Q4 effective tax rate to be approximately 18%.\n\nNow I’d like to share some closing thoughts as we look to the next fiscal year.\n\nWe continue to focus on building businesses that create meaningful value for our customers and therefore significant growth opportunities for years to come. In FY25, that focus and execution should again lead to double-digit revenue and operating income growth.\n\nTo scale to meet the growing demand signal for our cloud and AI products, we expect FY25 capital expenditures to be higher than FY24. These expenditures over the course of the next year are dependent on demand signals and adoption of our services, so we will manage that signal thru the year. We will also continue to prioritize operating leverage and therefore, we expect FY25 operating margins to be down only about one point year-over-year, even with our significant cloud and AI investments as well as a full year of impact from the Activision acquisition.\n\nWe are leading the AI platform wave and are committed to bringing that value to our global customers as we enter the final quarter of our fiscal year.\n\nWith that, let’s go to Q&A. Brett.\n\nBRETT IVERSEN: Thanks, Amy. We’ll now move over to Q&A. Out of respect for others on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions?\n\n(Operator Direction.)\n\nKEITH WEISS, Morgan Stanley: Thank you guys for taking the question, and congratulations on a fantastic quarter.\n\nA lot of excitement in the marketplace around generative AI and the potential of these technologies, but there’s also a lot of investment going on behind them. It looks like Microsoft is on track to ramp Capex over 50% year on year this year to over $50 billion. And there’s media speculation of more spending ahead, with some reports talking about $100 billion datacenter.\n\nObviously, investments are coming well ahead of the revenue contribution, but what I was hoping for is that you could give us some color on how you use the management team to try to quantify the potential opportunities that underlie these investments, because they are getting very big, and maybe if you give us some hints on whether there’s any truth to the potential of $100 billion datacenter out there. Thank you so much.\n\n:SATYA NADELLA: Thank you, Keith, for the question. Let me start, and then, Amy, you could add.\n\nAt a high level, the way we, as a management team, talk about it is there are two sides to this. There is training and there’s inference. Given that we want to be a leader in this big generational shift and paradigm shift in technology, that’s on the training side. We want to be able to allocate the capital required to essentially be training these large foundation models and stay on the leadership position there. And we’ve done that successfully all the way today, and you’ve seen it flow through our P&L. And you can continue to see that, going forward.\n\nThen, Amy referenced what we also do on the inference side, which is, one, we first innovate and build products. And, of course, we have an infrastructure business that’s also dependent on a lot of ISVs building products that run on our infrastructure. And it’s all going to be demand driven. In other words, we track very closely what’s happening with inference demand. And that’s something that we’ll manage, as Amy said in her remarks, very, very closely.\n\nAnd obviously, we’ve been doing this, quite frankly, Keith, for now, multiple years. This is not the quarter. I realize in the news, it’s a lot more in the quarter nowadays, but if you look at it, we have been doing what is essentially capital allocation to be a leader in AI for multiple years now. And we plan to sort of essentially keep taking that forward.\n\nAMY HOOD: And Keith, I do think it’s important to really think about our planning cycles. And we do talk about spending sequentially higher, and we look forward to being able to continue to build out the infrastructure needed to meet the demand.\n\nAnother thing that you really asked in the beginning was the opportunity and the size of that. And I think in some ways, it’s important to think about every business process that can be impacted and the opportunity that’s represented by every business process.\n\nAnd so, when you think of it that way, I think the opportunity is significant. The opportunity to power that next wave of, quote unquote, cloud infrastructure is important. It’s important because we’ve been the leader through this decade of the cloud transition, and it’s important for us to confidently invest to do that in the second wave, building on our success in the first.\n\nAnd I think that’s really the best way to think about how we’ll spend, is the same way we approached it for a decade. Watch the signal, invest to be a leader in the technical foundation, and then execute consistently to add value to customers. The opportunity is represented by the amount of value we add, and I look forward to being able to continue to deliver that.\n\nKEITH WEISS: Excellent. Thank you so much.\n\nBRETT IVERSEN: Thanks, Keith. Operator, next question, please.\n\n(Operator Direction.)\n\nBRENT THILL, Jefferies: Satya, how would you characterize the demand environment? On one hand, you have bookings in Azure both accelerating year over year in the quarter. But we’re seeing a lot of future concern hesitation from other vendors we all cover. I think everyone love to get your sense of budget health for customers this year.\n\nSATYA NADELLA: It’s a great question, Brent. There are a couple of things I would say.\n\nOn the Azure side, which I think is what you specifically asked, we feel very good about the – we’re fundamentally a share taker there because if you look at it from our perspective at this point, Azure has become a port of call for pretty much anybody who is doing any AI project. And so, that’s sort of been a significant help for us in terms of acquiring even new customers. Some of the logos I even referenced in my remarks are new Azure customers. That’s one.\n\nThe second thing that we are also seeing is AI just doesn’t sit on its own. AI projects obviously start with calls to AI models, but they also use a vector database. In fact, Azure Search, which is really used by even ChatGPT, is one of the fastest growing services for us. We have Fabric integration to Azure AI, and so, Cosmos DB integration. The data tier, the dev tools is another place where we are seeing great attraction. We are seeing adjacent services in Azure that get attached to AI.\n\nAnd lastly, I would say migrations to Azure as well. This is not just all an AI story. We are also looking at customers. I mean, this is something that we have talked about in the past, which is there’s always an optimization cycle, but there’s also, as people optimize, they spend money on new project starts, which will grow, and then they’ll optimize. It’s a continuous side of it.\n\nThese are the three trends that are playing out on Azure, in terms of what, at least, we see on demand side.\n\nBRENT THILL: Thank you.\n\nBRETT IVERSEN: Thanks, Brent. Operator, next question, please.\n\n(Operator Direction.)\n\nMARK MOERDLER, Bernstein: Thank you very much for taking my question, and congratulations on the quarter and the guidance. I want to follow up on the AI, obviously. We’re seeing companies shifting their IT spending to invest in and learn about AI, rather than receiving additional budgets for AI. At some point, for AI to be transformative, as everyone expects, it needs to be accretive to spending.\n\nSatya, when do you believe AI will hit the maturity level will be net increase to IT or outside of IT spending? And what would be the leading indicators of that maturation?\n\nAnd Amy, am I characterizing this correctly as it relates to Azure? Some projects are being delayed so that the spending could be shifted to from core Azure toward Azure AI. Thank you.\n\nSATYA NADELLA: Yeah, great set of questions, Mark. Let me just start by saying a good place to start is to watch what’s happening in terms of standard issues for software teams, right? I mean, if you think about it, they bought tools in the past. Now, you basically buy tools plus Copilot. You could even say that this is characterized as perhaps shift of what is OpEx dollars into effectively tool spend, because it gives operating leverage to all of the OpEx dollars you’re spending today.\n\nThat’s really a good example of, I think, what’s going to happen across the board. We see that in customer service. We see that in sales. We see that in marketing, anywhere there is operations. That’s why I described it as knowledge turns. You can even think of it as lean for knowledge work, because it just reduces waste, increases speed and customer value.\n\nAnd so, one of the interesting rate limiters here is culture change inside of organizations. When I say “culture change,” that means process change. And Amy referenced this even in her answer to the first question, because at the end of the day, companies will have to take a process, simplify the process, automate the process, and apply these solutions. And so, that requires not just technology, but in fact, companies to go do the hard work of culturally changing how they adopt technology to drive that operating leverage. And this is where we’re going to see firm level performance differences.\n\nOne of the things we see is any customer who is working closely with us, deploying it, internally at Microsoft, we see it, right? We’re also taking our own medicine to apply this across every process. And we know that this is not just about technology. It’s about being able to have the methodology that goes with it.\n\nAnd so, we see it in software development. We see it in customer service. We’re seeing it even in the horizontal use of Copilot today, where every day, people are discovering new workflows that they can optimize. And so, that’s like the PC when it became standard issue in early ‘90s. That’s the closest analogy I can come up with.\n\nAnd so, yes, it’ll take time for it to percolate through the economy, but this is faster diffusion, faster rate of adoption than anything we have seen in the past, as evidenced even by Copilot. It’s faster than any suite we have sold in the past, but it is going to require workflow and process change.\n\nAMY HOOD: And, Mark, maybe to answer your question on are we seeing project starts transition from maybe something that was core consumption to an AI project, in our results, that’s not what we saw. We saw more what Satya was speaking to earlier, which is you see maybe growth in migrations again. You’re seeing work in the data space again, and you’re seeing AI project starts.\n\nAnd I think that’s why maybe you see our growth be different, of course, than you’d see IT budget spend. It’s because it’s a share, I think, improvement, plus also really focusing on what Satya said, it’s about spending maybe in other areas that we don’t traditionally think of as being in the IT budget spend under a CIO. It’s spend being done by the head of customer service. It’s been being done by the head of marketing. And I do think that will be important as we think about the opportunity ahead.\n\nMARK MOERDLER: Incredibly helpful. Thank you both.\n\nBRETT IVERSEN: Thanks, Mark. Operator, next question, please.\n\n(Operator Direction.)\n\nKARL KEIRSTEAD, UBS: Thank you. And Satya and Amy, congrats on these outstanding Azure results.\n\nI’d love to hone in a little bit on the seven point lift to Azure growth from AI. Outstanding number, but it’s leveling off a little bit from six points in December. I’m wondering if you could unpack that a little bit. To what extent did the capacity issues that you, Amy, highlighted on the call impact that number? Is there any seasonality – I wouldn’t think so – or any other factor that can swing around that number that you’d advise us to keep in mind? Thanks so much.\n\nAMY HOOD: Thanks, Karl. There’s not a seasonality to the numbers. You’re absolutely right to start there, and it’s a good question.\n\nThe way to think about it is a bit more by it is how much capacity we have in play and how much capacity that we have to sell on the inferencing side, in particular. And so, that is partially why you see the capital investment in the shape that it is, is because right this minute, we do have demand that exceeds our supply by a bit. It is fair to say that that could have been an impact on the number for the quarter and does impact a little bit the number in Q4\n\nKARL KEIRSTEAD: Okay, helpful. Thank you.\n\nBRETT IVERSEN: Thanks, Karl. Operator, next question, please.\n\n(Operator Direction.)\n\nRAIMO LENSCHOW, Barclays: Thank you. I have more a conceptual question for Satya. And if you think about copilots and what you’re doing there, you’re kind of impacting a lot of different businesses, and the opportunities seem very broad based.\n\nHow do you think this will play out in the industry between you guys offering certain copilots versus the rest of the industry following, and everyone seems to have a copilot now and seems to be talking about it? How does that impact what you want to do, your partner strategy, going forward? Thank you.\n\nSATYA NADELLA: Yeah, it’s a great question. The way we see it play out is, if you think about it, the way Office was used broadly for knowledge work was in the context of business processes. It’s not like when people do knowledge work, they’re not doing knowledge work, they’re doing knowledge work in support of making progress in the context of sales enablement, customer service, revenue ops, supply chain or what have you. That’s the first thing to know. And they do it inside of e-mail. They do it inside of Teams. They do it inside of Excel, PowerPoint, Word and what have you.\n\nNow we have the ability to essentially bridge the work and the work artifacts inside of these knowledge worker tools, with the work flow, and the business process and the business process data. When we think about our copilot, our copilot has that ability to integrate, whether it’s with ServiceNow, where it has the ability to integrate with SAP, with Salesforce, with obviously, Dynamics. That’s what we are seeing.\n\nIn fact, you’ll hear us talk a lot about it at our developer conference, which is the extensibility. And Copilot Studio is really off to the races in terms of the product that most people are excited, because one of the things in the enterprise is you want to ground your copilot with enterprise data, which is in all of these SaaS applications. And Copilot Studio is the tool to use it to make that happen.\n\nAnd so, that’s what we are seeing, which is we are building a copilot, which also happens to be an orchestrator of all these other copilots, which, to us, appear as extensions. And net-net, what happens is some of these knowledge worker tools that people have used all the time, because when you think about Teams, when you’re having a meeting, you’re not doing a random meeting. The meeting is in the context of some business process. It could be a supply chain meeting where you’re trying to understand which suppliers to bet on or what terms to do. And so, now you can access all of that data right in the Teams context.\n\nThat’s, I think, what’s exciting for us, having built all these horizontal tools, which I would say were underappreciated for the amount of work, how people use those tools to make progress on business process. But we now get to bridge that between the business applications and knowledge worker tools more horizontally.\n\nRAIMO LENSCHOW: Okay, perfect. Thank you.\n\nBRETT IVERSEN: Thanks, Raimo. Operator, next question, please.\n\n(Operator Direction.)\n\nMICHAEL TURRIN, Wells Fargo: Great, I appreciate you taking the question. I wanted to go back to Azure. You’ve been hinting at stabilization there for the past couple of quarters, but still very good to see the bounce. Maybe you can expand on just what the commercial bookings number, appreciating the variability there, does in terms of visibility. And any characterization you can give us around what you’re seeing in areas like cost optimization and core workload growth coming back is just helpful context for us in unpacking the numbers. Thank you.\n\nAMY HOOD: Thanks, Michael. Maybe, I may take those a bit in reverse. It’s a little easier to address them.\n\nWhen you think about we’ve been talking about sort of stabilization and what you saw this quarter, if you break down the Azure number, as you saw, which I think I talked a little bit about with Karl, was seven points of contribution from AI, and you could call them the difference, 24 from our core, really Azure business.\n\nAnd within that, the activity we saw on the consumption side was really this balance that we were quite used to and have seen throughout the cloud transition. We saw new workloads starts, and we saw optimizations. And then those optimizations create new budget, and you apply it. And that cycle, which is actually quite normal, we saw it again this quarter in a balanced way.\n\nAnd I think when we talk about stabilization or even what we saw between Q2 and Q3, which is a bit of acceleration in that core, was a lot of the newer project starts relating back to not just AI starts, but lots of other workflows that companies are still going from on prem to cloud. That’s why Satya mentioned migrations. And some of that, which I know isn’t as exciting as talking about all the AI projects, this is still really foundational work to allow companies to take advantage of the cost savings. And the total TCO is still really good.\n\nAnd so, I think that balance is really what you saw this quarter. And I feel like there wasn’t really a big difference, Michael, across industries or across geos. I would say it was actually pretty consistent, is the other maybe texture that I could give you to that question.\n\nAnd so, then, when you’re saying, do we keep sort of pointing to stabilization, I really do look sort of workload to workload, what are we seeing, where are starts. And this one actually felt quite balanced. And optimizations looked like they normally would, which by the way, is super important. It’s something we encourage customers to do. You want to run your workloads as efficiently as you possibly can. It’s critical to customers being able to grow and get value out of that.\n\nI sometimes think you all may ask the question more as a negative. And for us, it’s just about a healthy cycle at the customer account level.\n\nMICHAEL TURRIN: Consistent core cloud growth is still pretty exciting to us as well. Thank you.\n\nAMY HOOD: Thank you.\n\nBRETT IVERSEN: Thanks, Michael. Operator, next question, please.\n\n(Operator Direction.)\n\nKIRK MATERNE, Evercore: Yes, thanks for taking the question, and I’ll add my congrats on the quarter.\n\nSatya, I was wondering if you could chime in on a discussion that comes up a lot with investors, which is, is there a sort of data quality problem in the market in terms of being able to take advantage of all these new gen AI capabilities? And I was just curious if you could comment on, do you see companies making inroads on sort of addressing that? And do you see that as sort of an inhibitor to growth at all at this point? Thanks.\n\nSATYA NADELLA: Yeah, it’s a great question because there are two sets of things in order to make sense of successful deployment of these new AI capabilities. I mean, if you sort of say this, what is this AI, it does two things right. There’s a new user experience as a natural language interface. And second thing is that the reasoning engine, and the reasoning engine requires good data. And it’s requires good data for grounding.\n\nPeople talk about something called retrieval augmented generation. And in that context, having good grounding data that then helps with the reasoning, I think, is helpful. And then, of course, people are also looking to sort of finetune or RLHF, or essentially take the large model and ground it further.\n\nAll of these tools are now available. The sophistication of how people can deploy these models across various business processes, where there is data and where there is tuning of these models, is also getting more widespread, even at system integrators and other developers are there to help enterprises. All that’s maturing, so we feel good.\n\nAnd this is where I think on the commercial side, these are some of the harder problems to solve, broad consumer, right? I mean, I think this is a couple of orders of magnitude of improvements in, I’ll call it, our models before we can have more sophisticated, open ended consumer scenarios. Whereas in the enterprise, these are all things we can go tackle.\n\nAgain, I point to GitHub. If you think about how it’s got an entire system, right, it’s just not an AI model. It’s the AI or the user experience scaffolding, the editor, the chat, the interpreter and the debugger work along with the continuations of the model to help essentially create these reasoning traces, which help the entire thing work.\n\nAnd effectively, what we are doing with Copilot, Copilot Studio and connectors to all these business systems, think of it as we are creating GitHub Copilot-like scenarios for every business system. That’s what I think is going to have both what Amy referenced as business value and better grounding. But you’re absolutely right in saying a lot of work we’re doing with Fabric or Cosmos or PostgreSQL is about preparing that data, so that it can be integrated with these AI projects.\n\nKIRK MATERNE: Thank you.\n\nBRETT IVERSEN: Thanks, Kirk. Operator, we have time for one last question.\n\n(Operator Direction.)\n\nALEX ZUKIN, Wolfe Research: Hey guys, thanks for taking the question. I wanted to ask the AI question, but from a Microsoft 365 Copilot perspective.\n\nI think you talked a little bit about starting to see some of those impacts positively in the quarter on the Office business. I wanted to ask more broadly around that capacity constraint that you alluded to in your prepared remarks, Amy, and how does the easing – how tight are we as you invest for that Capex and bring more of the capacity online? How much does that unblock or unlock the ability to deliver both a higher Azure AI number, as well as a higher Microsoft 365 Copilot number?\n\nAMY HOOD: Thanks for the question. It’s a good opportunity to clarify, and I would not say that there is a capacity constraint on the copilots. It’s a real priority for us to make sure we optimize the allocation of our capacity to make sure that those per-user businesses are able to continue to grow. And so, think about that as our priority one.\n\nAnd so, then what that does mean is capacity constraints when we have them, you’ll tend to see them on the Azure infrastructure side, the consumption side of the business is a better way of thinking about it.\n\nALEX ZUKIN: Perfect. Thank you.\n\nBRETT IVERSEN: Thanks, Alex. 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 all of you soon.\n\nSATYA NADELLA: Thank you, all.\n\nAMY HOOD: Thank you.\n\n(Operator Direction.)"
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      "content": "DOCUMENT: Microsoft FY24 Q4 earnings call (2024-07-30)\nDOCUMENT ID: msft_2024_q4\nSOURCE URL: https://www.microsoft.com/en-us/investor/events/fy-2024/earnings-fy-2024-q4\nSECTION: FY24 Q4 full transcript, including Q&A\n\nBRETT IVERSEN: Good afternoon and thank you for joining us today. On the call with me are Satya Nadella, chairman and chief executive officer, Amy Hood, chief financial officer, Alice Jolla, chief accounting officer, and Keith Dolliver, corporate secretary and deputy general counsel.\n\nOn 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.\n\nOn 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.\n\nAll 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 rate only.\n\nWe 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.\n\nDuring 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.\n\nAnd with that, I’ll turn the call over to Satya.\n\nSATYA NADELLA:\n\nThank you, Brett.\n\nWe had a solid close to our fiscal year.\n\nAll-up, annual revenue was more than $245 billion, up 15% year-over-year. And Microsoft Cloud revenue surpassed $135 billion, up 23%.\n\nBefore I dive in, I want to offer some broader perspective on the AI platform shift.\n\nSimilar to the cloud, this transition involves both knowledge and capital intensive investments.\n\nAs we go through this shift, we are focused on two fundamental things: First, driving innovation across a product portfolio that spans infrastructure and applications so as to ensure we are maximizing our opportunity, while in parallel continuing to scale our cloud business and prioritizing fundamentals, starting with security.\n\nSecond, using customer demand signal and time to value to manage our cost structure dynamically and generate durable, long-term operating leverage.\n\nWith that, let me highlight examples, starting with Azure.\n\nOur share gains accelerated this year, driven by AI.\n\nWe expanded our datacenter footprint, announcing investments across four continents. These are long term assets around the world to drive growth for the next decade and beyond.\n\nWe added new AI accelerators from AMD and NVIDIA, as well as our own first party silicon Azure Maia.\n\nAnd we introduced new Cobalt 100, which provides best-in-class performance for customers like Elastic, MongoDB, Siemens, Snowflake, and Teradata.\n\nWe continued to see sustained revenue growth from migrations.\n\nAzure Arc is helping customers in every industry, from ABB and Cathay Pacific, to LALIGA, to streamline their cloud migrations.\n\nWe now have 36,000 Arc customers, up 90% year-over-year.\n\nWe remain the hyperscale cloud of choice for SAP and Oracle workloads.\n\nAtos, Coles, Daimler Truck AG, Domino’s, Haleon, for example, all migrated their mission-critical SAP workloads to our cloud.\n\nAnd with our Azure VMware Solution, we offer the fastest and most cost-effective way for customers to migrate their VMware workloads too.\n\nWith Azure AI, we are building out the app server for the AI wave, providing access to the most diverse selection of models to meet customers’ unique cost, latency, and design considerations.\n\nAll-up, we now have over 60,000 Azure AI customers, up nearly 60% year-over-year, and average spend per customer continues to grow.\n\nAzure OpenAI Service provides access to best-in-class frontier models, including as of this quarter GPT-4o and GPT-4o mini.\n\nIt is being used by leading companies in every industry, including H&R Block, Suzuki, Swiss Re, Telstra as well as digital natives like Freshworks, Meesho, and Zomato.\n\nWith Phi-3, we offer a family of powerful, small language models, which are being used by companies like BlackRock, Emirates, Epic, ITC, Navy Federal Credit Union, and others.\n\nAnd with Models as a Service, we provide API access to third party models, including as of last week the latest from Cohere, Meta, and Mistral.\n\nThe number of paid Models as a Service customers more than doubled quarter-over-quarter, and we are seeing increased usage by leaders in every industry, from Adobe and Bridgestone, to Novo Nordisk and Palantir.\n\nNow, on to data.\n\nOur Microsoft Intelligent Data Platform provides customers with the broadest capabilities spanning databases, analytics, business intelligence, and governance – along with seamless integration with all of our AI services.\n\nThe number of Azure AI customers also using our data and analytics tools grew nearly 50% year-over-year.\n\nMicrosoft Fabric – our AI-powered next generation data platform – now has over 14,000 paid customers, including leaders in every industry, from Accenture and Kroger, to Rockwell Automation and Zeiss – up 20% quarter-over-quarter.\n\nAnd, this quarter, we introduced new first-of-their-kind real-time intelligence capabilities in Fabric so customers can unlock insights on high-volume, time sensitive data.\n\nNow, on to developer tools.\n\nGitHub Copilot is by far the most widely adopted AI-powered developer tool.\n\nJust over two years since its general availability, more than 77,000 organizations – from BBVA, FedEx, and H&M, to Infosys and Paytm – have adopted Copilot, up 180% year-over-year.\n\nAnd we are going further.\n\nWith Copilot Workspace, we offer Copilot-native end-to-end developer productivity across plan, build, test, debug, and deploy cycle.\n\nCopilot is driving GitHub growth, and all up, GitHub’s annual revenue run rate is now $2 billion.\n\nCopilot accounted for over 40% of GitHub’s revenue growth this year, and is already a larger business than all of GitHub was when we acquired it.\n\nWe are also integrating generative AI across Power Platform, enabling anyone to use natural language to create apps, automate workflows, or build a website.\n\nTo date, over 480,000 organizations have used AI-powered capabilities in Power Platform, up 45% quarter-over-quarter.\n\nIn total, we now have 48 million monthly active users of Power Platform, up 40% year-over-year.\n\nNow, on to future of work.\n\nCopilot for Microsoft 365 is becoming a daily habit for knowledge workers, as it transforms work, workflow, and work artifacts.\n\nThe number of people who use Copilot daily at work nearly doubled quarter-over-quarter, as they use it to complete tasks faster, hold more effective meetings, and automate business workflows and processes.\n\nCopilot customers increased more than 60% quarter-over-quarter.\n\nFeedback has been positive, with majority of enterprise customers coming back to purchase more seats.\n\nAll-up, the number of customers with more than 10,000 seats more than doubled quarter-over-quarter, including Capital Group, Disney, Dow, Kyndryl, Novartis. And EY alone will deploy Copilot to 150,000 of its employees.\n\nAnd we are going further, adding agent capabilities to Copilot.\n\nNew Team Copilot can facilitate meetings, and create and assign tasks.\n\nAnd, with Copilot Studio, customers can extend Copilot for Microsoft 365 and build custom copilots that proactively respond to data and events using their own first and third-party business data.\n\nTo date, 50,000 organizations – from Carnival Corp., Cognizant, and Eaton, to KPMG, Majesco, and McKinsey – have used Copilot Studio, up over 70% quarter-over-quarter.\n\nWe are also extending Copilot to specific industries, including healthcare, with DAX Copilot.\n\nMore than 400 healthcare organizations – including Community Health Network, Intermountain, Northwestern Memorial Healthcare, and Ohio State University Wexner Medical Center – have purchased DAX Copilot to date, up over 40% quarter-over-quarter.\n\nAnd the number of AI-generated clinical reports more than tripled.\n\nCopilot is also transforming ERP and CRM business applications.\n\nWe again took share this quarter, as customers like ThermoFisher Scientific switched to Dynamics.\n\nOur new Dynamics 365 Contact Center is a Copilot-first solution that infuses generative AI throughout the contact center workflow.\n\nCompanies like 1-800 Flowers, Mediterranean Shipping, Synoptek will rely on it to deliver better customer support.\n\nAnd Dynamics 365 Business Central is now trusted by over 40,000 organizations for core ERP.\n\nMicrosoft Teams has become essential to how hundreds of millions of people meet, call, chat, collaborate, and do business.\n\nWe once again saw year-over-year usage growth.\n\nTeams Premium has surpassed 3 million seats, up nearly 400% year-over-year, as organizations like dentsu, Eli Lilly, and Ford chose it for advanced features like end-to-end encryption and real-time translation.\n\nWhen it comes to devices, we introduced our new category of Copilot+ PCs this quarter.\n\nThey are the fastest, most intelligent Windows PCs ever, and they include a new system architecture designed to deliver best-in-class performance and breakthrough AI experiences.\n\nWe are delighted by early reviews. And we are looking forward to the introduction of more Copilot+ PCs powered by all of our silicon and OEM partners in the coming months.\n\nMore broadly, Windows 11 active devices increased 50% year-over-year.\n\nAnd we are seeing accelerated adoption of Windows 11 by companies like Carlsberg, E.ON, National Australia Bank.\n\nNow, on to security.\n\nWe continue to prioritize security above all else.\n\nWe are doubling down on our Secure Future Initiative, as we implement our principles of secure by design, secure by default, and secure operations.\n\nThrough this initiative, we are also continuously applying what we are learning, and translating it into innovation for our customers, including how we approach AI.\n\nOver 1,000 paid customers have used Copilot for Security, including Alaska Airlines, Oregon State University, Petrofac, Wipro, WTW.\n\nAnd we are also securing customers’ AI deployments, with updates to Defender and Purview.\n\nAll-up, we now have over 1.2 million security customers. Over 800,000 – including Dell Technologies, Deutsche Telekom, TomTom use 4 or more workloads, up 25% year-over-year.\n\nAnd Defender for Cloud, our cloud security solution, surpassed $1 billion in revenue over the past 12 months as we protect customer workloads across multi-cloud and hybrid environments.\n\nNow, let me turn to our consumer businesses, starting with LinkedIn.\n\nLinkedIn continues to see accelerated member growth and record engagement.\n\n1.5 million pieces of content are shared every minute on the platform.\n\nAnd video is now the fastest growing format on LinkedIn, with uploads up 34% year-over-year.\n\nLinkedIn Marketing Solutions continues to be a leader in B2B digital advertising, helping companies deliver the right message, to the right audience, on a safe, trusted platform.\n\nAnd when it comes to our subscription businesses, Premium sign ups increased 51% this fiscal year, and we are adding even more value to our members and customers with new AI tools.\n\nOur reimagined AI-powered LinkedIn Premium experience is now available for every Premium subscriber worldwide, helping them more easily and intuitively connect to opportunity, learn, and get career coaching.\n\nFinally, hiring took share for the second consecutive year.\n\nAnd, now, on to Search, Advertising and News.\n\nWe are ensuring that Bing, Edge, and Copilot are collectively driving more engagement and value to end-users, publishers, and advertisers.\n\nOur overall revenue ex-TAC increased 19% year-over-year, and we again took share across Bing and Edge.\n\nWe continue to apply generative AI to pioneer new approaches to how people search and browse.\n\nJust last week, we announced we are testing a new generative search experience, which creates a dynamic response to a user’s query, while maintaining click share to publishers.\n\nAnd we continue to drive record engagement with Copilot for the web. Consumers have used Copilot to create over 12 billion images and conduct 13 billion chats to date, up 150% since the start of the calendar year.\n\nThousands of news and entertainment publishers trust us to reach new audiences with Microsoft Start.\n\nAnd, in fact, we have paid them $1 billion over the last five years.\n\nWe are helping advertisers increase their ROI too.\n\nWe have seen positive response to Performance Max, which uses AI to dynamically create and optimize ads.\n\nAnd Copilot in Microsoft Ad Platform helps marketers create campaigns and troubleshoot using natural language.\n\nNow, on to gaming.\n\nWe now have over 500 million monthly active users across platforms and devices.\n\nAnd our content pipeline has never been stronger.\n\nWe previewed a record 30 new titles at our showcase this quarter. 18 of them – such as Call of Duty: Black Ops 6 – will be available on Game Pass.\n\nGame Pass Ultimate subscribers can now stream games directly on the devices they already have, including as of last month, Amazon Fire TVs.\n\nFinally, we are bringing our IP to new audiences. Fallout, for example, made its debut as a TV show on Amazon Prime this quarter. It was the second most watched title on the platform ever, and hours played on Game Pass for Fallout franchise increased nearly 5X quarter-over-quarter.\n\nIn closing, I am energized about the opportunities ahead.\n\nWe are investing for the long-term — in our fundamentals, in our innovation, and in our people.\n\nWith that, let me turn it over to Amy.\n\nAMY HOOD:\n\nThank you, Satya, and good afternoon everyone. This quarter, revenue was $64.7 billion, up 15% and 16% in constant currency. Earnings per share was $2.95 cents and increased 10% and 11% in constant currency.\n\nIn our largest quarter of the year, we again delivered double-digit top and bottom-line growth with continued share gains across many of our businesses and record commitments to our Microsoft Cloud platform.\n\nCommercial bookings were significantly ahead of expectations and increased 17% and 19% in constant currency. This record commitment quarter was driven by growth in the number of 10-million-dollar-plus and 100-million-dollar-plus contracts for both Azure and Microsoft 365 and consistent execution across our core annuity sales motions.\n\nCommercial remaining performance obligation increased 20% and 21% in constant currency to $269 billion. Roughly 40% will be recognized in revenue in the next 12 months, up 18% year-over-year. The remaining portion, recognized beyond the next 12 months, increased 21%. And this quarter, our annuity mix was 97%.\n\nAt a company level, Activision contributed a net impact of approximately 3 points to revenue growth, was a 2 point drag on operating income growth, and had a negative 6 cent impact to earnings per share. A reminder that this net impact includes adjusting for the movement of Activision content from our prior relationship as a third-party partner to first-party, and includes $938 million from purchase accounting adjustments, integration, and transaction-related costs.\n\nFX did not have a significant impact on our results and was roughly in line with our expectations on total company revenue, segment level revenue, COGS, and operating expense growth.\n\nMicrosoft Cloud revenue was $36.8 billion and grew 21% and 22% in constant currency, roughly in line with expectations.\n\nMicrosoft Cloud gross margin percentage decreased roughly 2 points year-over-year to 69% in line with expectations. Excluding the impact of the change in accounting estimate for useful lives, gross margin percentage decreased slightly driven by sales mix shift to Azure, partially offset by improvement in Azure even with the impact of scaling our AI infrastructure.\n\nCompany gross margin dollars increased 14% and 15% in constant currency and gross margin percentage decreased slightly year-over-year to 70%. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly, even with the impact from purchase accounting adjustments, integration, and transaction-related costs from the Activision acquisition.\n\nOperating expenses increased 13% with 9 points from the Activision acquisition.\n\nAt a total company level, headcount at the end of June was 3% higher than a year ago.\n\nOperating income increased 15% and 16% in constant currency and operating margins were 43%, relatively unchanged year-over-year. Excluding the impact of the change in accounting estimate, operating margins increased slightly driven by the higher gross margin noted earlier and improved operating leverage through continued cost discipline.\n\nNow to our segment results.\n\nRevenue from Productivity and Business Processes was $20.3 billion and grew 11% and 12% in constant currency, slightly ahead of expectations driven by better-than-expected results across all business units.\n\nOffice commercial revenue grew 12% and 13% in constant currency. Office 365 commercial revenue increased 13% and 14% in constant currency with ARPU growth primarily from E5 momentum as well as Copilot for Microsoft 365. Paid Office 365 commercial seats grew 7% year-over-year with installed base expansion across all customer segments. Seat growth was again driven by our small and medium business and frontline worker offerings, although both segments continued to moderate.\n\nOffice commercial licensing declined 9% and 7% in constant currency, with continued customer shift to cloud offerings.\n\nOffice consumer revenue increased 3% and 4% in constant currency with continued momentum in Microsoft 365 subscriptions, which grew 10% to 82.5 million.\n\nLinkedIn revenue increased 10% and 9% in constant currency driven by better-than-expected performance across all businesses.\n\nDynamics revenue grew 16% driven by Dynamics 365 which grew 19% and 20% in constant currency. We saw continued growth across all workloads and better-than-expected new business. Dynamics 365 now represents roughly 90% of total Dynamics revenue.\n\nSegment gross margin dollars increased 9% and 10% in constant currency and gross margin percentage decreased roughly 1 point year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage decreased slightly driven by Office 365 as we scale our AI infrastructure. Operating expenses increased 5%, and operating income increased 12% and 13% in constant currency.\n\nNext, the Intelligent Cloud segment. Revenue was $28.5 billion, increasing 19% and 20% in constant currency, in line with expectations.\n\nOverall, server products and cloud services revenue grew 21% and 22% in constant currency. Azure and other cloud services revenue grew 29% and 30% in constant currency, in line with expectations and consistent with Q3 when adjusting for leap year. Azure growth included 8 points from AI services where demand remained higher than our available capacity. In June, we saw slightly lower-than-expected growth in a few European geos.\n\nIn our per-user business, the enterprise mobility and security installed base grew 10% to over 281 million seats with continued impact from moderated growth in seats sold outside the Microsoft 365 suite.\n\nTherefore, our Azure consumption business continues to grow faster than total Azure.\n\nIn our on-premises server business, revenue increased 2% and 3% in constant currency. Growth was driven by demand for our hybrid solutions although with slightly lower-than-expected transactional purchasing.\n\nEnterprise and partner services revenue decreased 7% on a strong prior year comparable for Enterprise Support Services.\n\nSegment gross margin dollars increased 16% and gross margin percentage decreased roughly 2 points year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage decreased slightly driven by sales mix shift to Azure, partially offset by the improvement in Azure noted earlier, even with the impact of scaling our AI infrastructure. Operating expenses increased 5% and operating income grew 22% and 23% in constant currency.\n\nNow to More Personal Computing. Revenue was $15.9 billion, increasing 14% and 15% in constant currency, with 12 points of net impact from the Activision acquisition. Results were above expectations driven by Windows commercial and Search.\n\nThe PC market was as expected and Windows OEM revenue increased 4% year-over-year.\n\nWindows commercial products and cloud services revenue increased 11% and 12% in constant currency, ahead of expectations due to higher in-period revenue recognition from the mix of contracts.\n\nDevices revenue decreased 11% and 9% in constant currency, roughly in line with expectations, as we remain focused on our higher margin premium products. While early days, we’re excited about the recent launch of our Copilot+ PCs.\n\nSearch and news advertising revenue ex-TAC increased 19%, ahead of expectations, primarily due to improved execution. Healthy volume growth was driven by Bing and Edge.\n\nAnd in Gaming, revenue increased 44% with 48 points of net impact from the Activision acquisition. Xbox content and services revenue increased 61%, slightly ahead of expectations, with 58 points of net impact from the Activision acquisition. Stronger-than-expected performance in first-party content was partially offset by third-party content performance. Xbox hardware revenue decreased 42% and 41% in constant currency.\n\nSegment gross margin dollars increased 21%, with 10 points of net impact from the Activision acquisition. Gross margin percentage increased roughly 3 points year-over-year primarily driven by sales mix shift to higher margin businesses.\n\nOperating expenses increased 43% with 41 points from the Activision acquisition. Operating income increased 5% and 6% in constant currency.\n\nNow back to total company results.\n\nCapital expenditures including finance leases were $19 billion, in line with expectations, and cash paid for P, P, and E was $13.9 billion. Cloud and AI related spend represents nearly all of total capital expenditures. Within that, roughly half is for infrastructure needs where we continue to build and lease datacenters that will support monetization over the next 15 years and beyond. The remaining cloud and AI related spend is primarily for servers, both CPUs and GPUs, to serve customers based on demand signals. For the full fiscal year, the mix of our cloud and AI related spend was similar to Q4.\n\nCash flow from operations was $37.2 billion, up 29% driven by strong cloud billings and collections. Free cash flow was $23.3 billion, up 18% year-over-year, reflecting higher capital expenditures to support our cloud and AI offerings. For the full year, cash flow from operations surpassed $100 billion for the first time, reaching $119 billion.\n\nThis quarter, other income and expense was negative $675 million, more favorable than anticipated with lower-than-expected interest expense and higher-than-expected interest income. Our losses on investments accounted for under the equity method were as expected.\n\nOur effective tax rate was approximately 19%, higher than anticipated due to a state tax law signed in June that was effective retroactively.\n\nAnd finally, we returned $8.4 billion to shareholders through dividends and share repurchases, bringing our total cash returned to shareholders to over $34 billion for the full fiscal year.\n\nNow, moving to our outlook.\n\nMy commentary for both the full year and next quarter is on a US dollar basis unless specifically noted otherwise.\n\nLet me start with some full year commentary for FY25.\n\nFirst, FX. Assuming current rates remain stable, we expect FX to have no meaningful impact to full year revenue, COGS, or operating expense growth.\n\nNext, we continue to expect double-digit revenue and operating income growth as we focus on delivering differentiated value for our customers. To meet the growing demand signal for our AI and cloud products, we will scale our infrastructure investments with FY25 capital expenditures expected to be higher than FY24. As a reminder, these expenditures are dependent on demand signals and adoption of our services that will be managed thru the year. As scaling these investments drive growth in COGS, we will remain disciplined on operating expense management. Therefore, we expect FY25 opex growth to be in the single digits. And given our focused commitment to managing at the operating margin level, we still expect FY25 operating margins to be down only about one point year-over-year.\n\nAnd finally, we expect our FY25 effective tax rate to be around 19%.\n\nNow, to the outlook for our first quarter.\n\nBased on current rates, we expect FX to decrease total revenue and segment level revenue growth by less than one point. We expect FX to decrease COGS growth by less than one point and to have no meaningful impact to operating expense growth.\n\nIn commercial bookings, increased long-term commitments to our platform and strong execution across core annuity sales motions should drive healthy growth on a growing expiry base. As a reminder, larger long-term Azure contracts, which are more unpredictable in their timing, can drive increased quarterly volatility in our bookings growth rate.\n\nMicrosoft Cloud gross margin percentage should be roughly 70%, down year-over-year driven by the impact of scaling our AI infrastructure.\n\nWe expect capital expenditures to increase on a sequential basis given our cloud and AI demand, as well as existing AI capacity constraints. As a reminder, there can be quarterly spend variability from cloud infrastructure buildouts and the timing of delivery of finance leases.\n\nNext to segment guidance.\n\nIn Productivity and Business Processes, we expect revenue to grow between 10% and 11% in constant currency, or $20.3 to $20.6 billion.\n\nIn Office Commercial, revenue growth will again be driven by Office 365 with seat growth across customer segments and ARPU growth through E5 and Copilot for Microsoft 365. We expect Office 365 revenue growth to be approximately 14% in constant currency. In our on-premises business, we expect revenue to decline in the mid to high teens.\n\nIn Office consumer, we expect revenue growth in the low to mid-single digits, driven by Microsoft 365 subscriptions.\n\nFor LinkedIn, we expect revenue growth in the high single digits driven by continued growth across all businesses.\n\nAnd in Dynamics, we expect revenue growth in the low to mid-teens driven by Dynamics 365.\n\nFor Intelligent Cloud we expect revenue to grow between 18% and 20% in constant currency, or $28.6 to $28.9 billion.\n\nRevenue will continue to be driven by Azure which, as a reminder, can have quarterly variability primarily from our per-user business and in-period revenue recognition depending on the mix of contracts.\n\nIn Azure, we expect Q1 revenue growth to be 28% to 29% in constant currency. Growth will continue to be driven by our consumption business, inclusive of AI, which is growing faster than total Azure. We expect the consumption trends from Q4 to continue thru the first half of the year. This includes both AI demand impacted by capacity constraints and non-AI growth trends similar to June. Growth in our per-user business will continue to moderate. And in H2, we expect Azure growth to accelerate as our capital investments create an increase in available AI capacity to serve more of the growing demand.\n\nIn our on-premises server business, we expect revenue to decline in the low single digits as continued hybrid demand will be more than offset by lower transactional purchasing.\n\nAnd in Enterprise and partner services, revenue should decline in the low single digits.\n\nIn More Personal Computing, we expect revenue to grow between 9% and 12% in constant currency, or $14.9 to $15.3 billion.\n\nWindows OEM revenue growth should be relatively flat, roughly in line with the PC market.\n\nIn Windows commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the mid-single digits. As a reminder, our quarterly revenue growth can have variability primarily from in-period revenue recognition depending on the mix of contracts.\n\nIn Devices, revenue growth should be in the low to mid-single digits.\n\nSearch and news advertising ex-TAC revenue growth should be in the mid to high teens. This will be higher than overall Search and news advertising revenue growth, which we expect to be in the low single digits.\n\nAnd in Gaming, we expect revenue growth in the mid-30s, including approximately 40 points of net impact from the Activision acquisition. We expect Xbox content and services revenue growth in the low to mid-50s, driven by the net impact from the Activision acquisition. Hardware revenue will again decline year-over-year.\n\nNow back to company guidance.\n\nWe expect COGS between $19.95 to $20.15 billion, including approximately $700 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition.\n\nWe expect operating expense of $15.2 to $15.3 billion, including approximately $200 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition.\n\nOther income and expense should be roughly negative $650 million driven by losses on investments accounted for under the equity method as interest income will be mostly offset by interest expense. As a reminder, we are required to recognize gains or losses on our equity investments, which can increase quarterly volatility.\n\nWe expect our Q1 effective tax rate to be approximately 19%.\n\nIn closing, we remain focused on delivering innovations that matter to our global customers of every size. That focus extends to delivering on our financial commitments as well. We delivered operating margin growth of nearly three points year over year even as we accelerated our AI investments, completed the Activision acquisition, and had a headwind from the change in useful lives last year. So, as we begin FY25, we will continue to invest in the cloud and AI opportunity ahead aligned, and if needed adjusted, to the demand signals we see. We are committed to growing our leadership across our commercial cloud and within that, the AI platform, and we feel well positioned as we start FY25.\n\nWith that, let’s go to Q&A. Brett.\n\nBRETT IVERSEN: Thanks, Amy. We’ll now move over to Q&A. Out of respect for others on the call, we request the participants. Please only ask one question. Operator, can you please repeat your instructions?\n\n(Operator direction.)\n\nKEITH WEISS, Morgan Stanley: Excellent. Thank you guys for taking the question, and congratulations on another great quarter and really solid overall fiscal year.\n\nRight now, there’s an industry debate raging around the capex requirements around generative AI and whether the monetization is actually going to match with that. And I think the question for you guys from a Microsoft perspective is, is capex still an appropriate leading indicator for cloud growth, or do the shifting gross margin profiles changed that equation; or said another way, maybe can you give us a little bit more help in understanding the timing between the capex investments and the yields on those investments? Thank you.\n\nSATYA NADELLA: Thank you, Keith. Let me start and then Amy can add to this. I think I would say we primarily start right now from the demand side. What I mean by that is what’s the product shape of the product portfolio? What we learned even from the cloud transition, which, as you know, Keith, was similar in the sense it was both a knowledge-intensive and a capital-intensive transition. We needed to have the product portfolio where there was the right mix, I’ll call it, infrastructure meters, as well as SaaS applications.\n\nThat’s the first thing that we’re looking at, and how is that value landing with customers and what’s the growth rate. When I think about what’s happening with M365 Copilot as perhaps the best Office 365 or M365 suite we have had, the fact that we are getting recurring customers or customers coming back, buying more seats, or GitHub Copilot now being bigger than even GitHub when we bought it, what’s happening in the contact center with Dynamics.\n\nI would say, and obviously, the Azure AI growth, that’s the first place we look at. That then drives bulk of the capex spend. Basically, that’s the demand signal, because you’ve got to remember, even in the capital spend, there is land and there is data center built, but 60+% is the kit. That only will be bought for inferencing and everything else if there is demand signal, right? That’s, I think, the key way to think about capital cycle, even.\n\nThe asset, as Amy said, is a long-term asset, which is land and the data center, which, by the way, we don’t even construct things fully. We can even have things which are semi-constructed. We call co-shells and so on.\n\nWe know how to manage our capex spend to build out a long-term asset. And a lot of the hydration of the kit happens when we have the demand signal. There is definitely spend for training. Even there, of course, we will only be scaling our training as we see the demand accrue in any given period in time.\n\nI would say it’s more important to manage to capture the opportunity with the right product portfolio that’s driving value. And on that front, I feel good about the breadth of Microsoft offering, whether it’s in consumer side, whether it’s on commercial per-seat side, or the consumption meters. That’s, I think, the fundamental driver.\n\nAMY HOOD: And Keith, I do think – and I really do appreciate how you phrase the question as well, because I think the timing and some of the questions you all have had really led to how we were talking even about capital expense in our comments, in my comments today.\n\nBeing able to maybe share a little more about that, when we talked about roughly half of FY24’s total capital expense, as well as half of Q4’s expense, it’s really on land and builds, and finance leases. And those things really will be monetized over 15 years and beyond. And they’re incredibly flexible. Because we’ve built a consistent architecture, first with a commercial cloud, and second with the Azure stack for AI, regardless of whether demands at the platform layer or at the app layer, or through third parties and partners, or, frankly, our first-party SaaS, it uses the same infrastructure.\n\nWe’ve got long-lived, flexible assets. And if you think about it, that way, you can see what we’re doing and focused on is building out this network in parallel across the globe, because when we did this last transition, the first transition to the cloud, which seems a long time ago, sometimes – (laughter) – it rolled out quite differently. We rolled out more geo by geo. And this one, because we have demand on a global basis, we are doing it on a global basis, which is important. We have large customers in every geo.\n\nAnd so, hopefully, with that shape of our capital expense, it helps people see how much of that sort of near-term monetization driver as well as much longer duration.\n\nKEITH WEISS: That’s super helpful. Thank you very much.\n\nBRETT IVERSEN: Thanks, Keith. Operator, next question, please.\n\n(Operator direction.)\n\nMARK MOERDLER, Bernstein Research: Thank you very much. Thank you for taking the question, and congrats on a strong year.\n\nGen AI has been a bit of a roller coaster of tech over the last year with periods of acceleration, high expectations and expectations dropped as reality kicked in. With Azure growth we’ve seen this quarter and O365, Commercial not yet fully visible in numbers, even though, Amy, you gave us a lot of color on it, two parts to the question of Satya, how should we think about what it’s going to take for Gen AI to become more real across the industry, and for it to become more visible within your SaaS offerings?\n\nAnd Amy, with cloud, it took time for margins to improve. It looks like with AI, it’s happening quicker. Can you give us a sense of how you think about the margin impact near term and long term from all the investment on AI? Thank you.\n\nSATYA NADELLA: Thanks again, Mark, for the question. To me, look, at the end of the day Gen AI is just software, so it is really translating into fundamentally growth on what has been our M365 SaaS offering with a new offering that is the Copilot SaaS offering, which today is on a growth rate that’s faster than any other previous generation of software we launched as a suite in M365. That’s, I think, the best way to describe it. I mean, the numbers I think we shared even this quarter are indicative of this, Mark.\n\nIf you look at it, we have both the landing of the seats itself, quarter over quarter, that is growing 60%, right? That’s a pretty good, healthy sign. The most healthy sign for me is the fact that customers are coming back there. That is, the same customers with whom we land in the seats coming back and buying more seats, and then the number of customers with 10,000+ seats doubled. It’s 2x, quarter over quarter. That, to me, is a healthy SaaS core business.\n\nAnd on top of that, some of the things that Amy shared are on Dynamics, that’s another exciting place for us, which is one, we’re gaining share. We’re Dynamics with Gen AI built in is sort of really BizApps is probably the category that gets completely transformed with Gen AI, contact centers being a great example. We, ourselves, are on course to save hundreds of millions of dollars in our own Customer Support and Contact Center Operations. I think we can drive that value to our customers.\n\nAnd then on the Azure side, you see the numbers very clearly. In fact, I think last quarter is when we started giving you that. You saw an acceleration of that this quarter.\n\nOne of the other pieces, Mark, is AI doesn’t sit on its own. It’s just, we have a concept of design wins in Azure. In fact, 50% of the folks who are using Azure AI are also using a data meter. That’s very exciting to us because the most important thing in Azure is to win workloads in the enterprise, and that is starting to happen. And these are generational things, once they get going with you.\n\nThat’s, I think, how we think about it, at least when I look at what’s happening on our demand side.\n\nAMY HOOD: And, Mark, to answer the second half of your question on margin improvement looking different than it did through the last cloud cycle, that’s primarily for a reason I’ve mentioned a couple times. We have a consistent platform, so because we’re building to one Azure AI stack, we don’t have to have multiple infrastructure investments. We’re making one. We’re using that internally, first party. And that’s what we’re using with customers to build on as well as ISVs. It does, in fact, make margins start off better and obviously, scale consistently.\n\nMARK MOERDLER: Thank you.\n\nBRETT IVERSEN: Thanks, Mark. Operator, next question, please.\n\n(Operator direction.)\n\nKASH RANGAN, Goldman Sachs: Hi. Thank you very much, and congrats on a great year, fiscal year ending.\n\nA question for you, Amy. When you look at the capex, how do you bring efficiencies out of the capex? You disclose at 50% was infrastructure, the other 50%, tech, is very useful. In other words, do you have to keep going, growing capex at these elevated rates, or could you slow down capex and still get that consistent revenue growth rate in your Azure and generative AI? That’s the main question on my mind. Thank you so much.\n\nAMY HOOD: Thanks, Kash. That’s a very good question. There’s really two pieces, I think, as I heard your question that I would reflect on.\n\nThe first is, could we see sort of consistent revenue growth without maybe what you would say is more of this sort of elevated capital expense number, or something that continues to accelerate. And the answer to that is yes, because there’s two different pieces. You’re seeing half of this go toward long-term builds that Satya mentioned. The pace at which we fill those builds with CPUs, or GPUs, will be demand driven.\n\nAnd so, if we see differences in demand signal, we can throttle that investment on the CPU side, which we’ve done for, I guess, a long time at this point, as I reflect. And we’ll use all that same learning and demand signal understanding to do the same thing on the GPU side. And so, you’re right that you could see relatively consistent revenue patterns, and yet see these inconsistencies and capital spend, quarter to quarter.\n\nThe other thing I would note, Kash, is you’ll also notice there’s a growing distinction between our capex number and, on occasion, the cash that we pay for PP&E. And you’re going to start to see that more often in this period, because it happens when we use leases. Leases sort of show up all at once. And so, you’ll see a little bit more volatility. I’ve mentioned that in my comments before, but I mention it again, just because you’re starting to see that distinction in my comments. And hopefully, that’s helpful context.\n\nSATYA NADELLA: Just one other thing, Amy, I wanted to add. I think as people think about capital spend, I think it’s important to separate out releases from build. And when it comes to build, I think it’s important for us to think about – we think about it in terms of what’s the total percentage of cost that goes into each line item, land, which obviously has a very different duration and a very different lead time.\n\nThose are the other two considerations. We think about lead time and duration of the asset, land, network construction, the system or the kit, and then the ongoing cost. And so, if you think about it that way, then you know how to even adjust, if you will, the capital spend based on demand signal.\n\nKASH RANGAN: Thank you. It was triggered by the jump in capex, and as Amy pointed out, your guiding to accelerating Azure revenue growth rate, which I guess follows the capex. Thank you so much once again.\n\nBRETT IVERSEN: Thanks, Kash. Operator, next question, please.\n\n(Operator direction.)\n\nBRENT THILL, Jefferies: Thanks. Amy, the magnitude of beat this quarter was a little lower than we’ve seen in the past. Was there anything unusual on sales side on the disclosed rate that you saw? Thanks.\n\nAMY HOOD: Thanks, Brent. Actually, no. As I was talking on the quarter, I mean, commercial bookings were much better than we expected going into the quarter. Commitments were very good. Execution across both the core annuity renewal motion was good as expected. The larger long-term commitments were better than we expected.\n\nBrent, I would not say there was anything really unusual in how I thought about it what we saw in our commercial execution through the quarter.\n\nBRENT THILL: Great, thank you.\n\nBRETT IVERSEN: Thanks, Brent. Operator, next question, please.\n\n(Operator direction.)\n\nKARL KEIRSTEAD, UBS: Okay, great. Maybe I’ll direct this to Amy.\n\nAmy, I know when you set your Azure guidance, you’re always looking to meet or beat the high end. The 30% you put up in the June quarter, amazing number given the scale of Azure, but it did come in at the low end of your range. And I’d just love for you to maybe elaborate on the delta.\n\nI guess as I reflect on what you’ve said in your comments, there’s two things that I heard you say. One, it sounded like there’s persistent capacity constraints that you think might get alleviated in the second half. And then secondly, you mentioned perhaps the modest softness in Europe. I presume that’s a little bit more economic rather than Azure specific. Is that the right way to frame the performance in the quarter? Thank you.\n\nAMY HOOD: Thanks, Karl. Yes, that’s exactly right. Maybe I’ll just repeat it just so people can hear it in my words, as well, to that 30% to 31% guide for Q4 and coming in at the lower end at 30%. You’re exactly right, the distinguishing between being at the higher end or at the lower end really was some softness we saw in a few European geos on non-AI consumption, really made the difference in that number. And we’ve assumed that going forward into H1, inclusive of my guide in 28 to 29, going forward.\n\nAnd then let me separate, which was your larger point, which is what are the other factors you see ongoing. Number one, you’re right, capacity constraints, particularly on AI and Azure, remained in Q4 and will remain in H1. Hopefully, that’s helpful.\n\nKARL KEIRSTEAD: Yeah. Thank you, Amy.\n\nBRETT IVERSEN: Thanks, Karl. Operator, next question, please.\n\n(Operator direction.)\n\nBRAD ZELNICK, Deutsche Bank: Great, thank you very much.\n\nAmy, with Azure demand once again greater than available capacity, I appreciate the capex investments in the build out and acceleration you expect in the back half. But as we think about cloud capacity and AI services, specifically, can you talk about both the near-term and long-term strategy around the AI partnerships that you’re signing with the likes of Oracle and CoreWeave, for example? Thank you.\n\nAMY HOOD: Thanks, Brad. Maybe separate a couple of things.\n\nWe are, and we’ve talked about it now for quite a few quarters, we are constrained on AI capacity. And because of that, actually, we, to your point, have signed up with third parties to help us as we are behind with some leases on AI capacity. We’ve done that with partners who are happy to help us extend the Azure platform to be able to serve this Azure AI demand. And you do see us investing quite a bit, as we’ve talked about, in builds so that we can get back in a more balanced place.\n\nSATYA NADELLA: Yeah. I mean, to me, it’s no different than leases that we would have done in the past. You could even say sometimes buying from Oracle, maybe even more efficient leases because they’re even shorter date.\n\nBRAD ZELNICK: Excellent. Thanks for the color.\n\nBRETT IVERSEN: Thanks, Brad. Operator, next question, please.\n\n(Operator direction.)\n\nMARK MURPHY, JP Morgan: Thank you very much. With a couple quarters of Copilot for M365 availability under your belt now, how are you assessing the capability of copilots to replicate the productivity gains that they’ve created for developers, which seem to be very high, and to do something similar for the broader population of knowledge workers? For instance, you’re mentioning the 10,000 seat deals, the repeat purchases. Is it possible to eventually see Copilot penetration rates equally high in Office as they will be in GitHub?\n\nSATYA NADELLA: Yeah, that’s a great question. In fact, the GitHub design system and the GitHub Copilot Workspace design system, which now, for example, you start with an issue, you create a plan, from a plan, you create a spec, or you create a spec and from a spec, you create a plan, and then you go operate across the full repo, that’s effectively the design system that is getting replicated inside of even the M365 Copilot. And you see this even now.\n\nFor example, you get an e-mail. You’re in sales. You want to respond to the customer. The data from the e-mail is essentially context for a prompt, but you expand by bringing in all of your CRM data, right? This customer e-mail is in the context of some order. All of the CRM record gets completed in context, and a reply gets generated with the CRM data. That’s the type of stuff that’s already happening.\n\nThen you take something like Copilot Studio, you can start even grounding it in more data and then completing workflows. You could say, if this e-mail comes from this customer whose order date has got a particular issue with it, you can then go and escalate it to somebody else, who gets a notification in Teams. And those are the kinds of workflows that are getting built within IT or by end users themselves. What used to be line of business applications to us are Copilot extensions going forward.\n\nWe think of this as really, a new design system for knowledge and frontline work to drive productivity, which will be very akin to what has happened in software engineering. When you think about marketing or finance, or sales, or customer service, we will effectively replicate what you just said, which is the type of product you will be seeing and developers will come to all of these functions as they think about their work, workflow and work artifact all being driven by Copilot.\n\nMARK MURPHY: Thank you very much.\n\nBRETT IVERSEN: Thanks, Mark. Operator, we have time for one last question.\n\n(Operator direction.)\n\nKEITH BACHMAN, BMO: Hi. Good evening, and thank you for the opportunity to ask the question. I actually wanted to veer towards gaming, if I could for a second.\n\nXbox content services revenue grew 61%, 58 points help from Activision. Net is about three points of growth. How should investors think about the longer-term growth potential? In this area, you’ve made significant investments including the Activision deal. But how should investors be thinking about the growth potential of the gaming, or what are the puts and takes to help make considerations here? Thank you.\n\nSATYA NADELLA: Yeah. For us, our investment in gaming, fundamentally, was to have, I’d say, the right portfolio of both what we love about gaming and always have loved about gaming, which is Xbox and the content for the console, and expand from there so that we have content for everywhere people play games, starting with the PC.\n\nWhen I think about the Activision portfolio, it comes with great assets for us to cover both the PC and the console, and then, of course, assets to cover mobile sockets, which we never had. We feel that now, we have both the content and the ability to access all the traditional high scale platforms where people play games, which is the console, PC and mobile. But we’re also excited about the new sockets, right?\n\nI mean, the fact that even in this last quarter, we expanded xCloud to Amazon TV, I forget the name of what it’s called, but that’s the type of new axis that really helps us a lot, reach new gamers or the same gamer everywhere they want to play. And that ultimately will show up in that software plus services and transaction revenue for us, which is really our long-term KPI. And that’s what we’re building towards, and that was this strategy behind Activision as an asset.\n\nAmy, if you wanted to add to it?\n\nAMY HOOD: No, I do think the real goal here is to be able to take a broad set of content to more users in more places, and really build what looks more like, to us, a software annuity and subscription business with enhanced transactions and the ownership of IP, which is quite valuable long term. And Satya mentioned things where with the ownership of IP, it can be monetized in multiple ways. And I think we’re really encouraged by some of the progress and how we’re making progress with Game Pass, as well, with some of the new announcements.\n\nThank you, Keith.\n\nBRETT IVERSEN: Thanks, Keith. 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 all of you soon.\n\nAMY HOOD: Thank you.\n\nSATYA NADELLA: Thank you, all.\n\n(Operator direction.)"
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      "content": "Microsoft AI investment memo — information available July 30, 2024\n\nAcross the four calls, AI moved from a small contributor to Azure growth to a material growth driver whose near-term expansion was constrained by available infrastructure. This is a synthesis of management's evolving commentary, not a claim that the whole Azure business was supply-constrained. In FY23 Q4, management was already preparing to accelerate cloud infrastructure investment; by FY24 Q3 and Q4, the discussion explicitly linked additional capacity to serving AI demand. [FY23 Q4, Hood prepared remarks; FY24 Q3 and Q4, Hood prepared remarks and Q&A.]\n\nAI services contributed roughly one percentage point to Azure growth in FY23 Q4, six in FY24 Q2, seven in FY24 Q3, and eight in FY24 Q4. Those are contributions to the growth rate, not AI's share of Azure revenue. The distinction matters: FY24 Q4 Azure and other cloud services growth was 29% as reported and 30% in constant currency. Management also identified softer-than-expected growth in a few European geographies in June. The packet therefore supports a strong AI demand story alongside a more mixed account of the non-AI business. [Each call, Hood's Intelligent Cloud discussion.]\n\nFY24 Q4 capital expenditures including finance leases were $19 billion, while cash paid for property and equipment was $13.9 billion. The comparable capital-expenditure figures were $10.7 billion in FY23 Q4, $11.5 billion in FY24 Q2, and $14 billion in FY24 Q3. These measures should not be interchanged. The Q2 figure was also affected by a third-party capacity delivery moving into Q3, so individual quarterly movements include timing effects. [Each call, Hood's capital expenditure discussion.]\n\nThe investment was not all short-lived GPU spending. In Q4, management said approximately half of cloud and AI spending was for building and leasing datacenters expected to support monetization for at least 15 years; the remainder was primarily CPUs and GPUs. In the Q&A, Hood described the pace of filling those facilities with equipment as demand-driven. This separates long-lived infrastructure commitments from the timing of equipment deployment, without establishing what returns either category will ultimately earn. [FY24 Q4, Hood prepared remarks and capital-spending Q&A.]\n\nThe capacity constraint described in Q3 concerned Azure infrastructure consumption, not an inability to supply Copilot subscriptions. Hood explicitly prioritized capacity allocation for the per-user businesses. In Q4, she expected AI capacity constraints to persist into the first half of FY25 and Azure growth to accelerate in the second half as investments brought more capacity online. That was an outlook conditional on execution and demand, not an observed acceleration. [FY24 Q3, Hood's capacity Q&A; FY24 Q4, Hood's outlook and Q&A.]"
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