Microsoft Q3 2024 Earnings Call Transcript

Brett IversenVice President, Investor Relations at MicrosoftGood 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.On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides the reconciliation of differences between GAAP and non-GAAP financial measures. More detailed outlook slides will be available on the Microsoft Investor Relations website when we provide outlook commentary on today's call.On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's third quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted.We will also provide growth rates in constant currency when available as a framework for assessing how our underlying 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.We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded.If you ask a question, it will be included in our live transmission, in the transcript and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website.During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call and in the Risk Factors section of our Form 10-K, Forms 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement.And with that, I'll turn the call over to Satya.Satya NadellaChairman and CEO at MicrosoftThank you, Brett. It was a record third quarter powered by the continued strength of Microsoft Cloud, which surpassed $35 billion in revenue, up 23%. Microsoft CoPilot and CoPilot stack spanning everyday productivity, business process and developer services to models, data and infrastructure are orchestrating a new era of Al transformation, driving better business outcomes across every role and industry.Now I'll highlight examples walking up the stack, starting with Al infrastructure. Azure again took share as customers use our platforms and tools to build their own Al solutions. We offer the most diverse selection of Al accelerators, including the latest from NVIDIA, AMD as well as our own first-party silicon. Our Al innovation continues to build on our strategic partnership with OpenAl. More than 65% of the Fortune 500 now use Azure OpenAl service.We also continue to innovate and partner broadly to bring customers the best selection of frontier models in open source models, LLMS and SLMS, with 53, 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, LT, Mindtree, PwC and TCS. Our models as a service offering makes it easy for developers to use LLMs and SLMs without having to manage any underlying infrastructure.Hundreds 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. And as part of our partnership announced last week, G42 will run its AI applications and services on our cloud. All up, the number of Azure AI customers continues to grow and average spend continues to increase.We also saw an acceleration of revenue from migrations to Azure. Azure Arc continues to help customers like DICK'S Sporting Goods and World Bank streamlined their cloud migrations. Arc now has 33,000 customers, up over 2x year-over-year, and we are the hyperscale platform of choice for SAP and Oracle workloads with Conduent and Medline moving their on-premise Oracle estates to Azure and Kyndryl and L'Oreal migrating their SAP workloads to Azure.Overall, we are seeing an acceleration in the number of large Azure deals from leaders across industries, including billion-dollar plus, multiyear commitments announced this month from Cloud Software Group and the Coca-Cola Company. The number of $100 million-plus Azure deals increased over 80% year-over-year, while the number of $10 million-plus deals more than doubled.Now on to data and analytics. Our Microsoft intelligent data platform provides customers with the broadest capability, spanning databases, analytics, business intelligence, governance and Al. Over half of our Azure Al customers also use our data and analytics tools. Customers are building intelligent applications running on Azure, PostgreSQL and Cosmos DB with deep integrations with Azure Al. TomTom is a great example. They've used Cosmos DB along with Azure Open Al service to build their own immersive in-car infotainment system. We are also encouraged by our momentum with our next-generation analytics platform, Microsoft Fabric. Fabric now has over 11,000 paid customers, including leaders in every industry from ABB, EDP, Energy Transfer to Equinor, Foot Locker, ITOCHU and Lumen, and we are seeing increased usage intensity.Fabric is seamlessly integrated with Azure Al studio, meaning customers can run models against enterprise data that's consolidated in Fabric's multi-cloud data lake, Onelake. And Power BI, which is also natively integrated with Fabric, provides business users with Al-powered insights. We now have over 350,000 paid customers.Now on to developers. GitHub Copilot is bending the productivity curve for developers. We now have 1.8 million paid subscribers with growth accelerating to over 35% quarter-over-quarter and continues to see increased adoption from businesses in every industry, including Itau, Lufthansa Systems, Nokia, Pinterest and Volvo cars. CoPilot is driving growth across the broader GitHub platform too. AT&T, Citi Group and Honeywell all increased their overall GitHub usage after seeing productivity and code quality increases with CoPilot. All up, more than 90% of the Fortune 100 are now GitHub customers and revenue accelerated over 45% year-over-year.Anyone can be a developer with new Al-powered features across our low-code, no-code tools, which makes it easier to build an app, automate workflow or create a Copilot using natural language. 30,000 organizations, across every industry have used Copilot studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter-over-quarter. Cineplex, for example, built a Copilot for customer service agents, reducing query handling time from as much as 15 minutes to 30 seconds.All up over 330,000 organizations, including over half of Fortune 100 have used Al-powered capabilities in Power Platform, and Power Apps now has over 25 million monthly active users, up over 40% year-over-year.Now on to future of work. We are seeing Al democratize expertise across the workforce. What inventory turns are to efficiency of supply chains, knowledge turns, the creation and diffusion and knowledge, are to productivity of an organization and Copilot for Microsoft 365 is helping increase knowledge turns. Thus having a cascading effect, changing work, work artifacts and workflows and driving better decision-making, collaboration and efficiency.This quarter, we made Copilot available to organizations of all types and sizes from enterprises to small businesses. Nearly 60% of the Fortune 500 now use Copilot and we have 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. We'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.And we're not stopping there. We're accelerating our innovation, adding over 150 Copilot capabilities since the start of the year. With Copilot in Dynamics 365, we are helping businesses transform every role in business function as we take share with our Al-powered apps across all categories. This 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.And with our Copilot for finance, we are 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. ISVs are also building their own co-pilot integrations. For example, new integrations between Adobe Experience Cloud and Copilot will help marketeers access campaign insights in the flow of their work. When 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. With Co-pilot, we have an opportunity to create an entirely new category of devices, purpose built for this new generation of Al. All of our largest OEM partners have announced Al PCs in recent months. And this quarter, we introduced new Surface devices, which includes integrated NPUs to power on-device Al experiences like auto framing and live captions. And there's much more to come. In just a few weeks, we'll hold a special event to talk about our Al vision across Windows and devices.When it comes to Teams, we once again saw year-over-year usage growth. We're rolling out a new version, which is up to 2x faster while using 50% less memory to all customers. We surpassed 1 million Teams rooms for the first time as we continue to make hybrid meetings better with new Al-powered features like automatic camera switching and speaker recognition. And Teams Phone continues to be the market leader in cloud calling, now with over 20 million PSTN users, up nearly 30% year-over-year.All of this innovation is driving growth across Microsoft 365 companies 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.Now on to industry and cross-industry clouds. We are also bringing Al-powered transformation to every industry. In health care, DAX Copilot is being used by more than 200 health care organizations, including Providence, Stanford Health care and WellSpan Health. And in manufacturing this week at Hannover Messe, customers like BMW, Siemens and Volvo, Penta, shared how they're using our cloud and Al solutions to transform factory operations.Now on to security. Security underpins every layer of the tech stack and it's our #1 priority. We 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. We are focused on making continuous progress across the 6 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 responses and remediation.We remain committed to sharing our learnings, tools and innovation with customers. A 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.Now let me talk about our consumer businesses, starting with Linkedin. We continue to combine our unique data with this new generation of Al to transform the way members learn, sell and get hired. Features like LinkedIn Al assisted messages are seeing a 40% higher acceptance rate and accepted over 10% faster by jobseekers saving hirers' time and making it easier to connect them to candidates.Our Al-powered collaborative articles, which has reached over 12 million contributions are helping increase engagement on the platform, which reached a new record this quarter. New Al features are also helping accelerate Linkedin Premium growth, with revenue up 29% year-over-year. And we are also seeing strength across our other businesses. We're hiring, taking share for the seventh consecutive quarter.Now on to search advertising and news. We once again took share across Bing and Edge as we continue to apply this new generation of Al to transform how people search and browse. Bing reached over 140 million daily active users, and 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. We also rolled out Copilot to our ad platform this quarter, helping marketers use Al to generate recommendations for product images, headlines and descriptions.Now on to gaming. We are committed to meeting players where they are by bringing great games to more people on more devices. We set third quarter records for game streaming hours, console usage and monthly active devices. And last month, we added our first Activision Blizzard title Diablo 4 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.We were also encouraged by ongoing success of Call of Duty: Modern Warfare 3, which is attracting new gamers and retaining franchise loyalists. Finally, we are expanding our games to new platforms, bringing 4 of our fan favorite titles to Nintendo Switch and Sony PlayStation for the first time. In fact, earlier this month, we had 7 games among the top 25 on the PlayStation store, more than any other publisher.In closing, I'm energized about our opportunity ahead as we innovate to help people and businesses thrive in this new era.With that, let me turn it over to Amy.Amy HoodEVP and CFO at MicrosoftThank 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%. Results 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.In 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. Commercial 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%.In 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. At 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 $0.04 impact to earnings per share.A reminder, 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 cost. FX 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.Microsoft Cloud revenue was $35.1 billion and grew 23%, ahead of expectations. Microsoft 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 Al infrastructure, partially offset by sales mix shift to Azure.Company 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 the 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.Operating expenses increased 10% with 9 points from the Activision acquisition. At a total company level, head count at the end of March was 1% lower than a year ago. Operating 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.Now to our segment results. Revenue from Productivity and Business Processes was $19.6 billion and grew 12% and 11% in constant currency, in line with expectations. Office 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.Office Commercial Licensing declined 20% and 18% in constant currency, with continued customer shift to cloud offerings. Office consumer revenue increased 4%, slightly below expectations. Microsoft 365 subscriptions grew 14% to $80.8 million.LinkedIn 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.Dynamics 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, although bookings growth remains moderated. Segment 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.Operating expenses increased 1% and operating income increased 17% and 16% in constant currency.Next, the Intelligent Cloud segment. Revenue was $26.7 billion, increasing 21%, ahead of expectations with better-than-expected results across all businesses. Overall, Server products and cloud services revenue grew 24%. Azure and other cloud services revenue grew 31%, ahead of expectations, while our Al services contributed 7 points of growth as expected.In the non-Al 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. In 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.In 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. Enterprise and partner services revenue decreased 9% on a strong prior year comparable for enterprise support services. Segment gross margin dollars increased to 20% and gross margin percentage decreased slightly year-over-year. Excluding the impact of the change in accounting estimate [Technical Issues] percentage increased slightly, primarily driven by the improvement in Azure noted earlier, even with the impact of scaling our Al infrastructure, partially offset by sales mix shift to Azure.Operating expenses increased 1% and operating income grew 32%.Now to 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. Windows 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. Windows commercial products and cloud services revenue increased 13% and 12% in constant currency, below expectations, with impact from the growth trends in new stand-alone business noted earlier as well as lower in-period revenue recognition from a mix of contracts.Devices 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. Search and News advertising revenue ex TAC increased 12%, ahead of expectations, with continued volume growth and increased engagement on Bing and Edge. And 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. Segment 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.Operating expenses increased 41% with 43 points from the Activision acquisition. Operating income increased 16% and 15% in constant currency.Now back to total company results. Capital expenditures, including finance leases, were $14 billion to support our cloud demand, inclusive of the need to scale our Al infrastructure. Cash paid for PP&E was $11 billion. Cash 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 Al offerings. This quarter, Other income and expense was negative $854 million, lower than anticipated, driven by losses on investments accounted for under the equity method. Our effective tax rate was approximately 18%.And finally, we returned $8.4 billion to shareholders through dividends and share repurchases.Now moving to our Q4 outlook, which unless specifically noted otherwise, is on a U.S. dollar basis. First, FX. Based on current rates, which reflect the recent strengthening of the U.S. dollar, we now expect FX to decrease total revenue and segment level revenue growth by less than 1 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 1 point and operating expense growth by less than 1 point.In 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. Microsoft Cloud gross margin percentage should decrease roughly 2 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 Al infrastructure will be offset by sales mix shift to Azure.We expect capital expenditures to increase materially on a sequential basis driven by cloud and Al infrastructure investments. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure build-outs and the timing of finance leases. We continue to bring capacity online as we scale our Al investments with growing demand. Currently, near-term Al demand is a bit higher than our available capacity.Next, to segment guidance. In Productivity and Business Processes, we expect revenue to grow between 9% and 11% in constant currency or USD19.9 billion to USD20.2 billion. In Office Commercial, revenue growth will again be driven by Office 365 with seat growth across customer segments and ARPU growth primarily through ES. 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. In Office Consumer, we expect revenue growth in the low to mid-single digits, driven by Microsoft 365 subscriptions. For Linkedin, we expect revenue growth in the mid- to high single digits driven by continued growth across all businesses. And in Dynamics, we expect revenue growth in the low to mid-teens, driven by Dynamics 365. For both Linkedin and Dynamics, the continued bookings growth moderation noted earlier is a headwind to Q4 revenue growth.For Intelligent Cloud, we expect revenue to grow between 19% and 20% in constant currency or USD28.4 billion to USD28.7 billion. Revenue 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.In Azure, we expect Q4 revenue growth to be 30% to 31% in constant currency or similar to our stronger-than-expected Q3 results. Growth will be driven by our Azure consumption business and continued contribution from Al with some impact from the Al 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. In 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. And 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.In more Personal Computing, we expect revenue to grow between 10% and 13% in constant currency or $15.2 billion to $15.6 billion. Windows OEM revenue growth should be in the low to mid-single digits as PC market unit volumes continue at prepandemic levels.In 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. In Devices, revenue should decline in the mid-teens as we continue to focus on our higher-margin premium products. Search 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. And 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.Now back to company guidance. We expect COGS between $19.6 billion to $19.8 billion, including approximately $700 million from purchase accounting, integration and transaction-related costs from the Activision acquisition. We expect operating expense of $17.15 billion to $17.25 billion, including approximately $300 million from purchase accounting, integration and transaction-related costs from the Activision acquisition. Therefore, we now expect full year FY '24 operating margins to be up over 2 points year-over-year, even with our cloud and Al 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 Al investments next year. Other 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. We expect our Q4 effective tax rate to be approximately 18%.Now I'd like to share some closing thoughts as we look to the next fiscal year. We continue to focus on building businesses that create meaningful value for our customers and therefore, significant growth opportunities for years to come. In FY '25, that focus on execution should again lead to double-digit revenue and operating income growth. To scale to meet the growing demand signal for our cloud and Al products, we expect FY '25 capital expenditures to be higher than FY '24. 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 through the year.We will also continue to prioritize operating leverage. And therefore, we expect FY '25 operating margins to be down only about 1 point year-over-year, even with our significant cloud and Al investments as well as a full year of impact from the Activision acquisition. We are leading the Al platform wave and are committed to bringing that value to our global customers as we enter the final quarter of our fiscal year.With that, let's go to Q&A, Brett.Keith Weiss Analyst at Morgan StanleyExcellent. Thank you, guys, for taking the question, and congratulations on the fantastic quarter. A lot of excitement in the marketplace around generative Al 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 like $100 billion data center.So obviously, investments are coming well ahead of the revenue contribution. But what I was hoping for is that you give us some color on how usually the management team, try to quantify the potential opportunities that underlie these investments because they are getting very big.And maybe if you could give us some hint on whether there's any truth to the potential of like $100 billion data center out there?Keith Weiss Analyst at Morgan StanleyExcellent. Thank you so much.Brent Thill Analyst at Jefferies Financial GroupSatya, 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. So I think everyone would love to get your sense of budget health for customers this year.Brent Thill Analyst at Jefferies Financial GroupThank you.Mark Moerdler Analyst at Sanford C. BernsteinThank you very much for taking my question. Congratulates on the quarter and the guidance.I want to follow up on the Al, obviously. We're seeing companies shifting their IT spending to invest in and learn about Al rather than receiving additional budgets for Al. At some point for Al to be transformative, as everyone expects, it needs to be accretive to spending. Satya, when do you believe Al 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?Amy, am I characterizing this correctly as it relates to Azure. Some projects are being delayed so that, that spending could be shifted from core Azure toward Azure Al? Thank you.Mark Moerdler Analyst at Sanford C. BernsteinIncredibly helpful. Thank you both.Karl Keirstead Analyst at UBS GroupThank you. Satya and Amy, congrats on these outstanding Azure results. I'd love to hone in a little bit on the 7-point lift to Azure growth from Al. Outstanding number, but it's leveling off a little bit from 6 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.Karl Keirstead Analyst at UBS GroupOkay, helpful. Thank you.Raimo Lenschow Analyst at BarclaysI have more conceptual question for Satya. If you think about Copilots and what you're doing there, you're kind of impacting a lot of this in businesses and the opportunities seem very broad-based. How do you think this will play out in the industry between you guys offering certain Copilots versus like 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 do you want to do, your partner strategy going forward? Thank you.Satya NadellaChairman and CEO at MicrosoftYes, it's a great question. So 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, right? So 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, right? So that's the first thing to note.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. Now we have the ability to essentially bridge the work and the work artifacts inside of these knowledge worker tools with the workflow and the business process and the business process data. So when we think about our Copilot, our Copilot has that ability to integrate, whether it's with ServiceNow, it has the ability to integrate with SAP, with Salesforce, with obviously, Dynamics. That's what we are seeing.In 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 if 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. And 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, right? 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 that data right in the Team's context.So that's I think what's exciting for us, having built all these horizontal tools, which I would say were under -- 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.Raimo Lenschow Analyst at BarclaysOkay. Thank you. Congrats on these as well.Michael Turrin Analyst at Wells Fargo & CompanyGreat. 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.Michael Turrin Analyst at Wells Fargo & CompanyConsistent core cloud growth is still pretty exciting to us as well. Thank you.Kirk Materne Analyst at Evercore ISIThanks for taking the question and I'll add my congrats in the quarter.Satya, 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 Al 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 Al growth at all at this point?Alex Zukin Analyst at Wolfe ResearchHey guys. Thanks for taking my questions. I wanted to ask the Al question but from a Microsoft 365 Copilot perspective. I 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 kind of how does the easing -- how tied are we like, 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 Al number as well as a higher Microsoft 365 Copilot number?Alex Zukin Analyst at Wolfe ResearchPerfect. Thank you.