MICROSOFT CORP Q1 FY2025 earnings call

• Microsoft Cloud showed strong performance with revenue surpassing $38.9 billion, up 22%. The AI business is on track to exceed a $10 billion annual revenue run rate next quarter. - Azure gained market share, Azure Arc had over 39,000 customers across various industries, and new cloud and AI infrastructure investments were made in Brazil, Italy, Mexico, and Sweden. - GitHub Copilot enterprise customers increased by 55% quarter - over - quarter, and the next phase of AI code generation was introduced. - Microsoft 365 Copilot innovation led to accelerated usage, with nearly 70% of the Fortune 500 using it. - Dynamics 365 captured market share, and monthly active users of Copilot across the CRM and ERP portfolio increased by over 60% quarter - over - quarter. - LinkedIn experienced accelerated member growth, and video views saw significant increases. - Gaming achieved new records in monthly active users, and Game Pass set a first - quarter revenue record.

The Intelligent Cloud segment generated revenue of $24.1 billion, rising 20% and 21% in constant currency. The Productivity and Business Processes segment recorded revenue of $28.3 billion, growing 12% and 13% in constant currency. The More Personal Computing segment had revenue of $13.2 billion, increasing by 17% with a 15-point net impact from the Activision acquisition. Microsoft Cloud revenue stood at $38.9 billion, marking a 22% growth. Commercial bookings saw an increase of 30% and 23% in constant currency. Microsoft Cloud gross margin percentage decreased by 2 percentage points year - over - year to 71%. The company's gross margin percentage was 69%, down 2 percentage points year - over - year, driven by the lower Microsoft Cloud gross margin and the impact from the Activision acquisition.

• FX is expected to increase total revenue and segment - level revenue growth by less than 1 point assuming current exchange rates remain stable. - Commercial bookings are expected to grow strongly due to increased long - term commitments to the platform and strong execution in core annuity sales motions. - Microsoft Cloud gross margin percentage is expected to be roughly 70%, down year - over - year due to the scaling of AI infrastructure. - Productivity and Business Processes revenue is expected to grow between 10% and 11% in constant currency. - Intelligent Cloud revenue is expected to grow between 18% and 20% in constant currency. - More Personal Computing revenue is expected to be in the range of $13.85 billion to $14.25 billion. - COGS is expected to grow between 11% and 13% in constant currency. - Operating expense is expected to grow approximately 7% in constant currency.

• There are supply constraints affecting Azure growth, including challenges related to data center (DC) build - out, power, and delays in third - party deliveries. - External factors such as the timing of finance lease deliveries and cloud infrastructure build - outs can impact the ability to fulfill demand.

Q: What are the internal constraints regarding investing in future generations of foundational models?

A: Ultimately, capital outlay for training is limited by the monetization of inference. It can be thought of as building based on the demand signal for inference, which in turn drives training.

Q: How does the deceleration in Azure growth in Q2 relate to supply pushouts?

A: The underlying consumption growth from Q1 to Q2 is stable, but Q2 has supply pushouts because third parties are delivering later than expected.

Q: Can you give color on CapEx growth and when facilities will be online?

A: CapEx growth depends on demand. As demand grows, CapEx growth will slow down and align with revenue growth. The pace depends on the rate of adoption.

Q: How to frame the relationship with OpenAI?

A: It is a mutually successful partnership. We push each other to achieve more, and we are committed to building on this relationship.

Q: How does the inference cycle look for Microsoft?

A: We have real demand across a diversified portfolio in the enterprise and our own products, so revenue comes from real inference demand.

Q: What's the nature of supply limitations impacting Azure in Q2?

A: Supply pushouts from third parties, where deliveries are later than expected, are affecting Azure in Q2.

Q: How to think about the journey between Copilots, agents and what's next?

A: The system consists of Copilot, Copilot Studio, agents, and autonomous agents. Copilot is the UI layer, agents are built in Copilot Studio, and autonomous agents need exceptions to be handled by Copilot.

Q: How to think about Copilot numbers and AI strategy on consumer vs enterprise?

A: Commercial Copilot has strong momentum, growing faster than previous suites. The consumer business like search, news, and ads is growing faster than the market, and AI is utilized in LinkedIn and gaming.