Microsoft (MSFT) Q2 2025 Profits Name Transcript | The Motley Idiot

MSFT income name for the era finishing December 31, 2024.

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Microsoft (MSFT -1.09%)
Q2 2025 Profits Name
Jan 29, 2025, 5:30 p.m. ETContents: Ready Remarks Questions and Solutions Name Contributors Ready Remarks: OperatorGreetings, and welcome to the Microsoft fiscal yr 2025 second-quarter income convention name. At the moment, all contributors are in a listen-only mode. An issue-and-answer consultation will observe the formal presentation. [Operator instructions] As a reminder, this convention is being recorded. It’s now my excitement to introduce your host, Brett Iversen, vice chairman of investor members of the family. Please pass forward.Brett Iversen — Vice President, Investor Members of the family Excellent afternoon, and thanks for becoming a member of us nowadays. At the name with me are Satya Nadella, chairman and leader government officer; Amy Hood, leader monetary officer; Alice Jolla, leader accounting officer; and Keith Dolliver, company secretary and deputy normal suggest. At the Microsoft Investor Members of the family website online, you’ll be able to to find our income press unlock and monetary abstract slide deck, which is meant to complement our ready remarks all through nowadays’s name and gives the reconciliation of variations between GAAP and non-GAAP monetary measures. Extra detailed outlook slides might be to be had at the Microsoft Investor Members of the family website online after we supply outlook observation on nowadays’s name. On this name, we can talk about sure non-GAAP pieces. The non-GAAP monetary measures equipped will have to now not be thought to be as an alternative choice to or awesome to the measures of economic efficiency ready in line with GAAP. They’re integrated as further clarifying pieces to help traders in additional figuring out the corporate’s second-quarter efficiency along with the have an effect on this stuff and occasions have at the monetary effects. All expansion comparisons we make at the name nowadays relate to the corresponding era of ultimate yr except differently famous.We can additionally supply expansion charges in consistent foreign money when to be had as a framework for assessing how our underlying companies carried out, except the impact of foreign currency echange charge fluctuations. The place expansion charges are the similar in consistent foreign money, we can check with the expansion charge solely. We can publish our ready remarks to our website online in an instant following the decision till your complete transcript is to be had. These days’s name is being webcast are living and recorded. For those who ask a query, it is going to be integrated in our are living transmission, within the transcript, and in any long run use of the recording. You’ll replay the decision and look at the transcript at the Microsoft Investor Members of the family website online. All over this name, we can be making forward-looking statements, which can be predictions, projections, or different statements about long run occasions. Those statements are in line with present expectancies and assumptions which can be matter to dangers and uncertainties. Precise effects may just materially vary on account of elements mentioned in nowadays’s income press unlock, within the feedback made all through this convention name, and within the Chance Components segment of our Shape 10-Ok, Shape 10-Q, and different studies and filings with the Securities and Trade Fee. We don’t adopt any accountability to replace any forward-looking observation. And with that, I will flip the decision over to Satya. Satya Nadella — Chair and Leader Govt Officer Thanks, Brett. This quarter, we noticed persisted energy in Microsoft Cloud, which surpassed $40 billion in earnings for the primary time, up 21% yr over yr. Enterprises are starting to transfer from evidence of ideas to enterprisewide deployments to unencumber the whole ROI of AI. And our AI trade has now surpassed an annual earnings run charge of $13 billion, up 175% yr over yr. Earlier than I am getting into the main points of the quarter, I wish to remark at the core thesis in the back of our method to how we organize our fleet and the way we allocate our capital to compute. AI scaling regulations proceed to compound throughout each pre-training and inference time compute. We ourselves were seeing important potency positive aspects in each practicing and inference for years now. On inference, we’ve got generally observed greater than 2x value efficiency acquire for each and every {hardware} era and greater than 10x for each and every fashion era because of utility optimizations. And as AI turns into extra environment friendly and available, we can see exponentially extra call for. Subsequently, a lot as we’ve got executed with the industrial cloud, we’re eager about steadily scaling our fleet globally and keeping up the appropriate steadiness throughout practicing and inference in addition to geo-distribution. Any further, it is a extra steady cycle ruled by means of each earnings expansion and capacity expansion because of the compounding results of software-driven AI scaling regulations and Moore’s Regulation. With that, I can stroll during the development we’re making throughout each and every layer of the tech stack. Azure is the infrastructure layer for AI. We proceed to amplify our information middle ability in step with each near-term and long-term call for indicators. We now have greater than doubled our general information middle ability within the ultimate 3 years, and we’ve got added extra ability ultimate yr than some other yr in our historical past. Our information facilities, networks, racks, and silicon are all coming in combination as a whole machine to power new efficiencies to energy each the cloud workloads of nowadays and the next-generation AI workloads. We proceed to make the most of Moore’s Regulation and refresh our fleet as evidenced by means of our make stronger of the newest from AMD, Intel, NVIDIA, in addition to our first-party silicon innovation from Maia, Cobalt, Spice up, and HSM. In the case of cloud migrations, we proceed to look shoppers like UBS transfer workloads to Azure. UBS by myself migrated mainframe workloads encompassing just about 400 billion data and two petabytes of knowledge. And we stay the cloud of selection for purchasers’ mission-critical Oracle, SAP, and VMware apps. On the information layer, we’re seeing Microsoft Cloth get away. We’ve over 19,000 paid shoppers from Hitachi to Johnson Controls to Schaeffler. Cloth is now the fastest-growing analytics product in our historical past. Energy BI may be deeply built-in with Cloth with over 30 million per month lively customers, up 40% since ultimate yr. Past Cloth, we’re seeing new AI-driven information patterns emerge. For those who glance beneath ChatGPT or Copilot or undertaking AI apps, you spot the expansion of uncooked garage, database products and services, and app platform products and services as those workloads scale. The selection of Azure OpenAI apps working on Azure databases and Azure App Services and products greater than doubled yr over yr, using important expansion in adoption throughout SQL, hyperscale, and Cosmos DB. Now, directly to AI platform and gear. As we shared ultimate week, we’re overjoyed OpenAI has made a brand new massive Azure dedication. Via our strategic partnership, we proceed to learn mutually from every different’s expansion. And with OpenAI’s APIs completely working on Azure, shoppers can depend on us to get get right of entry to to the sector’s main fashions. And OpenAI has much more coming quickly, so keep tuned. Azure AI Foundry options best-in-class tooling run instances to construct brokers, multi-agent apps, AIOps, API get right of entry to to 1000’s of fashions. Two months in, we have already got greater than 200,000 per month lively customers, and we’re smartly located with our make stronger of each OpenAI’s main fashions and the most efficient collection of open-source fashions and SLMs. DeepSeek’s R1 introduced nowadays by the use of the fashion catalog on Foundry and GitHub with automatic pink teaming, content material protection integration, and safety scanning. Our Phi circle of relatives of SLMs has now been downloaded over 20 million instances. And we even have greater than 30 fashions from companions like Bayer, PAYG AI, Rockwell Automation, Siemens to handle industry-specific use circumstances. With AI, how we construct, deploy, and care for code is essentially converting, and GitHub Copilot is increasingly more the software of selection for each virtual natives like ASOS and Spotify in addition to international’s greatest enterprises like HP, HSBC, and KPMG. We now have been thrilled by means of the early reaction to GitHub Copilot and VS Code with greater than 1 million sign-ups in simply the primary week publish release. All up, GitHub now could be house to 150 million builders, up 50% during the last two years. Now, directly to the way forward for paintings. Microsoft 365 Copilot is the UI for AI. It is helping supercharge worker productiveness and gives get right of entry to to a swarm of clever brokers to streamline worker workflow. We’re seeing sped up visitor adoption throughout all deal sizes as we win new Microsoft 365 Copilot shoppers and notice nearly all of current undertaking shoppers come again to buy extra seats. Whilst you have a look at shoppers who bought Copilot all through the primary quarter of availability, they have got expanded their seat jointly by means of greater than 10x during the last 18 months. To proportion only one instance, Novartis has added 1000’s of seats every quarter during the last yr and also have 40,000 seats. Barclays, Service Staff, Pearson, and College of Miami all bought 10,000 or extra seats this quarter. And general, the quantity of people that use Copilot day by day, once more, greater than doubled quarter over quarter. Workers also are enticing with Copilot greater than ever. Utilization depth larger greater than 60% quarter over quarter, and we’re increasing our TAM with Copilot Chat, which was once introduced previous this month. Copilot Chat, along side Copilot Studio, is now to be had to each and every worker to start out the use of brokers proper within the waft of labor. With Copilot Studio, we’re making it as easy to construct an agent as it’s to create an Excel spreadsheet. Greater than 160,000 organizations have already used for Copilot Studio, and so they jointly created greater than 400,000 customized brokers within the ultimate 3 months by myself, up over 2x quarter over quarter. We have now additionally presented our personal first-party brokers to facilitate conferences, organize initiatives, unravel commonplace HR and IT queries, and get right of entry to SharePoint information. And we additionally proceed to look companions like Adobe, SAP, ServiceNow, and Workday construct their third-party brokers and combine with Copilot. What’s using Copilot because the UI for AI in addition to our momentum with brokers is our wealthy information cloud, which is the sector’s greatest supply of organizational wisdom. Billions of emails, paperwork, and chats, loads of thousands and thousands of Groups conferences, and thousands and thousands of SharePoint websites are added every day. That is the undertaking wisdom cloud. It’s increasing speedy, up over 25% yr over yr. Extra extensively, what we’re seeing is Copilot plus brokers disrupting trade packages, and we’re leaning into this. With Dynamics 365, we took proportion as organizations like Ecolab, Lenovo, RTX, TotalEnergies, and Vizient switched to our AI-powered apps from legacy suppliers. In healthcare, DAX Copilot surpassed 2 million per month physician-patient encounters, up 54% quarter over quarter. It’s being utilized by peak suppliers like Mass Normal Brigham, Michigan Medication, Vanderbilt College Clinical Heart to extend productiveness in their physicians. In the case of Home windows, we’re seeing momentum construct as we means finish of make stronger for Home windows 10. Consumers are opting for the newest Home windows 11 gadgets for his or her enhanced safety and complex AI functions. 15% premium-priced laptops within the U.S. this vacation have been Copilot+ PCs, and we predict nearly all of the PCs offered within the subsequent a number of years to be Copilots+ PCs. We additionally see increasingly builders from Adobe and CapCut to WhatsApp construct apps that leverage integrated NPUs. And they’re going to quickly be capable of run DeepSeek’s R1 distal fashions in the community on Copilot+ PCs in addition to the huge ecosystem of GPUs to be had on Home windows. And past Copilot+ PCs, probably the most robust AI workstation for native building is a Home windows PC working WSL2 powered by means of NVIDIA RTX GPUs. Now, directly to safety. We proceed to make development with our Protected Long run initiative, and we’re making use of what we’ve got discovered, introducing over 80 new product functions during the last yr. With Safety Copilot organizations throughout personal and public sector like Town of Johannesburg, Eastman, Intesa, Nationwide Australia Financial institution, NTT can unravel incidents 30% quicker. Knowledge governance is increasingly more serious, and shoppers now use Microsoft purview to audit over 2 billion Copilot interactions for protected and compliant use. Now, directly to our client companies, beginning with LinkedIn. Extra pros than ever are enticing in high-value conversations on LinkedIn with feedback up 37% yr over yr. Brief-form video continues to develop at the platform, with video advent all up increasing at two times the velocity of alternative publish codecs. We are additionally innovating with brokers to assist recruiters and small companies to find certified applicants quicker, and our hiring trade once more took proportion. In subscriptions, LinkedIn premiums surpassed $2 billion in annual earnings for the primary time this quarter. Subscriber expansion has larger just about 50% during the last two years, and just about 40% of subscribers have used our AI options to make stronger their profiles. And LinkedIn Advertising Resolution stays the chief in B2B promoting. Now, on to go looking, promoting, and information. We as soon as once more took proportion throughout Bing and Edge. Edge surpassed 30% marketplace proportion within the U.S. on Home windows and has taken proportion for 15 consecutive quarters. The investments we’ve got made in bettering our advert charges are paying off and advertisers increasingly more see our community as an very important platform to optimize ROI. And our Copilot client app is seeing larger engagement and retention with its progressed pace, distinctive persona, first-of-its-kind options like Copilot Imaginative and prescient. Simply nowadays, we made Assume Deeper, powered by means of o1, loose for all Copilot customers globally. Now, directly to gaming. We’re eager about bettering the profitability of the trade so as to place it for long-term expansion pushed by means of higher-margin content material and platform products and services, and we’re handing over in this plan. Black Ops 6 was once top-selling recreation on Xbox and PlayStation this quarter and noticed extra gamers in its release quarter than some other paid unlock within the franchise historical past. And we noticed rave opinions of Indiana Jones and the Nice Circle, which has already been performed by means of greater than 4 million folks. We additionally proceed to look sturdy momentum for Xbox Cloud Gaming with a document 140 million hours streamed this quarter. All up, Sport Go set a brand new quarterly document for earnings and grew its PC subscriber base by means of over 30% as we focal point on using totally paid subscribers throughout endpoints. In last, we proceed to innovate throughout our tech stack to assist our shoppers on this AI technology, and I am energized by means of the various alternatives forward. With that, let me flip it over to Amy.Amy E. Hood — Govt Vice President, Leader Monetary Officer Thanks, Satya, and excellent afternoon, everybody. This quarter, earnings was once $69.6 billion, up 12%. Gross margin bucks larger 13% and 12% in consistent foreign money, whilst working source of revenue larger 17% and 16% in consistent foreign money. Profits consistent with proportion was once $3.23, an building up of 10%. We delivered any other quarter of double-digit top- and bottom-line expansion. Effects have been pushed by means of sturdy call for for our cloud and AI choices, whilst we additionally progressed our working leverage with higher-than-expected working source of revenue expansion. As you heard from Satya, our AI trade annual earnings run charge surpassed $13 billion and was once above expectancies. Business bookings larger 67% and 75% in consistent foreign money and have been considerably forward of expectancies pushed by means of Azure commitments from OpenAI. Execution was once sturdy throughout our core annuity gross sales motions with expansion within the selection of $100 million-plus contracts for each Azure and Microsoft 365. Business final efficiency legal responsibility larger to $298 billion, up 34% and 36% in consistent foreign money. More or less 40% might be known in earnings within the subsequent 365 days, up 21% yr over yr. The remainder portion known past a better 365 days larger 45%. And this quarter, our annuity combine was once 97%. FX didn’t have a vital have an effect on on our effects and was once kind of in step with expectancies on general corporate earnings, extra non-public computing earnings, general corporate COGS, and working expense. FX diminished earnings greater than anticipated in our industrial segments. Microsoft Cloud earnings was once $40.9 billion and grew 21%. Microsoft Cloud gross margin share was once 70%, in step with expectancies, and diminished two issues yr over yr, pushed by means of scaling our AI infrastructure. Corporate gross margin share larger moderately yr over yr to 69%, basically pushed by means of gross sales combine shift to higher-margin companies in addition to development in gaming and seek, partly offset by means of the have an effect on of scaling our AI infrastructure. Running bills larger 5%, not up to anticipated, and working margins larger two issues yr over yr to 45%. The simpler-than-expected margin growth was once pushed by means of handing over efficiencies throughout our companies as we make investments to scale AI infrastructure and construct AI packages. At a complete corporate stage, head depend on the finish of December was once 2% increased than a yr in the past and was once fairly unchanged from ultimate quarter. Now, to our section effects. Earnings from Productiveness and Industry Processes was once $29.4 billion and grew 14% and 13% in consistent foreign money, even with the negative FX have an effect on famous previous. Effects have been forward of expectancies pushed by means of Microsoft 365 Business. Microsoft 365 Business Cloud earnings larger 16% and 15% in consistent foreign money, moderately forward of expectancies because of better-than-expected efficiency in E5 and Microsoft 365 Copilot. With M365 Copilot, we proceed to look expansion in adoption, growth, and utilization. ARPU expansion was once once more pushed by means of E5 and M365 Copilot. Paid M365 industrial seats grew 7% yr over yr, with put in base growth throughout all visitor segments, even though basically in our small and medium trade and frontline employee choices. M365 industrial merchandise earnings larger 13%, considerably forward of expectancies, pushed by means of higher-than-expected transactional buying with the release of Place of work 2024 in addition to the Home windows industrial on-premises elements from the better-than-expected efficiency of M365 suites famous previous. M365 client cloud earnings larger 8%, moderately forward of expectancies. We noticed persisted momentum in M365 client subscriptions, which grew 10% to $86.3 million, with combine shift to M365 fundamental. LinkedIn earnings larger 9% with persisted expansion throughout all strains of industrial. In our Skill Answers trade, effects have been moderately beneath expectancies, pushed by means of persisted weak spot within the hiring marketplace in key verticals. Dynamics 365 earnings larger 19% and 18% in consistent foreign money, moderately forward of expectancies with expansion throughout all workloads. Section gross margin bucks larger 13% and 12% in consistent foreign money, and gross margin share diminished moderately yr over yr, pushed by means of scaling our AI infrastructure. Running bills larger 6% and working source of revenue larger 16% and 15% in consistent foreign money. Subsequent, the Clever Cloud section. Earnings was once $25.5 billion and grew 19% with extra negative FX have an effect on than anticipated. Apart from the negative FX have an effect on, ends up in Azure non-AI products and services, on-prem server, and undertaking and spouse products and services have been moderately not up to anticipated, partly offset by means of better-than-expected ends up in Azure AI products and services. Azure different cloud products and services earnings grew 31%. Azure expansion integrated 13 issues from AI products and services, which grew 157% yr over yr, and was once forward of expectancies whilst call for persisted to be increased than our to be had ability. Enlargement in our non-AI products and services was once moderately not up to anticipated because of go-to-market execution demanding situations, specifically with our shoppers that we basically succeed in via our scale motions as we steadiness using near-term non-AI intake with AI expansion. In our on-premises server trade, earnings diminished 3%, moderately beneath expectancies, pushed by means of slower-than-expected buying round Home windows Server 2025 release. Undertaking and Spouse Services and products earnings diminished 1%, beneath expectancies, with lower-than-expected efficiency throughout Undertaking Give a boost to Services and products and Business Answers. Section gross margin bucks larger 12% and 13% in consistent foreign money, and gross margin share diminished 4 issues yr over yr, pushed by means of scaling our AI infrastructure. Running bills larger 10% and working source of revenue grew 14%. Now, to Extra Non-public Computing. Earnings was once $14.7 billion, fairly unchanged yr over yr, with better-than-expected effects pushed basically by means of Home windows OEM prebuilds, utilization from a third-party partnership in seek in addition to Name of Accountability release efficiency in gaming. Home windows OEM and gadgets earnings larger 4% yr over yr, forward of expectancies, pushed by means of industrial stock builds prematurely of Home windows 10 finish make stronger in addition to uncertainty round price lists. Seek and information promoting earnings ex-TAC larger 21% and 20% in consistent foreign money, forward of expectancies, pushed by means of utilization from a third-party partnership. Enlargement is still pushed by means of charge growth and wholesome quantity expansion in each Edge and Bing. And in gaming, earnings diminished 7% and eight% in consistent foreign money as content material and products and services expansion persisted to be offset by means of {hardware} declines. Xbox content material and products and services earnings larger 2%, forward of expectancies, pushed by means of stronger-than-expected efficiency in Snowfall and Activision content material, together with Name of Accountability. Section gross margin bucks larger 13% and 12% in consistent foreign money. Gross margin share larger six issues yr over yr, pushed by means of gross sales combine shift to higher-margin companies in addition to sturdy execution on margin development in gaming and seek. Running bills diminished 1%. Running source of revenue larger 32% and 30% in consistent foreign money, pushed by means of persisted prioritization of higher-margin alternatives. Now, again to general corporate effects. Capital expenditures, together with finance rentals, have been $22.6 billion, in step with expectancies, and money paid for PP&E was once $15.8 billion. Greater than part of our cloud and AI-related spend was once on long-lived belongings that can make stronger monetization over a better 15 years and past. The remainder cloud and AI spend was once basically for servers, each CPUs and GPUs, to serve shoppers in line with call for indicators, together with our customer-contracted backlog. Money waft from operations was once $22.3 billion, up 18%, pushed by means of sturdy cloud billings and collections, partly offset by means of increased provider, worker, and tax bills. Loose money waft was once $6.5 billion, down 29% yr over yr, reflecting the capital expenditures famous previous. This quarter, different source of revenue and expense was once unfavorable $2.3 billion, not up to our October steerage because of the impairment price from our Cruise funding. Our efficient tax charge got here in moderately not up to expected at 18%. And in the end, we returned $9.7 billion to shareholders via dividends and proportion repurchases. Now, transferring to our Q3 outlook, which except particularly famous differently, is on a U.S. buck foundation. First, FX. With the strengthening of the U.S. buck since October, we now be expecting FX to lower general earnings expansion by means of two issues. Throughout the segments, we predict FX to lower earnings expansion by means of two issues in Productiveness and Industry Processes and Clever Cloud and kind of one level in Extra Non-public Computing. When in comparison to our October steerage assumptions on Q3 FX have an effect on, it is a lower to general earnings of kind of $1 billion. We predict FX to lower COGS expansion by means of roughly two issues and working expense expansion by means of roughly one level. Our outlook has most of the tendencies we noticed in Q2 proceed via Q3. Call for for our differentiated cloud and AI choices around the Microsoft Cloud will have to power any other quarter of sturdy expansion. In industrial bookings, with a fairly flat expiry base and a powerful prior yr similar with regards to massive Azure contracts, we predict expansion to be kind of flat yr over yr. We predict constant execution throughout our core annuity gross sales motions and persisted long-term commitments to our platform. As a reminder, greater long-term Azure contracts, which can be extra unpredictable of their timing, can power larger quarterly volatility in our bookings expansion charge. Microsoft Cloud gross margin share will have to be kind of 69%, down yr over yr, pushed by means of the have an effect on of scaling our AI infrastructure. Subsequent, to section steerage. In Productiveness and Industry Processes, we predict earnings to develop between 11% and 12% in consistent foreign money, or USD 29.4 billion to USD 29.7 billion. Microsoft 365 industrial cloud earnings expansion will have to be between 14% and 15% in consistent foreign money, fairly strong in comparison to our better-than-expected Q2 effects. We predict persisted ARPU expansion via E5 and M365 Copilot, and we once more be expecting some seat expansion moderation given the scale of the put in base. For M365 industrial merchandise, we predict earnings to be fairly unchanged yr over yr. As a reminder, M365 industrial merchandise come with Home windows industrial on-premises elements of M365 suites. So, our quarterly earnings expansion may have variability basically from in-period earnings reputation relying at the mixture of contracts. M365 client cloud earnings expansion will have to be within the mid- to excessive unmarried digits, pushed by means of M365 subscriptions. For LinkedIn, we predict earnings expansion within the low to mid-single digits. Even supposing we predict expansion throughout all companies, the Q2 tendencies in Skill Answers will have to proceed in Q3 as a headwind to expansion. And in Dynamics 365, we predict earnings expansion to be within the mid-teens pushed by means of persisted expansion throughout all workloads. For Clever Cloud, we predict earnings to develop between 19% and 20% in consistent foreign money, or USD 25.9 billion to USD 26.2 billion. Earnings will proceed to be pushed by means of Azure, which, as a reminder, may have quarterly variability basically from in-period earnings reputation relying at the mixture of contracts. In Azure, we predict Q3 earnings expansion to be between 31% and 32% in consistent foreign money pushed by means of sturdy call for for our portfolio of products and services. As we shared in October, the contribution from our AI products and services will develop from larger AI ability coming on-line. In non-AI products and services, wholesome expansion continues, even if we predict ongoing have an effect on via H2 as we paintings to handle the execution demanding situations famous previous. And whilst we predict to be AI capacity-constrained in Q3, by means of the top of FY ’25, we will have to be kind of in step with near-term call for given our important capital investments. In our on-premises server trade, we predict earnings to say no within the mid-single digits, pushed by means of a lower in transactional buying. And in Undertaking and Spouse Services and products, we predict earnings expansion to be within the low to mid-single digits. In Extra Non-public Computing, we predict earnings to be USD 12.4 billion to USD 12.8 billion with persisted prioritization of higher-margin alternatives. Home windows OEM and gadgets earnings will have to decline within the low to mid-single digits. We predict earnings from Home windows OEM to be fairly flat yr over yr as our outlook assumes stock ranges will normalize. Precise effects would possibly vary in line with present tariff uncertainties. Units earnings will decline. Seek and information promoting ex-TAC earnings expansion will have to be within the mid-teens from persisted expansion in each quantity and earnings consistent with seek with proportion positive aspects throughout Edge and Bing. Enlargement is predicted to average from ultimate quarter, basically because of further FX have an effect on and because the third-party partnership utilization famous previous returns to extra customary ranges. Seek ex-TAC expansion might be increased than general seek and information promoting earnings expansion, which we predict to be within the mid- to excessive unmarried digits. And in gaming, we predict earnings expansion to be within the low unmarried digits. We predict Xbox content material and products and services earnings expansion to be within the low to mid-single digits pushed by means of first-party content material in addition to Xbox Sport Go. {Hardware} earnings will decline yr over yr. Now, again to corporate steerage. We predict COGS to develop between 19% and 20% in consistent foreign money or to be between USD 21.65 billion to USD 21.85 billion and working expense to develop between 5% and six% in consistent foreign money or to be between USD 16.4 billion and USD 16.5 billion. Different source of revenue and expense is predicted to be kind of unfavorable $1 billion, basically pushed by means of investments accounted for only the fairness approach. As a reminder, we don’t acknowledge mark-to-market positive aspects or losses on fairness approach investments. And finally, we predict our Q3 efficient tax charge to be roughly 18%. Now, some further ideas on the remainder of the fiscal yr and past. First, FX. With the strengthening of the U.S. buck since October, we now be expecting FX to lower This autumn earnings and COGS expansion by means of multiple level and working expense expansion by means of kind of one level. Subsequent, capital expenditures. We predict quarterly spend in Q3 and This autumn to stay at identical ranges as our Q2 spend. In FY ’26, we predict to proceed making an investment towards sturdy call for indicators, together with visitor shriveled backlog we wish to ship towards around the entirety of our Microsoft Cloud. Then again, the expansion charge might be not up to FY ’25 and the combo of spend will start to shift again to short-lived belongings, which can be extra correlated to earnings expansion. As a reminder, our long-lived infrastructure investments are fungible, enabling us to stay agile as we meet visitor call for globally throughout our Microsoft Cloud, together with AI workloads. As at all times, there may also be quarterly spend variability from cloud infrastructure build-outs and the timing of supply of finance rentals. For the whole fiscal yr, we proceed to be expecting double-digit earnings and working source of revenue expansion as we focal point on handing over efficiencies throughout each COGS and working expense. And given the working leverage that we have delivered all through the yr, inclusive of potency positive aspects as we scale our AI infrastructure and make the most of our personal AI answers, we now be expecting FY ’25 working margins to be up moderately yr over yr. And in the end, our FY ’25 full-year efficient tax charge will have to be between 18% and 19%. In last, we’re dedicated to handing over real-world AI answers to assist shoppers develop and make stronger their effects. We’re assured in our management place as we develop with our shoppers. Earlier than turning to Q&A, I’ve one particular thanks. Brett Iversen is transferring to a brand new position right here because the Head of our Americas gross sales finance workforce. On behalf of the corporate, thanks to your super have an effect on main Investor Members of the family for the previous 4 years and for the partnership with each Satya and me. And I would love to welcome Jonathan Neilson, the previous head of finance for our safety merchandise, who’s returning to Investor Members of the family to guide the workforce. With that, let’s pass to Q&A, Brett.Brett Iversen — Vice President, Investor Members of the family Thank you, Amy. We will now transfer over to Q&A. Out of appreciate for others at the name, we request that contributors please solely ask one query. Operator, are you able to please repeat your directions? Questions & Solutions:OperatorThank you. [Operator instructions] And our first query comes from the road of Keith Weiss with Morgan Stanley. Please continue.Keith Weiss — Analyst Superb. Thanks, guys, for taking the query. And echoing Amy’s feedback, Brett, congratulations at the new position. It is been a excitement running with you, and ideal of success in that new position. Having a look on the quarter, any other truly forged quarter in relation to industrial bookings. However once more, we have been somewhat bit upset on Azure coming in on the backside finish of the steerage vary. Amy, I used to be hoping it’s essential dig into most likely what a few of the ones execution problems have been, what the answer to these problems have been. And can we nonetheless really feel relaxed within the acceleration into the again part of the yr that you just have been speaking about after the June quarter and after ultimate quarter? Thanks very a lot.Amy E. Hood — Govt Vice President, Leader Monetary Officer Thank you, Keith. Let me spend somewhat time on that about what we noticed in Q2 and come up with some further background at the near-term execution problems that we are speaking about. First, let me be very particular, they’re within the non-AI ACR part. Our Azure AI effects have been greater than we concept because of superb paintings by means of the working groups pulling in some supply dates even by means of weeks. If you find yourself capacity-constrained, weeks topic, and it was once excellent execution by means of the workforce, and you spot that within the earnings effects. At the non-AI facet, truly, the demanding situations have been in what we name the size motions. So, take into accounts basically, those are shoppers we succeed in via companions and thru extra oblique strategies of marketing. And truly, the artwork kind there may be as those shoppers, which we succeed in on this manner, are seeking to steadiness how do you do an AI workload with proceeding one of the vital paintings they have got executed on migrations and different basics, we then took our gross sales motions in the summertime and truly modified to take a look at to steadiness the ones two. As you do this, you be informed along with your shoppers and along with your companions on kind of getting that steadiness proper between the place to place our investments, the place to place the promoting bucks, and importantly, the place to place folks with regards to protection and having the ability to assist shoppers make the ones transitions. And I feel we’re going to make some changes to ensure we’re in steadiness as a result of when you’re making the ones adjustments in the summertime, by the point it really works its manner during the machine, you’ll be able to see the affects on whether or not you’ve gotten that steadiness proper. And so, the groups are running via that. They are already making changes. And I be expecting whilst we can see some have an effect on via H2 simply because whilst you paintings during the scale movement, it may take a while for that to regulate. I think excellent that the groups perceive and are running via that. So, confidently, that is simply useful on that. Then we talked somewhat bit about Q3. And so, we have mentioned 31 to 32 after publishing a 31 this quarter. Our AI effects that we had felt excellent about and mentioned our talent to land that earnings is similar. So, once more, in Q3, we’re running from a lovely constrained ability position, and that’s the reason no other than it was once our expectation to be in that place ultimate October once I talked to you all. And once I discuss being capacity-constrained, it takes two issues. You must have house, which I most often name long-lived belongings, proper? That is the infrastructure and the land after which it’s important to have kits. We are proceeding, and you have got observed that is why our spend has pivoted this manner, to be within the long-lived funding. We now have been quick energy and house. And so, as you spot the ones investments land that we have made during the last 3 years, we get nearer to that steadiness by means of the top of this yr. And so, the boldness at the AI facet is still there with regards to having the ability to promote, make the most of, and be, I feel, inspired by means of the indicators. What we are seeing is ready to look simply how the non-AI ACR works during the scale motions in H2. However normally, the one factor that is modified is truly that scale movement from my seat, Keith. I’m hoping that is useful. Satya?Satya Nadella — Chair and Leader Govt Officer Yeah. I feel, Amy, only one factor I would upload, Keith, for your query is, as Amy stated, AI expansion charge is in truth greater than what we anticipated, and we labored via one of the vital provide stuff and extra importantly, one of the vital workloads are scaling smartly. And whilst you glance beneath any of those AI workloads, the opposite factor this is excellent is the ratio of even what we’d name simply common garage, information products and services, app products and services. So, beneath a ChatGPT or a Copilot and even the rising AI workloads within the undertaking, in order that’s all excellent. The undertaking workloads, whether or not it is SAP or whether or not it is VMware migrations, what have you ever, that is additionally in excellent form. And it is simply the size position the place Amy mentioned this nuance, proper, how do you truly tweak the incentives, go-to-market? At a time of platform shifts, you more or less wish to make sure to lean into even the brand new design wins, and also you simply do not stay doing the stuff that you just did within the earlier era. And that’s the reason the artwork kind Amy was once referencing to, to make sure to get the appropriate steadiness. However let me put it this manner. You may quite win the brand new than simply offer protection to the previous. And that’s the reason kind of any other factor that we for sure will lean into at all times.Brett Iversen — Vice President, Investor Members of the family Thank you, Keith. Operator, subsequent query, please.OperatorThe subsequent query comes from the road of Mark Moerdler with Bernstein Analysis. Please continue.Mark Moerdler — Analyst Thanks very a lot for taking my query. Are you able to give extra colour on what drove the a ways larger-than-expected Microsoft AI earnings? We talked a bit of concerning the Azure AI part of it. However are you able to give extra colour on that? And our estimates are that the Copilot was once a lot larger than we had anticipated and increasing a lot quicker. Any further main points at the breakdown of what that Microsoft AI beat could be nice. Thank you.Amy E. Hood — Govt Vice President, Leader Monetary Officer Thank you, Mark, for the query. Sure, that was once, as we mentioned, greater than anticipated. A few items to that, which you as it should be recognized, primary is the Azure part we simply mentioned. And the second one piece, you might be proper, Microsoft Copilot was once greater. And what was once vital about that, we noticed energy each in seats, each new seats and growth seats, as Satya mentioned. And utilization does not immediately have an effect on earnings, however in fact, not directly does as folks get increasingly price added. And likewise, value consistent with seat was once in truth relatively excellent. We nonetheless have a excellent sign for price. So, the ones are the largest items, Mark, of that kind of outperformance with regards to our expectancies.Brett Iversen — Vice President, Investor Members of the family Thanks, Mark. Operator, subsequent query, please.OperatorThe subsequent query comes from the road of Brent Thill with Jefferies. Please continue.Brent Thill — Analyst Thank you. Satya, you discussed DeepSeek a few instances to your ready remarks. I feel everybody would like your ideas on what you might be seeing there. And are we seeing AI scale now at a cheaper price? Are we achieving a mark the place you’ll be able to see that? Or can we nonetheless have a while to head? Thank you to your ideas in this.Satya Nadella — Chair and Leader Govt Officer Yeah. Thank you, Brent. So, yeah, in my remarks, I mentioned, in some sense, what is taking place with AI. It is no other than what was once taking place with the common compute cycle. It is at all times about bending the curve after which striking extra issues up the curve. So, there may be Moore’s Regulation that is running and hyperdrive. Then on peak of that, there may be the AI scaling regulations, each the pretraining and the inference time compute that compound, and that’s the reason all utility. You will have to recall to mind what I stated in my remarks, which we’ve got seen for some time, which is 10x on enhancements consistent with cycle simply on account of the entire utility optimizations on inference. And so, that is what you spot. And upload to that, I feel DeepSeek has had some genuine inventions. And that’s one of the vital issues that even OpenAI present in ’01. And so, we’re going to — clearly, now that every one will get commoditized and it is going to get extensively used. And the massive beneficiaries of any utility cycle like that’s the shoppers, proper? As a result of on the finish of the day, in the event you take into accounts it, proper, what was once the massive lesson discovered from shopper server to cloud? Extra folks purchased servers, with the exception of it was once referred to as cloud. And so, when token costs fall, inference computing costs fall, that implies folks can devour extra, and there might be extra apps written. And it is attention-grabbing to look that once I referenced those fashions which can be lovely robust, it is impossible to suppose that right here we’re in kind of starting of ’25, the place at the PC, you’ll be able to run a fashion that required lovely huge cloud infrastructure. So, that form of optimization approach AI might be a lot more ubiquitous. And so, subsequently, for a hyperscaler like us, a PC platform supplier like us, that is all excellent information so far as I am involved.Brett Iversen — Vice President, Investor Members of the family Thank you, Brent. Operator, subsequent query, please.OperatorThe subsequent query comes from the road of Karl Keirstead with UBS. Please continue.Karl Keirstead — Analyst Thanks. Possibly this one is easily for Satya, and it is usually clear of the numbers. However Satya, I sought after to invite you concerning the Stargate information and the introduced adjustments within the OpenAI courting ultimate week. It sort of feels that the majority of your traders have interpreted this as Microsoft, needless to say, final very dedicated to OpenAI’s good fortune, however electing to take extra of a backseat with regards to investment OpenAI’s long run practicing capex wishes. I used to be hoping you could body your strategic resolution right here round Stargate, and Amy, whether or not there may be any takeaway for traders from that call with regards to how you might be fascinated with capex wishes over a better a number of years? Thanks.Satya Nadella — Chair and Leader Govt Officer Yeah. Thank you for the query. So, we stay more than happy with the partnership with OpenAI. And as you noticed, they have got dedicated in a large solution to Azure, or even within the bookings, what we known is simply the primary tranche of it. And so, you’ll be able to see given the ROFR we’ve got extra advantages of that even into the long run. And clearly, their good fortune is our good fortune as a result of even the entire different industrial preparations that we detailed out within the weblog that we put out even commensurate with that announcement. However for your general level, the object that I might say is we’re construction a lovely fungible fleet, proper? We’re ensuring that there is the appropriate steadiness between practicing and inference. It is geo-distributed. We’re running tremendous onerous on the entire utility optimizations, proper? I imply, simply now not the utility optimizations that come on account of what DeepSeek has executed, however the entire paintings we’ve got executed to, for instance, cut back the costs of GPT fashions through the years in partnership with OpenAI. If truth be told, we did numerous the paintings at the inference optimizations on it, and that’s the reason been key to compelling, proper? One of the vital key issues to notice in AI is you simply do not release the frontier fashion — but when it is too dear to serve, it is no excellent, proper? It does — it would possibly not generate any call for. So, you have to have that optimization in order that inferencing prices are coming down and they may be able to be ate up extensively. And so, that is the fleet physics we’re managing. And likewise, keep in mind, you do not need to shop for an excessive amount of of the rest at one time for the reason that Moore’s Regulation once a year goes to come up with 2x, your optimization goes to come up with 10x. You need to steadily improve the fleet, modernize the fleet, age the fleet, and on the finish of the day, have the appropriate ratio of monetization and demand-driven monetization to what you recall to mind as the educational expense. So, I think superb concerning the funding we’re making, and it is fungible, and it simply permits us to scale extra long-term trade.Amy E. Hood — Govt Vice President, Leader Monetary Officer And possibly, Karl, simply to reiterate somewhat of the feedback that I made on capex as a result of I feel it is useful to floor a bit of extra in what Satya is announcing, a fungible fleet approach. We now have, and I feel we mentioned it, as regards to $300 billion of RPO. This is dedicated visitor contracts that wish to be delivered on. And the speedier we will do this and the extra successfully we will do this, the we’re, now not simply the OpenAI partnership, which is a work of that, however with all the platform that we wish to ship for our shoppers. And I feel the opposite factor that is now and again lacking is after we say fungible, we imply now not simply the main use, which we have at all times mentioned, which is inference. However there may be some practicing publish practicing, which is a key part. After which they are simply working the industrial cloud, which at each and every layer below each and every trendy AI app that is going to be constructed might be required. It is going to be required to be dispensed, and it is going to be required to be international. And all of the ones issues are truly vital as it then approach you are the most productive. And so, the funding you spot us make in capex, you might be proper, the entrance finish has been this kind of infrastructure construct that we could us truly catch up now not simply at the AI infrastructure we wanted, however take into accounts that because the construction itself, information facilities, but additionally one of the vital catch-up we wish to do at the industrial cloud facet. After which you’ll be able to see the pivot to extra CPU and GPU. And that pivot will extra immediately correlate to earnings, and it is going to be shriveled both with the partnership that you just requested about with OpenAI or with others. And so, I do suppose the way in which I would like everybody to internalize it’s that the capex expansion goes via that cycle pivot, which is way more correlated to visitor contract supply, regardless of who the top visitor is.Brett Iversen — Vice President, Investor Members of the family Thank you, Karl. Operator, subsequent query, please.OperatorAnd our subsequent query comes from the road of Brad Zelnick with Deutsche Financial institution. Please continue.Brad Zelnick — Analyst Thanks very a lot for taking my query. And I will echo my congrats and gratitude to Brett as smartly. Satya, as we take into accounts Microsoft’s very wealthy Copilot portfolio, now having been in marketplace for over a yr with the goods and precision solely getting greater and the price of inference coming down, how do you take into accounts the adventure from right here and most likely the power to package deal and evolve the go-to-market to handle the broadest vary of shoppers and visitor necessities available in the market? Thank you.Satya Nadella — Chair and Leader Govt Officer Neatly, thank you, Brad, for the query. If truth be told, you noticed us make two bulletins not too long ago. One is at the M365 Copilot facet, we’ve the Copilot chat. So, that is now going to be extensively deployed throughout all the put in base successfully as a result of you’ll be able to pass have this now became on by means of IT and everyone can get started the use of web-grounded chat with the entire undertaking controls immediately, and it has Copilot Studio inbuilt. And so, that implies they may be able to get started construction brokers. So, we recall to mind that plus the whole Copilot as a excellent aggregate that I feel will boost up, relatively frankly, with regards to simply seat utilization and agent construction and what have you ever. So, that is kind of one. And the opposite factor is you additionally see, even at the client facet, we simply, the previous day, introduced one — or the ThinkHarder characteristic on Copilot now that is powered by means of o1. It is to be had globally, proper? So, you’ll be able to see the advantages of inference optimization and the associated fee coming down approach you’ll be able to power extra ubiquity of what have been options that ones have been kind of top class tier, and that’s the reason all for sure one thing that we can do throughout, proper? The similar factor is going on in GitHub Copilot, similar factor in safety Copilot. So, around the period and breadth of our portfolio, you’ll be able to see that.Brad Zelnick — Analyst Thanks.Brett Iversen — Vice President, Investor Members of the family Thank you, Brad. Operator, subsequent query, please.OperatorThe subsequent query comes from the road of Brad Reback with Stifel. Please continue.Brad Reback — Analyst That is nice. Thanks very a lot. Satya, in the event you glance out a number of years, any sense of what p.c of inference executed on Azure might be executed on proprietary fashions as opposed to open fashions? And with that stated, does it topic to Microsoft on the finish of the day? Thank you.Satya Nadella — Chair and Leader Govt Officer Yeah. It is a excellent query as a result of at some stage, what you might be seeing is successfully loads of fashions that get utilized in any software, proper? Whilst you glance beneath even a Copilot or a GitHub Copilot or what have you ever, you already see loads of many alternative fashions. You construct fashions, you fine-tune fashions, you distill fashions. A few of them are fashions that you just distill into an open-source fashion. So, there may be going to be a mixture. So, we have at all times maintained that it is at all times excellent to have frontier fashions. You need to at all times construct your software with excessive ambition the use of the most efficient. fashion this is to be had after which optimize from there on. So, that is additionally any other facet. Like there is a temporality to it, proper? What you get started with as a given COGS profile does not wish to be the top since you steadily optimize for latency and COGS and putting in place other fashions. And if truth be told, all that complexity, by means of the way in which, needs to be controlled by means of a brand new app server. So, probably the most issues that we’re making an investment closely on is foundry as a result of from an app developer viewpoint, you more or less wish to stay tempo with this flurry of fashions which can be coming in, and you wish to have to have an evergreen manner to your software to have the benefit of all that innovation, however now not have the entire dev price or the DevOps price or what folks discuss AIOps price. So, we also are making an investment considerably in the entire app server for any workload so to have the benefit of a lot of these other fashions, open supply, shut supply, other weight categories, and on the similar time, from an operations viewpoint, it is quicker, more straightforward for you.Brad Reback — Analyst Nice. Thanks.Brett Iversen — Vice President, Investor Members of the family Thank you, Brad. Operator, subsequent query, please.OperatorAnd a better query comes from the road of Brad Sills with Financial institution of The us. Please continue.Brad Sills — Analyst Glorious. Thanks such a lot. Nice to listen to concerning the energy you might be seeing in Copilot. Would really like to get some colour as to the place you might be seeing that energy. Is it departmental offers, shoppers transferring from evidence of thought to departmental offers, possibly a couple of departmental offers within the undertaking? And also you discussed some uptick in utilization tendencies. Would really like to get some colour on simply the typical use circumstances that you are seeing that come up with that self assurance that that can ramp into monetization later. Thanks.Satya Nadella — Chair and Leader Govt Officer Yeah. I imply, I feel the preliminary kind of set of seats have been for puts the place there may be extra trust in instant productiveness, a gross sales workforce, in finance, or in provide chain the place there may be numerous, like, for instance, SharePoint grounded information that you wish to have so to use along with cyber web information and feature it produce effects which can be advisable. However then what is taking place very just like what we’ve got observed in those earlier era productiveness issues is that folks collaborate throughout purposes, throughout roles, proper? As an example, even in my very own day by day dependancy, I’m going to talk. I exploit paintings tab and get effects, after which I in an instant proportion the use of pages with colleagues. I kind of name it suppose with AI and paintings with folks. And that trend then calls for you to make it extra of an ordinary factor around the undertaking. And so, that is what we are seeing. It begins possibly at a departmental stage. Briefly, the collaboration community results will successfully call for that you just unfold it throughout. You’ll do it by means of cohort and what have you ever. And so, what we have made it more straightforward even is initially Copilot Chat plus this. And so, that provides the undertaking shoppers much more flexibility to have one thing that is extra ubiquitous.Brad Sills — Analyst Glorious. Thanks such a lot.Brett Iversen — Vice President, Investor Members of the family Thank you, Brad. Operator, we’ve got time for one ultimate query.OperatorAnd the ultimate query will come from the road of Brent Bracelin with Piper Sandler. Please continue.Brent Bracelin — Analyst Thanks for taking the query right here. Excellent afternoon. I sought after to return to industrial bookings. Business RPO, I feel, larger $39 billion sequentially. That is the maximum we have ever observed on a sequential foundation, industrial bookings expansion, 75% consistent foreign money. That is 2x increased than we have observed within the ultimate decade. I recognize there may be some volatility with this metric, however it does really feel like this quarter, there was once a bit of of a sea trade relative to momentum on backlog and bookings. Are you able to simply discuss possibly the breadth of the place that energy got here from? Was once it broad-based? Was once there a few massive offers? Any colour there could be useful. Thank you.Amy E. Hood — Govt Vice President, Leader Monetary Officer Thank you, Brent. It is a nice query. We talked somewhat bit about probably the most major drivers, which was once probably the most Azure commitments that OpenAI has made. And I do wish to say, whilst this is clearly a large part, you’ll be able to proceed to look OpenAI make commitments. So, I do not — I wish to separate the idea that that it is one-time as opposed to an ongoing courting that can develop as they develop, which it completely will. And for your query on what else is collaborating in that quantity. First, we did have superb core motions. Our core motions are such things as, for your level, renewals of our current contracts, add-ons to these contracts, upsells, like, for instance, Copilot or GitHub Copilot or different processes. And I feel that is vital. We additionally had a excellent E5 quarter, which after we communicate so much about M365 Copilot, I now and again overlook to additionally discuss Suite momentum, and we noticed that as smartly this quarter, which we felt superb about. After which the overall part is big Azure commitments. And the ones truly did glance as we anticipated, which is excellent. In your level, and that you are seeing a truly broad-based expansion. The ones Azure commitments take two bureaucracy. One, it is current shoppers who have labored via their commitments and are making greater commitments, which is a superb dedication signed for the platform. After which you’ve gotten new shoppers making commitments, and we additionally noticed that this quarter. And so, for your level, now and again I feel a large quantity that appears like this will make you suppose it is only one factor. I feel you might be proper. A few of it was once something, however numerous it was once excellent execution persistently around the workloads.Brent Bracelin — Analyst Thanks.Brett Iversen — Vice President, Investor Members of the family Thank you, Brent. That wraps up the Q&A portion of nowadays’s income name. Thanks for becoming a member of us nowadays, and we look ahead to talking with all of you quickly.Operator[Operator signoff] Period: 0 minutesCall contributors:Brett Iversen — Vice President, Investor RelationsSatya Nadella — Chair and Leader Govt OfficerAmy E. Hood — Govt Vice President, Leader Monetary OfficerKeith Weiss — AnalystAmy Hood — Govt Vice President, Leader Monetary OfficerMark Moerdler — AnalystBrent Thill — AnalystKarl Keirstead — AnalystBrad Zelnick — AnalystBrad Reback — AnalystBrad Sills — AnalystBrent Bracelin — Analyst
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