The operator welcomes listeners to the Microsoft Fiscal Year 2024 First Quarter Earnings Conference Call and introduces the speakers. The company's recent acquisition of Activision Blizzard will be discussed, and non-GAAP financial measures will be used to aid investors in understanding the company's performance. All growth comparisons will be made to the same period last year.

In the second paragraph, the speaker mentions that they will provide growth rates in constant currency to assess their business performance, and the call is being recorded and webcasted. They also mention the use of forward-looking statements and the strong start to the fiscal year, driven by the growth of Microsoft Cloud and the infusion of AI across the tech stack. The speaker then highlights the progress in infrastructure, specifically the increase in Azure's market share.

Microsoft's Azure is a top cloud provider with a global footprint and advanced AI infrastructure. They have a wide range of AI services available in many regions, making them a popular choice for organizations. Their Azure Arc platform allows for easy migration of apps across different environments, and they are the only other cloud provider to run Oracle's database services. Many companies, including PepsiCo and Vodafone, have chosen Azure for their SAP workloads. Microsoft's Intelligent Data Platform offers a consolidated solution for data management, with over 73% of Fortune 1000 companies using three or more of their data solutions.

Microsoft is unifying compute, storage, and governance with Microsoft Fabric, which has over 16,000 active customers. GitHub Copilot is increasing developer productivity by 55% and has over 1 million paid users and 37,000 business subscribers. Copilot has also been integrated into Power Platform, with over 126,000 organizations using it. Power Apps has 20 million monthly active users and Dynamics 365 has taken market share for 10 consecutive quarters. Microsoft is using AI to redefine its role in business applications as a Copilot-led transformation layer.

Microsoft's Sales Copilot helps personalize customer interactions for over 15,000 organizations, and is also being integrated into Dynamics 365 and Field Service. In healthcare, the Dragon Ambient eXperience and DAX Copilot are being used to streamline patient interactions and increase physician productivity. The company is also introducing healthcare data solutions and a Microsoft Cloud for sovereignty for public sector customers. Copilot is also being used as an AI assistant for everyday tasks by tens of thousands of employees at companies like Bayer, KPMG, and Visa.

This paragraph discusses the success of Copilot, a new feature that helps employees access their work, data, and knowledge through chat. Additionally, the popularity of Teams continues to grow, with 320 million monthly active users and new updates to improve speed and collaboration. The success of Teams Rooms and the introduction of Viva, a platform for employee experience, are also mentioned, along with the use of skills in Viva to help employers understand workforce gaps. The paragraph concludes by mentioning the increasing number of organizations choosing Microsoft 365 and relying on its Premium E5 offerings for advanced security, compliance, voice, and analytics.

In this paragraph, Microsoft discusses their innovations in Windows, including new AI-powered experiences and the introduction of Copilot, an AI companion for everyday tasks. They also mention the high demand for their security product, Security Copilot, and the success of their SIEM, Microsoft Sentinel. Finally, they mention their progress in the professional networking platform, LinkedIn.

This paragraph discusses how the company is using AI to improve various aspects of their business, including learning, hiring, and advertising. They have seen significant growth and engagement since implementing these AI-driven features. They have also expanded to new endpoints, such as Meta's AI chat experience, and are integrating AI into their ad platforms to better connect marketers to customer intent.

The article discusses Microsoft's recent acquisition of Activision Blizzard King and their focus on gaming. They have seen success with their Game Pass and released a popular game, Starfield. With the addition of Activision Blizzard King, they now have a diverse portfolio of popular franchises. The company is also expanding in other areas, such as AI, and saw strong financial results in the first quarter of the fiscal year.

In the commercial business, Microsoft saw healthy renewals and moderate growth in new business. Azure saw higher-than-expected AI consumption contributing to revenue growth. In the consumer business, PC market unit volumes are returning to pre-pandemic levels and advertising spend was in line with expectations. Commercial bookings increased and remaining performance obligation grew. FX had minimal impact on results. Microsoft Cloud revenue grew ahead of expectations, with a slight increase in gross margin percentage driven by improvements in Azure and Office 365. This was partially offset by the impact of scaling AI infrastructure.

The company's gross margin dollars and percentage increased year-over-year, driven by improvements in Azure and Office 365 and a shift in sales mix to higher margin businesses. Operating expenses increased slightly, but were lower than expected due to cost-efficiency measures and investments being shifted to future quarters. Overall, operating income and margins also increased significantly. In terms of segment results, revenue from Productivity and Business Processes exceeded expectations, with strong growth in Office 365 Commercial and LinkedIn. Office Commercial and Office 365 Commercial revenue also saw significant growth, driven by renewal execution and ARPU growth. Paid Office 365 Commercial seats increased by 10% year-over-year, primarily driven by small and medium businesses and frontline worker offerings.

The Office Commercial licensing declined by 17%, while Office Consumer revenue increased by 3% and 4% in constant currency. LinkedIn revenue increased by 8%, driven by Talent Solutions and Dynamics revenue grew by 22% and 21% in constant currency. The Intelligent Cloud segment had revenue of $24.3 billion, increasing by 19%, with better-than-expected results across all businesses. Overall, server products and cloud services revenue grew by 21%, with Azure and other cloud services revenue growing by 29% and 28% in constant currency. This was primarily driven by increased GPU capacity and better-than-expected utilization of AI services. Additionally, the enterprise mobility and security installed base grew by 11% to over 259 million seats.

Microsoft's on-premises server business saw a 2% increase in revenue, driven by demand before the end of support for Windows Server 2012. Enterprise and partner services revenue increased 1%, while gross margin dollars and percentage also saw growth. Operating expenses and income also increased. In the More Personal Computing segment, revenue was $13.7 billion, with better-than-expected results in all businesses. Windows OEM revenue increased 4%, while Windows Commercial products and cloud services revenue increased 8%. Devices revenue decreased 22%, but search and news advertising revenue saw a 10% increase. In gaming, revenue increased 9% due to growth in Xbox Game Pass subscribers and the launch of Starfield.

In the second quarter, Xbox content and services revenue increased while hardware revenue declined. Segment gross margin dollars and percentage increased due to higher-margin businesses. Operating expenses decreased and operating income increased. Capital expenditures and cash flow from operations were also up. Other income and expense was higher than expected. The effective tax rate was 18% and $9.1 billion was returned to shareholders. The outlook for the second quarter includes the impact of the Activision acquisition and FX is expected to have a minimal impact on COGS and operating expenses.

In commercial bookings, Microsoft expects consistent execution and healthy renewals. The growth will be impacted by a low growth expiry base, resulting in relatively flat bookings growth. The Microsoft Cloud gross margin percentage is expected to be relatively flat, with a 1 point increase in Q2 due to improvements in Azure and Office 365. Capital expenditures will increase due to investments in cloud and AI infrastructure. In the Productivity and Business Processes segment, revenue is expected to grow 11-12%, driven by Office 365 and Microsoft 365. In Office Commercial, revenue growth will be driven by seat and ARPU growth, while on-premise revenue is expected to decline. In Office Consumer, revenue growth will be in the mid-single-digits, and for LinkedIn, revenue growth will be in the mid-single-digits due to market conditions. In Dynamics, revenue growth is expected to be in the high teens.

In the Intelligent Cloud segment, Microsoft expects revenue to grow between 17% and 18%, driven by Azure and AI. The company also anticipates continued growth in its per-user business and moderation in seat growth rates. For H2, they expect stable revenue growth in constant currency. In the on-premises server business, revenue is expected to remain flat with demand for hybrid solutions. In the Personal Computing segment, revenue is expected to be between $16.5 billion and $16.9 billion, with mid-to-high single digit growth in Windows OEM and low-to-mid teens growth in Windows Commercial products and cloud services. Revenue from devices is expected to decline, while search and news advertising revenue growth is projected to be mid-single digits with a negative impact from a third-party partnership.

In the second quarter, Microsoft expects growth in volume and Edge browser share, with a similar advertising spend environment as Q1. Gaming revenue is expected to grow in the mid-to-high 40s, with a net impact of 35 points from the Activision acquisition. Xbox content and services revenue is expected to grow in the mid-to-high 50s, with a net impact of 50 points from the acquisition. COGS is expected to be between $19.4 billion to $19.6 billion, with operating expenses of $15.5 billion to $15.6 billion. Other income and expense is expected to be negative $500 million. The effective tax rate for Q2 is expected to be between 19% and 20%. In the second half of the fiscal year, FX is not expected to have a significant impact on revenue, COGS, or operating expenses.

In paragraph 18, the speaker discusses their expectations for Activision, including purchase accounting adjustments and integration costs. They also mention their commitment to investing in the cloud and AI opportunity while maintaining operating leverage. The speaker expresses confidence in their team's ability to deliver healthy growth in the year ahead. During the Q&A portion, a question is asked about sustaining commercial growth and managing OpEx growth in a volatile spending environment.

In this paragraph, Satya Nadella discusses the multiple factors contributing to the growth of Azure, including cloud migrations, workload optimization, and the adoption of AI projects. He also mentions the potential for increased investment in product innovation in the future.

The paragraph discusses the positive results and confidence in productivity seen with GitHub Copilot and other products, as well as the consistent execution and value proposition of the company. It also mentions the stability and demand in the commercial market and the company's ability to maintain operating margins despite challenges in the second half of the year. The focus is on investing in commercial cloud and AI leadership.

The speaker discusses the success of Microsoft's AI division and attributes it to their full stack approach and high utilization of their one model for training and inferencing. This approach also allows for stack optimization and a higher level of abstraction for developers. They also mention the availability of Copilots and the use of both open source and proprietary models.

The speaker discusses how Microsoft is using fine-tuning and RLHF in various ways, with one large model being used for inference across all first-party SaaS apps and the Azure AI service. They also mention the importance of leveraging their infrastructure and being disciplined in their tech stack and capital spend for the AI transition. The question is raised about sustaining double-digit growth, and the speaker responds that Q1 was a strong start and Q2 implies continued growth.

The speaker is optimistic about the upcoming release of Copilot for Microsoft Office, as 40% of the Fortune 100 companies are already using it in the preview and giving positive feedback. The tool is being used across various functions and roles, and is expected to bring productivity gains similar to those seen with GitHub Copilot for developers.

The speaker is excited about the upcoming Ignite conference, where they will discuss use cases and give guidance on deployment. They are pleased with the level of usage and excitement for their enterprise product. The Azure growth has been strong, but they expect it to decelerate in the second half of the fiscal year due to ongoing optimization trends by customers. They are remaining conservative in their outlook.

The speaker discusses the growth of Office 365 commercial seats, which has remained in the double digits despite the business's already dominant market position. The growth is coming from all segments, but particularly from small and mid-sized businesses and frontline workers. The speaker believes there is still potential for more growth in this area.

The intelligent cloud segment of Microsoft had the highest operating margins in six years, despite increased investments in AI. This was due to the stability and growth of Azure revenue, as well as the team's efforts to improve gross margins through technical decisions and software implementations.

The Microsoft cloud gross margin has improved by 2 points year-over-year, despite concerns about increased AI investments. The core Azure, Office 365, M365, and Dynamics businesses have all contributed to this improvement.

The speaker reiterates that having a consistent infrastructure from the platform to its layers allows for optimized revenue and leverage of capital spending. The company's investment in AI may affect COGS growth, but it will be well-paired with revenue growth due to the company's previous choices. The speaker also mentions that the company's stack and capital allocation are optimized across all segments and products. The Q&A portion of the earnings call ends.

The writer is expressing gratitude for the reader's participation.

This summary was generated with AI and may contain some inaccuracies.