The operator welcomes participants to the Microsoft Fiscal Year 2024 Fourth Quarter Earnings Conference Call and introduces the host, Brett Iversen. The call will be recorded and a question-and-answer session will follow the presentation. Other Microsoft executives are also present on the call. Non-GAAP financial measures will be discussed and compared to the previous year's performance. Growth rates will be provided in constant currency.

The company will post their prepared remarks on their website after the call and the call will be webcast live and recorded. They will be making forward-looking statements and their annual revenue and cloud revenue have increased. The company is focused on driving innovation and scaling their cloud business while prioritizing security and managing their cost structure. Examples of this include their Azure platform.

Microsoft's share gains have been driven by AI, with investments in datacenters across four continents and the addition of new AI accelerators. Azure Arc has helped streamline cloud migrations for customers in various industries, and the platform remains the top choice for SAP and Oracle workloads. Azure AI has over 60,000 customers and is continuously growing, with access to diverse models. Azure OpenAI Service provides access to top frontier models, and Phi-3 offers powerful language models. Microsoft also offers API access to third-party models through Models as a Service.

The number of paid customers for Models as a Service has doubled, with increased usage across various industries. The Microsoft Intelligent Data Platform has seen a 50% increase in Azure AI customers using data and analytics tools. The AI-powered data platform, Microsoft Fabric, now has over 14,000 paid customers and introduced real-time intelligence capabilities. GitHub Copilot, an AI-powered developer tool, has been adopted by over 77,000 organizations and is driving growth for GitHub. Generative AI is also being integrated into Power Platform, with over 480,000 organizations using AI-powered capabilities.

Microsoft Power Platform has seen a 40% increase in monthly active users, with Copilot becoming a daily habit for knowledge workers. The number of customers using Copilot has increased significantly, with positive feedback and many enterprise customers coming back for more. Copilot is now being extended to include agent capabilities, a new Team Copilot for facilitating meetings, and Copilot Studio for building custom copilots. This has been well-received by customers, with over 50,000 organizations using Copilot Studio. Copilot is also being expanded to specific industries, such as healthcare, with DAX Copilot. This has resulted in a 40% increase in DAX Copilot purchases and a significant increase in AI-generated clinical reports. Copilot is also transforming ERP and CRM business applications, with the company taking share from competitors.

Microsoft's new Dynamics 365 Contact Center, which uses generative AI, has been adopted by companies like 1-800 Flowers and Mediterranean Shipping for improved customer support. Dynamics 365 Business Central is trusted by over 40,000 organizations for core ERP. Microsoft Teams has seen significant usage growth and has surpassed 3 million seats, with organizations like dentsu and Eli Lilly choosing it for advanced features. The new category of Copilot+ PCs has received positive reviews and Windows 11 active devices have increased by 50%. Microsoft continues to prioritize security, with over 1,000 customers using Copilot for Security and updates to Defender and Purview. Overall, Microsoft now has over 1.2 million security customers.

In the past year, over 800,000 companies, including Dell Technologies and Deutsche Telekom, have increased their use of multiple workloads, resulting in a 25% year-over-year growth. Microsoft's cloud security solution, Defender for Cloud, has also surpassed $1 billion in revenue. LinkedIn has seen accelerated member growth and record engagement, with 1.5 million pieces of content shared per minute and a 34% increase in video uploads. Their subscription businesses have also seen a 51% increase in sign-ups and the addition of new AI tools. In terms of search, advertising, and news, Microsoft's overall revenue has increased by 19%, with a focus on driving engagement and value for end-users, publishers, and advertisers through generative AI. A new generative search experience has been announced, and record engagement has been achieved with Copilot for the web.

In the paragraph, the speaker discusses the success of Microsoft's Copilot tool, which has been used by consumers to create over 12 billion images and conduct 13 billion chats. The company has also paid $1 billion to news and entertainment publishers who use their Microsoft Start platform. In addition, their gaming division has over 500 million monthly active users and a strong content pipeline. The speaker is optimistic about future opportunities and the company's investments in innovation and people. The CFO then provides financial results for the quarter, including double-digit growth in revenue and earnings per share and record commitments to their Microsoft Cloud platform.

In the commercial sector, bookings were higher than expected, with a 17% and 19% increase in constant currency. This was due to growth in large contracts for Azure and Microsoft 365, as well as strong execution in annuity sales. The remaining performance obligation also saw a 20% and 21% increase. Activision had a net impact on revenue and earnings, and FX had a minimal effect on results. Microsoft Cloud revenue grew 21% and 22% in constant currency, with a gross margin decrease of 2 points. Overall, company gross margin dollars increased 14% and gross margin percentage decreased slightly.

In the second quarter, the gross margin percentage increased slightly and operating expenses increased by 13%. Operating income also increased by 15% and operating margins remained relatively unchanged. Revenue from Productivity and Business Processes grew by 11% and 12% in constant currency, driven by strong results across all business units. Office commercial revenue grew by 12% and Office 365 commercial revenue increased by 13%. Office consumer revenue also increased by 3%, driven by Microsoft 365 subscriptions. LinkedIn revenue increased by 10% and Dynamics revenue grew by 16%, with Dynamics 365 showing strong growth of 19%.

In the Intelligent Cloud segment, Microsoft saw a 19% increase in revenue, driven by a 21% growth in server products and cloud services. Azure and other cloud services revenue grew 29%, with 8 points coming from AI services. The enterprise mobility and security installed base also grew by 10%. However, there was a slight decrease in growth in some European regions. In the on-premises server business, revenue increased by 2%, driven by demand for hybrid solutions. Enterprise and partner services revenue decreased by 7%, but segment gross margin dollars increased by 16%.

In the More Personal Computing segment, revenue increased by 14% due to strong performance in Windows commercial and Search. The PC market was as expected and Windows OEM revenue increased by 4%. Devices revenue decreased, but the company remains focused on higher margin products. Search and news advertising revenue also saw a 19% increase due to improved execution. In Gaming, revenue increased by 44% with a significant impact from the Activision acquisition. Xbox content and services revenue increased by 61%, while hardware revenue decreased. Gross margin dollars increased by 21% and operating expenses increased by 43%, with a significant impact from the Activision acquisition.

In the fourth quarter, the company's operating income increased by 5% and 6% in constant currency. Capital expenditures were in line with expectations and the majority of it was for cloud and AI related spending. Cash flow from operations was up 29% due to strong cloud billings and collections, while free cash flow was up 18% year-over-year. Other income and expense was more favorable than expected, and the effective tax rate was higher due to a retroactive state tax law. The company returned $8.4 billion to shareholders and expects no significant impact from foreign exchange rates for the full fiscal year.

In summary, the company expects continued double-digit revenue and operating income growth in the next fiscal year, with higher capital expenditures to meet growing demand for AI and cloud products. Operating expenses are expected to increase in single digits, while operating margins are predicted to only decrease by one point. The effective tax rate for the year is expected to be around 19%. For the first quarter, foreign exchange rates may have a small impact on revenue and expenses. The company expects healthy growth in commercial bookings, driven by long-term commitments and strong execution. The gross margin percentage for Microsoft Cloud is expected to decrease due to increased AI infrastructure scaling. Capital expenditures will also increase due to demand for cloud and AI, as well as existing capacity constraints. There may be some variability in quarterly spending due to infrastructure buildouts and finance lease delivery timing.

In the Productivity and Business Processes segment, Microsoft expects revenue to grow between 10-11% in constant currency, driven by Office 365 subscriptions and growth in all businesses. In the Intelligent Cloud segment, revenue is expected to grow between 18-20% in constant currency, with Azure driving the growth. Azure's revenue growth is expected to be 28-29% in Q1, with continued growth in the consumption business and moderation in the per-user business. In the second half of the year, Azure growth is expected to accelerate due to increased AI capacity. The on-premises server business is expected to decline in revenue due to lower transactional purchasing.

In the Enterprise and partner services division, revenue is expected to decline slightly. In the More Personal Computing division, revenue is expected to grow between 9% and 12%, with flat growth in Windows OEM revenue and mid-single digit growth in Windows commercial products and cloud services. Devices revenue is expected to grow in the low to mid-single digits. In the Gaming division, revenue is expected to grow in the mid-30s, with a net impact of approximately 40 points from the Activision acquisition. COGS is expected to be between US$19.95 billion and US$20.15 billion, and operating expense is expected to be between US$15.2 billion and US$15.3 billion. Other income and expense is expected to be roughly negative $650 million due to losses on investments.

The company expects their Q1 effective tax rate to be around 19% and remains focused on delivering innovations and meeting financial commitments. They have seen growth in operating margin despite investments in AI and acquisitions. As they begin FY2025, they will continue to invest in the cloud and AI, adjusting to demand signals. They are committed to growing their leadership in the commercial cloud and AI platform. During the Q&A session, the first question was about the debate around CapEx requirements for Generative AI and its potential impact on cloud growth. The company believes that CapEx is still a leading indicator for cloud growth, but the shift in gross margin profile may change this. They are unable to provide a specific timeline for the yield on CapEx investments.

The speaker discusses the importance of having the right product portfolio in order to successfully transition to new technologies, such as cloud computing. They mention the success of products like M365 Copilot, GitHub Copilot, and Dynamics in driving growth and demand for their services. They also explain how this demand drives their capital spending, with a majority being allocated towards equipment for inferencing and other needs. The speaker emphasizes the importance of managing and capturing opportunities with the right product portfolio.

In response to a question about Microsoft's offerings and capital expenses, Amy Hood and Keith Weiss discuss the company's focus on building a consistent infrastructure for its cloud and AI services. They also mention that the current transition to the cloud is being rolled out globally, with a mix of short-term and long-term monetization drivers.

Mark Moerdler congratulates Satya Nadella and asks about the growth of GenAI in the past year. He asks how GenAI will become more visible in the industry and within Microsoft's SaaS offerings. Satya responds by saying that GenAI is just software and it is driving growth in Microsoft's M365 and Copilot SaaS offerings. He mentions that the number of customers with 10,000+ seats has doubled and that Dynamic is another exciting area for growth.

In paragraph 21, the speaker discusses the potential impact of GenAI on business applications, specifically in the contact center industry. They mention that their own company has already seen significant cost savings in customer support and contact center operations and believe they can provide similar value to their customers. They also mention the success of Azure AI and how it is integrated with other services such as data meters. The speaker also notes that their consistent platform allows for better margins and scalability. The question posed by the next speaker is about how they can improve efficiencies in CapEx.

Amy Hood, Microsoft's CFO, responds to a question about the company's capital expenses and its impact on revenue growth. She explains that while 50% of the infrastructure and 50% of the technology investments are useful, they can still see consistent revenue growth without continuously increasing capital expenses. This is because the pace at which they fill long-term builds with CPUs and GPUs is demand-driven and can be throttled accordingly. Hood also notes that there is a growing distinction between the company's CapEx number and the cash paid for PP&E, as leases show up all at once, causing some volatility. Microsoft CEO Satya Nadella adds that they have the ability to add to Hood's comments.

Amy Hood, Microsoft's CFO, addressed the importance of separating out leases from build when considering capital spend. She also emphasized the need to think about lead time and duration of assets when making investment decisions. Hood mentioned that land, network construction, and ongoing costs should be considered when adjusting capital spend based on demand signals. The question from Brent Thill about the lower magnitude of the beat in the quarter was answered by Hood, who stated that there was nothing unusual in their commercial execution. Karl Keirstead then directed a question to Hood.

In the paragraph, Brad Zelnick asks Amy Hood about the Azure guidance and the 30% performance in the June quarter. He wants her to elaborate on the reasons for the low end of the range and mentions two factors - persistent capacity constraints and modest softness in Europe. Amy confirms this and adds that the constraints will continue in the next quarter and first half of the year. She also mentions the ongoing investments in CapEx to meet the demand for Azure.

The speaker discusses the company's strategy around AI partnerships and their current constraints on AI capacity. They have signed up with third parties to help with this issue and are investing in builds to address the imbalance. They compare these partnerships to leases and mention the success of Copilot for M365 in increasing productivity for developers and the potential for it to have a similar impact for knowledge workers. They also mention the potential for high Copilot penetration rates in both office and GitHub.

The paragraph discusses the design system used in GitHub and GitHub Copilot, which allows for seamless workflow across different tasks and data sources. This system is also being replicated in other areas such as sales and customer service, where Copilot extensions can enhance productivity. The speaker believes that this design system will have a similar impact on other functions as it has had on software engineering.

The last question from Keith Bachman of BMO Capital Markets is about the growth potential in gaming for Microsoft. Satya Nadella explains that their investment in gaming was to have a strong portfolio for all platforms, including console, PC, and mobile. The recent acquisition of Activision has expanded their reach and access to new gamers. Their long-term goal is to increase software and services revenue, and the acquisition of Activision was a strategic move towards this goal. CFO Amy Hood adds no additional information.

The goal of the company is to expand their reach and offer a variety of content through a software annuity and subscription model. They plan to monetize their ownership of intellectual property in multiple ways. They are encouraged by the progress of Game Pass and recent announcements. The Q&A portion of the earnings call has ended.

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