The paragraph is an introduction to the Microsoft Fiscal Year 2025 Second Quarter Earnings Conference Call. It provides information about the participants, including Brett Iversen, Satya Nadella, Amy Hood, Alice Jolla, and Keith Dolliver. The call will include discussions on Microsoft's earnings, with additional resources available on their Investor Relations website. It highlights that non-GAAP financial measures will be discussed for clarity, but they should not replace GAAP measures. Growth comparisons will be made relative to the previous year, and constant currency growth rates will be provided where applicable.

The paragraph discusses Microsoft's earnings call, which is being webcast and recorded, with the transcript available on their website. It includes forward-looking statements that are subject to risks. Satya Nadella highlights the company's strong performance, mentioning Microsoft Cloud's revenue surpassing $40 billion for the first time, a 21% increase year-over-year, and the AI business reaching a $13 billion annual run rate, up 175% year-over-year. He also talks about efficiencies in AI pre-training and inference, reflecting on the core approach to managing their resources and capital allocation.

The paragraph discusses advancements in AI and cloud infrastructure, emphasizing significant performance improvements with each hardware and software generation. It highlights the increasing demand for AI, driven by efficiency and accessibility improvements, and outlines Microsoft's global efforts to scale its AI infrastructure, particularly through Azure. The company has significantly expanded its data center capacity recently and integrates various technologies to enhance efficiency for current and future workloads. It leverages Moore's Law to upgrade its systems and supports major platforms like AMD, Intel, and NVIDIA. Additionally, Microsoft is facilitating cloud migrations for enterprises like UBS, handling significant data transfers and remaining a top choice for mission-critical applications. Microsoft Fabric, an analytics product, is rapidly gaining traction, with over 19,000 paid customers.

The paragraph discusses the integration of Power BI with Microsoft's Fabric platform and highlights significant growth in AI-driven data patterns, particularly with Azure OpenAI apps. Azure's partnership with OpenAI has strengthened, with OpenAI's APIs running exclusively on Azure, offering access to leading AI models. Azure AI Foundry has quickly gained 200,000 monthly users, and the platform supports OpenAI and open-source models. The DeepSeek R1 model has launched with security features, and the Phi family of models has been widely downloaded. Microsoft's AI advancements are transforming code development, with GitHub Copilot becoming a popular tool among both digital natives and large enterprises.

The paragraph highlights the significant success and adoption of GitHub Copilot and Microsoft 365 Copilot, with GitHub now hosting 150 million developers and rapid expansion in Microsoft 365 Copilot users. Key examples include Novartis expanding to 40,000 seats and other major organizations purchasing large numbers of seats. Copilot usage and engagement have continued to grow, driven by new features like Copilot Chat and Copilot Studio, which simplify agent creation. Over 160,000 organizations have created 400,000 custom agents recently. Microsoft also launched its own agents to assist with meetings, project management, and common HR and IT tasks.

The paragraph discusses the integration of Copilot with partners like Adobe, SAP, ServiceNow, and Workday, highlighting Copilot's role as a key UI for AI driven by a vast data cloud. This Enterprise Knowledge Cloud, which sees rapid growth, leverages extensive organizational data and is disrupting business applications alongside agents, as seen in Dynamics 365's adoption by companies switching from legacy providers. In healthcare, DAX Copilot's usage is rising among top providers. The text also notes increasing adoption of Windows 11 for its enhanced security and AI, with a growing market for Copilot+ PCs. It highlights developments in AI-capable apps, local model running capabilities, and advanced AI workstations using NVIDIA RTX GPUs on Windows PCs.

The paragraph highlights several advancements and achievements across various business areas. The Secure Future initiative introduced over 80 new product capabilities, enabling organizations to resolve incidents faster with Security Copilot. Microsoft Purview is used for auditing millions of interactions for compliance. On LinkedIn, there is significant engagement growth in comments and short-form videos, with LinkedIn Premium surpassing $2 billion in annual revenue and subscriber growth up 50% in two years. LinkedIn remains a leader in B2B advertising. In search advertising, Bing and Edge continue to gain market share, with Edge reaching 30% in the US. Investments in ad rates are proving successful, and their Copilot consumer app is seeing increased engagement with new features.

The paragraph highlights the gaming division's focus on improving long-term profitability through high-margin content and services. It notes the success of "Black Ops 6," which was the top-selling game on Xbox and PlayStation this quarter with record player engagement. "Indiana Jones and the Great Circle" also received positive reviews and a high number of players. Xbox Cloud Gaming hit a record 140 million hours streamed, and Game Pass saw record revenue and a 30% growth in its PC subscriber base. The company continues to innovate its tech stack to support growth in the AI era. Amy Hood reports on the financials for the quarter, with revenue at $69.6 billion—a 12% increase—and emphasizes strong cloud and AI demand driving top and bottom-line growth. AI business annual revenue surpassed $13 billion, and commercial bookings, especially from Azure and Microsoft 365, increased significantly.

In the article, Microsoft's commercial remaining performance obligation rose to $298 billion, with 40% set to be recognized as revenue in the next 12 months. The company experienced a 21% year-over-year increase in recognized revenue for the coming year and a 45% increase for revenue beyond that period. Annuity made up 97% of the mix, and FX did not significantly impact overall results. However, it decreased revenue more than expected in commercial segments. Microsoft Cloud revenue reached $40.9 billion, growing 21%, with a gross margin of 70%. Company gross margins slightly increased to 69%, driven by a shift to higher-margin businesses and improvements in Gaming and Search, and offset by investments in AI infrastructure. Operating expenses rose 5%, while operating margins increased by two points to 45%. Headcount increased by 2% from the previous year. In segment results, Productivity and Business Processes revenue grew 14% to $29.4 billion, driven by Microsoft 365 Commercial's strong performance, especially with E5 and Microsoft 365 Copilot, despite unfavorable FX impacts.

The paragraph outlines revenue and growth figures for various Microsoft products and services. ARPU growth was driven by the E5 and M365 Copilot offerings, with a 7% increase in paid M365 Commercial seats largely due to expansion in small and medium businesses and frontline worker segments. M365 commercial products revenue rose 13%, outpacing expectations due to successful launches, while consumer subscriptions grew 10%. LinkedIn revenue increased 9%, although Talent Solutions underperformed due to hiring market challenges. Dynamics 365 saw a 19% rise in revenue. Gross margin dollars improved by 13%, but the margin percentage slightly decreased due to AI infrastructure scaling. Operating expenses increased 6%, while operating income rose by 16%. The Intelligent Cloud segment's revenue reached $25.5 billion, growing 19%, helped by Azure AI services' 157% growth, despite impacts from unfavorable FX and other slight underperformances. Azure and other cloud services revenue grew by 31%, with significant contributions from AI services.

The paragraph details the company's recent financial performance across different segments. Non-AI services experienced lower than expected growth due to go-to-market challenges, while on-premises server revenue decreased slightly due to delayed purchasing related to the upcoming Windows Server 2025 launch. Revenue from Enterprise and Partner Services also fell short of expectations. Despite this, overall segment gross margin dollars rose significantly, driven by AI infrastructure scaling, even though the gross margin percentage declined. Operating expenses increased, but operating income also saw growth.

In the More Personal Computing segment, revenue remained stable, boosted by Windows OEM pre-builds, partnership-driven Search usage, and Call of Duty's strong performance in Gaming. Windows OEM and Devices revenue increased, partially due to commercial inventory builds ahead of Windows 10's end of support and tariff uncertainties. Search and News advertising revenue grew significantly, supported by a third-party partnership, with growth driven by rate expansion and volume in Edge and Bing. In Gaming, revenue declined mainly due to hardware sales, but Xbox content and services revenue grew due to solid content performance from Blizzard and Activision. Overall, segment gross margin continued to grow.

The paragraph discusses the financial performance and outlook of a company, noting a six-point year-over-year increase in gross margin due to a shift to higher margin businesses and strong execution in Gaming and Search. Operating expenses fell 1%, while operating income rose by over 30% in constant currency. Capital expenditures were $22.6 billion, with a significant portion allocated to long-term cloud and AI assets. Cash flow from operations increased by 18%, but free cash flow decreased by 29% due to capital expenditures. The company faced a $2.3 billion loss in other income and expenses, linked to an impairment charge from a Cruise investment, and had a lower-than-expected effective tax rate of 18%. $9.7 billion was returned to shareholders through dividends and share repurchases. Looking ahead to Q3, the strengthening US dollar is expected to decrease revenue growth across segments due to foreign exchange impact, reducing overall revenue by approximately $1 billion compared to previous guidance.

In this article paragraph, Microsoft anticipates certain financial impacts and growth patterns for Q3, including a reduction in COGS and operating expense growth due to FX and sustained demand for its cloud and AI offerings. Although commercial bookings growth is expected to remain flat year-over-year, driven by large Azure contracts, the company's strong annuity sales motion is expected to continue. Challenges include the unpredictable timing of large Azure contracts, affecting quarterly volatility. The Microsoft Cloud's gross margin percentage is projected to decrease to about 69% due to AI infrastructure scaling. In terms of revenue growth, the Productivity and Business Processes segment is estimated to grow 11%-12% in constant currency, with M365 Commercial Cloud revenue growing 14%-15%. There is an expected moderation in seat growth for M365 and unchanged revenue for M365 Commercial products year-over-year due to on-premises components. M365 Consumer Cloud revenue is anticipated to grow in the mid to high-single digits due to subscriptions, and LinkedIn revenue growth is expected in the low to mid-single digits.

The paragraph outlines revenue expectations for various business segments in the upcoming quarters. Growth is anticipated across all areas, despite some challenges in Talent Solutions and non-AI services. Dynamics 365 is expected to see mid-teens revenue growth, while Intelligent Cloud is projected to grow by 19-20%, driven largely by Azure. Azure anticipates 31-32% growth due to strong demand, though AI capacity constraints may persist until FY25. The on-premises server business expects a mid-single-digit decline, and Enterprise and Partner services should grow modestly. In More Personal Computing, revenue is expected between $12.4 billion and $12.8 billion, with declines in Windows OEM and Devices revenues, though Search and News advertising are projected to grow in the mid-teens.

The article discusses financial expectations for a company, forecasting moderated growth this quarter due to foreign exchange impacts and normalizing partnerships. Search growth will outpace overall advertising revenue growth, while gaming revenue, including Xbox, will see low single-digit growth. Hardware revenue is projected to decline. Cost of goods sold (COGS) is expected to grow between 19% and 20%, and operating expenses by 5% to 6%, in constant currency. Other income and expenses will be negatively impacted by around $1 billion, primarily due to equity method investments. The Q3 effective tax rate is anticipated to be around 18%. In the fiscal year ahead, the strengthening US dollar is expected to negatively impact Q4 revenue and expense growth. Capital expenditures in the upcoming quarters will remain consistent, with FY26 investments aligning with demand but at a slower growth pace compared to FY25, shifting towards short-lived assets.

The paragraph discusses Microsoft's strategic approach to managing its cloud infrastructure investments, highlighting the flexibility and global reach of their Microsoft Cloud, including AI workloads. The company anticipates variability in quarterly spending due to cloud infrastructure projects and finance lease deliveries. For the full fiscal year, Microsoft expects double-digit growth in revenue and operating income, focusing on cost efficiencies. They project a slight increase in operating margins for FY25 and an effective tax rate of 18-19%. The company remains committed to providing real-world AI solutions to support customer growth. The paragraph concludes by announcing Brett Iversen's transition to a new role in sales finance and welcoming Jonathan Neilson as the new head of Investor Relations, followed by the start of a Q&A session.

In the paragraph, Amy Hood addresses execution challenges faced in Q2, specifically with the non-AI ACR component of Azure. While Azure AI results exceeded expectations due to effective team execution, the non-AI challenges were mainly related to the scale motion, involving indirect sales to customers through partners. The company had to adjust its sales strategies over the summer to help customers balance AI workloads with ongoing migrations, requiring a reevaluation of resource allocation, marketing investments, and customer support strategies.

The paragraph discusses making adjustments to maintain balance after changes made in the summer, which can take time to reflect in the system. The teams are already implementing these adjustments, and there is optimism about their understanding and efforts. It mentions Q3 expectations of 31% to 32% growth, consistent with previous results and predictions, despite facing constrained capacity, which involves having sufficient infrastructure (long-lived assets) and equipment. Investments made over the past three years should help address power and space shortages by the end of the year. There is confidence in the AI sector's performance, while non-AI adjustments are ongoing. The overall change noted is related to scaling efforts. Satya Nadella confirms this view.

The paragraph is part of a discussion involving Amy, Keith, and others about the growth and success of AI workloads and services. They emphasize that AI is performing better than expected, particularly with scaling workloads like mainstream enterprise applications (e.g., SAP and VMware). The focus is on adapting strategies to platform shifts and prioritizing new innovations over past methods. Mark Moerdler from Bernstein Research asks Amy Hood for more details on the unexpected growth in Microsoft's AI revenue, specifically referencing Azure AI and Copilot's rapid growth. Amy acknowledges the better performance and suggests that various components contributed to the success.

The paragraph features Satya Nadella discussing Microsoft's advancements in AI technology, particularly in cost-effective scaling. He draws parallels between AI development and traditional computing cycles, highlighting the rapid improvements driven by Moore's Law and AI scaling laws. Nadella mentions achieving a 10x improvement per cycle due to software optimizations in AI inference. He also refers to innovations by DeepSeek, which have contributed to these advancements and are becoming widely commoditized and utilized, including by OpenAI.

The paragraph discusses a conversation between Brent Thill, Brett Iversen, Karl Keirstead, and Satya Nadella concerning shifts in the software industry and Microsoft's relationship with OpenAI. Karl Keirstead asks about Microsoft's strategic decisions related to the "Stargate" news, which involves changes in their partnership with OpenAI. Nadella confirms Microsoft's continued commitment to OpenAI, highlighting their significant use of Azure, while also suggesting a reduced role in funding OpenAI's future training capital expenditures. The paragraph highlights a positive outlook from Microsoft regarding the evolving AI landscape and its impacts on their business strategy and capital expenditure planning.

The paragraph discusses the strategic management and optimization of a computing fleet for AI, focusing on balancing training and inference capabilities. The company emphasizes the importance of reducing inference costs to make AI models more accessible and ensure demand. They highlight the need for continuous fleet upgrades, taking advantage of improvements like Moore's Law and optimization advancements. The ultimate goal is to maintain a balance between investment, monetization, and demand-driven costs to support long-term scalability and success. Amy Hood reinforces these points by explaining the concept of a fungible fleet.

The paragraph discusses the company's strategy and investments related to fulfilling approximately $300 billion in committed customer contracts, emphasizing the importance of efficiency and speed in delivery. It highlights the significance of their AI infrastructure, including the OpenAI partnership, and the comprehensive platform they need to deliver globally. The investment in capital expenditures (CapEx) is focused on building infrastructure and enhancing AI capabilities, with a particular pivot towards more CPU and GPU resources. This investment is closely tied to revenue growth and contract fulfillment, regardless of the end customer. Following this discussion, the conversation transitions to a new question from Brad Zelnick of Deutsche Bank.

In this paragraph, Satya Nadella discusses Microsoft's advancements and strategies regarding their Copilot portfolio. He highlights recent announcements, such as the broad deployment of M365 Copilot Chat and the integration of Copilot Studio for building agents. Nadella emphasizes the aim to enhance user engagement and agent development. Additionally, he mentions the consumer-side launch of the Think Harder feature, powered by o1, which showcases inference optimization and reduced costs, making premium features more accessible. He points out similar progress in GitHub Copilot and Security Copilot, illustrating a broader trend across Microsoft's offerings.

Satya Nadella discusses the mix of proprietary and open-source models used for inference on Azure. He emphasizes that applications often incorporate multiple models, including open-source ones, and highlights the importance of using the best available models to optimize performance and costs. He notes the evolving nature of these models and the need for continuous optimization. Microsoft is heavily investing in Foundry and app server technology to help developers manage the complexity of integrating various models while minimizing development and operational costs. This approach aims to ensure applications can efficiently utilize innovations across different model types.

In the paragraph, Brad Sills from Bank of America asks about the areas where Copilot is showing strong performance and its common use cases. Satya Nadella responds by explaining that the initial adoption of Copilot is in departments where productivity gains are immediately evident, such as sales, finance, and supply chain. He describes a collaborative pattern where people use AI to enhance productivity and then share results across functions, which drives broader enterprise adoption. The network effects of collaboration eventually necessitate wider implementation across the enterprise. Nadella also mentions that the ease of starting with Copilot Chat provides flexibility for enterprises to adopt it more widely.

In this transcript, Brent Bracelin from Piper Sandler asks about the significant sequential increase in commercial bookings and the broad-based growth seen in the quarter, noting the rise by $39 billion in commercial RPO and a 75% constant currency growth in commercial bookings. Amy Hood responds by attributing the growth to a major Azure commitment made by OpenAI, indicating this is part of an ongoing relationship. She explains the growth is also due to strong core business activities, including contract renewals, upsells like Copilot and GitHub Copilot, and a strong performance in the E5 sector. Additionally, she highlights the significant Azure commitments that contributed to the broad-based growth in bookings.

The paragraph discusses an earnings call where it was noted that existing customers are increasing their commitments and new customers are joining, resulting in strong platform growth. It emphasizes that while some growth is from significant individual contributions, much of it is due to consistent execution across different workloads. The paragraph concludes with acknowledgments from Brent Bracelin, Brett Iversen, Satya Nadella, and Amy Hood, and the operator closes the conference call.

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