Release Date: October 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Microsoft Cloud revenue surpassed $38.9 billion, marking a 22% increase, driven by strong demand for AI and cloud services.
- AI business is on track to surpass an annual revenue run rate of $10 billion next quarter, making it the fastest-growing business in Microsoft's history.
- Azure and other cloud services revenue grew 33% in constant currency, with healthy consumption trends.
- Microsoft 365 Copilot adoption is accelerating, with nearly 70% of the Fortune 500 using it, and customers continue to adopt it at a faster rate than any other new Microsoft 365 suite.
- LinkedIn revenue increased 10%, with record engagement and growth across all lines of business.
Negative Points
- Microsoft Cloud gross margin percentage decreased by 2 points year over year, driven by scaling AI infrastructure.
- Operating expenses increased by 12%, partly due to the Activision acquisition, impacting overall profitability.
- Free cash flow decreased by 7% year over year, reflecting higher capital expenditures to support cloud and AI offerings.
- Supply constraints, particularly in AI infrastructure, are impacting Azure's ability to meet demand, leading to potential growth deceleration.
- The Activision acquisition had a negative $0.05 impact on earnings per share due to purchase accounting adjustments and related costs.
Q & A Highlights
Q: What are the internal and external constraints Microsoft faces in investing in AI innovations, particularly regarding the funding of future generations of foundational models and building out capacity sustainably?
A: Satya Nadella, CEO, explained that capital outlay for AI training is rate-limited by monetization of inference. Microsoft allocates capital based on demand signals, similar to cloud infrastructure. External constraints include data center (DC) and power availability, which are being addressed to match supply and demand by the second half of the fiscal year.
Q: Why is Azure's growth expected to decelerate in Q2 despite strong performance in Q1?
A: Amy Hood, CFO, noted that the deceleration is primarily due to supply pushouts affecting AI supply, not a decline in underlying consumption growth. The company expects stable consumption growth from Q1 to Q2 and anticipates acceleration in the second half of the year as more supply becomes available.
Q: How does Microsoft view its relationship with OpenAI, and how does it manage CapEx demands from this partnership?
A: Satya Nadella emphasized the mutual success of the partnership, with Microsoft providing infrastructure for OpenAI's model innovations. Amy Hood added that Microsoft is committed to meeting OpenAI's demand signals while also serving broader customer needs, which drives their capital investment strategy.
Q: How does Microsoft plan to monetize AI inference, and what impact will it have on the company's financials?
A: Satya Nadella highlighted that Microsoft's AI business is already generating significant revenue from inference, with products like GitHub Copilot and M365 Copilot driving demand. The company focuses on real enterprise demand rather than selling raw GPUs for training, ensuring high-quality revenue.
Q: Can you explain the evolution from Copilot to agents and autonomous agents in Microsoft's AI strategy?
A: Satya Nadella described a system comprising Copilot, Copilot Studio, agents, and autonomous agents. Copilot serves as the UI layer for AI, while Copilot Studio allows for extending capabilities and building agents. Autonomous agents operate independently but interact with Copilot for exceptions, forming a comprehensive AI system.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
