Microsoft CEO Satya Nadella stated that Deepseek indeed has some real innovations. He mentioned that when the token price decreases and the cost of inference computing drops, it means that people can consume more. Nadella also informed investors that the company's AI business currently has a revenue run rate exceeding 13 billion dollars, an increase of 175% compared to the same period last year.
On January 29th, Wednesday, Eastern Time, during Post-Market Trading, Microsoft announced the financial data for the second fiscal quarter of the 2025 fiscal year (referred to as the fourth quarter) ending December 31, 2024.
In the fourth quarter, Microsoft's total revenue from commercial cloud grew by 21% year-on-year, with analysts expecting the growth rate to remain flat at 22% from the third quarter; revenue from Azure and other cloud computing services grew by 31%, also slowing from 33% in the third quarter. AI products contributed 13 percentage points to Azure's growth, exceeding expectations; capital expenditures nearly doubled.
In the conference call, Microsoft's CEO Satya Nadella stated that deepseek indeed has some real innovations, noting that when token prices decline and inference computing prices drop, it means people can consume more, leading to more applications being written.
Microsoft's Chief Financial Officer Amy Hood revealed that future orders increased by 67%, or 75% when adjusted for constant exchange rates, with much of the anticipated growth likely coming from OpenAI, which Microsoft continues to host exclusively on Azure. Nadella also informed investors that the current revenue run rate of the company's AI business has exceeded 13 billion dollars, a 175% increase compared to the same period last year.
The following are the key points from the conference call:
Insights from Satya Nadella (CEO)
The scaling laws of AI: "The scaling laws of AI continue to compound in terms of pre-training and inference computation." AI efficiency improvement: "In terms of inference, due to software optimization, we generally see the cost-effectiveness of each generation of hardware increase by more than 2 times, and the cost-effectiveness of each generation of models increase by more than 10 times." Datacenter expansion: "In the past three years, our overall datacenter capacity has increased by more than double, and the capacity added last year was more than in any previous year in our history." AI-driven data growth: "If you look at the underpinnings of ChatGPT, Copilot, or enterprise AI applications, you'll find that as these workloads expand, raw storage, database services, and application platform services are all growing." Success of GitHub Copilot: "GitHub Copilot is increasingly becoming the preferred tool for digital natives like ASOS and Spotify, as well as the world's largest enterprises like HP, HSBC, and KPMG." Widespread adoption of Copilot: "The number of people using Copilot daily has increased more than double compared to the previous month." Popularity of Copilot Studio: "Over 160,000 organizations have used Copilot Studio, and they have created more than 400,000 custom agents in total over the past three months, with a month-over-month growth of more than double." Combination of open source and closed source AI models: "Our support for OpenAI's leading models as well as the best open source models and SLM puts us in a favorable position." Recognition of DeepSeek: "DeepSeek's R1 is released today via the model directory on Foundry and GitHub, featuring automatic red teaming, content safety integration, and security scanning capabilities."Amy Hood (CFO)'s perspective
AI Business revenue is strong: "As you heard from Satya, our AI business annual revenue run rate exceeds $13 billion, and it is above expectations." Significant growth in commercial bookings: "Commercial bookings grew by 67% and 75% (at constant exchange rates), significantly exceeding expectations due to OpenAI's Azure commitment." Microsoft Cloud revenue growth: "Microsoft Cloud revenue reached $40.9 billion, growing by 21%." Reasons for gross margin decline: "Microsoft Cloud's gross margin is 70%, in line with expectations, but it decreased by two percentage points year-on-year due to the expansion of AI infrastructure." Contribution of Copilot: "With M365 Copilot, we continue to see growth in adoption, expansion, and usage, with ARPU growth again driven by E5 and M365 Copilot." Growth of Azure AI: "Azure's growth includes 13 percentage points from AI services, growing 157% year-on-year, and is above expectations, even as demand remains higher than our available capacity." Adjustment for scaling sales: "In non-AI areas, the real challenge is what we call scaling sales. So think about it, these are mainly customers we reach through partners and through more indirect sales methods." Capital Expenditure: "More than half of our Cloud and AI-related spending is directed toward long-term assets that will support monetization over the next 15 years and beyond." Future Capital Expenditure Plans: "In fiscal year 2026, we expect to continue investing to respond to strong demand signals, including the backlog of customer contracts that we need to deliver across the Microsoft Cloud. However, the growth rate will be lower than in fiscal year 2025, and spending by NYX will begin to shift back to short-term assets that are more correlated with revenue growth." Outlook for Fiscal Year 2025: "For the entirety of the fiscal year, we continue to expect revenue and operating income to achieve double-digit growth as we focus on improving efficiency in sales costs and operating expenses."
The following is a transcript of the conference call, translated by AI:
Host:
Hello everyone, welcome to the Microsoft Fiscal Year 2025 Second Quarter Earnings Conference Call. All participants are currently in listen-only mode. A question-and-answer session will follow the formal presentation. (Host's note) Please be reminded that this meeting will be recorded.
It is now my honor to introduce your host, Vice President of Investor Relations, Brett Iversen. Please go ahead.
Brett Iversen, Vice President of Investor Relations:
Good afternoon, thank you everyone for joining today. Joining me on the conference call are Director and CEO Satya Nadella, Chief Financial Officer Amy Hood, Chief Accounting Officer Alice Jolla, and Company Secretary and Deputy General Counsel Keith Dolliver.
On Microsoft's Investor Relations website, you can find our earnings press release and financial summary slides that are intended to complement the prepared remarks for today's meeting and provide a reconciliation of the differences between GAAP and non-GAAP financial indicators. When we provide outlook comments during the call today, a more detailed outlook slide will be available on Microsoft's Investor Relations website.
In this conference call, we will discuss certain non-GAAP items. The non-GAAP financial indicators provided should not be viewed as a substitute or superior to the performance metrics prepared in accordance with GAAP. These items serve as additional explanatory components intended to help investors better understand the company's performance in the second quarter and the impact of these items and events on the financial results.
All year-on-year growth mentioned in today's conference call relates to the same period last year unless otherwise stated. When available, we will also provide constant currency growth rates as a framework for assessing underlying business performance, excluding the effects of exchange rate fluctuations. When the constant currency growth rate is the same as the actual growth rate, we will only mention the growth rate.
We will immediately post the prepared remarks on the website after the meeting, until a complete transcript is available. Today's conference call is being live-streamed and recorded. If you ask a question, your question will be included in the live stream, transcript, and any future recordings. You can replay the conference call and view the transcript on Microsoft's Investor Relations website. During this conference call, we will make forward-looking statements that are predictions, estimates, or other statements about future events. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Due to the factors discussed in today's earnings press release, the comments during this conference call, and the risk factors section of our 10-K, 10-Q forms and other reports and documents submitted to the Securities and Exchange Commission, actual results may differ materially. We do not undertake any obligation to update any forward-looking statements. Having said that, I now turn the time over to Satya.
Satya Nadella, Director and CEO:
Thank you, Brett. This quarter, we see Microsoft Cloud continuing strong growth, with revenue exceeding 40 billion dollars for the first time, a year-on-year increase of 21%. Businesses are moving from the proof-of-concept phase to enterprise-wide deployment to realize the full return on AI investments. Our AI business annual run rate has now exceeded 13 billion dollars, a year-on-year growth of 175%. Before entering the quarterly details, I would like to talk about how we manage our infrastructure fleet and the core principles of how we allocate computing resources.
The scaling laws of AI continue to accumulate in both pre-training and inference calculations. Over the years, we have seen significant efficiency improvements in our own training and inference. In terms of inference, we generally see more than a 2x improvement in price-performance with each generation of hardware, while each generation of models can achieve over a 10x improvement due to software optimization. As AI becomes more efficient and accessible, we will see exponential growth in demand.
Therefore, just like what was done for the Business Cloud, we focus on continuously expanding our Global infrastructure scale while maintaining an appropriate balance between training and inference as well as geographical distribution. From now on, this will be a more continuous cycle driven jointly by revenue growth and capacity growth, thanks to the software-driven AI scaling patterns and the overlapping effects of Moore's Law. Next, I will introduce the progress we have made across the layers of our technology stack.
Azure is the infrastructure layer for AI. We continue to expand datacenter capacity based on recent and long-term demand signals. Over the past three years, our overall datacenter capacity has more than doubled, with last year's capacity increase exceeding that of any year in history. Our datacenters, networks, racks, and chips work together as a complete system, driving new efficiencies to support today's Cloud workloads and next-generation AI workloads. We continue to update our infrastructure in line with Moore's Law, which is reflected in our support for the latest products from AMD, Intel, and NVIDIA, as well as our proprietary innovations in Maya, Cobalt, Boost, and HSM chips.
In terms of cloud migration, we continue to see clients like UBS migrating workloads to Azure. UBS alone has migrated a large mainframe workload containing nearly 400 billion records and 2PB of data. For critical Oracle, SAP, and VMware applications, we remain the preferred cloud platform.
On the data level, we see Microsoft Fabric making breakthrough progress. We now have over 19,000 paying customers, from Hitachi to Johnson Controls to Schaeffler. Fabric is now our fastest-growing analytics product in history. Power BI is also deeply integrated with Fabric, with over 30 million monthly active users, a 40% increase from last year.
In addition to Fabric, we are also seeing new AI-driven data patterns emerge. If you look at the underlying layers of ChatGPT or Copilot or enterprise AI applications, you will see the growth of raw storage, database services, and application platform services as these workloads scale.
The number of Azure OpenAI applications running on Azure Database and Azure App Service has more than doubled year-on-year, driving significant adoption growth for SQL Hyperscale and Cosmos DB. Now let's talk about AI platforms and tools. As we shared last week, we are excited that OpenAI has made new large-scale commitments to Azure. Through our strategic partnership, we continue to mutually benefit from each other's growth. Because OpenAI's API runs entirely on Azure, customers can rely on us for world-leading models.
More new content from OpenAI is coming soon, stay tuned. Azure AI Foundry offers first-class tools, runtimes to build agents, multi-agent applications, AI operations, and API access to thousands of models. Since its launch two months ago, we have had over 0.2 million monthly active users. By simultaneously supporting OpenAI's leading models and the best open-source models and SLM options, we are in a strong position. DeepSeek's R1 was released today through the model catalog on Foundry and on GitHub, including automated red team testing, content safety integration, and security scanning.
Our five series of SLM have now been downloaded over 20 million times. We also have over 30 models from partners like Bayer, PageAI, Rockwell Automation, and Siemens for solving specific industry use cases. As AI evolves, the way we build, deploy, and maintain code is undergoing fundamental changes. GitHub Copilot is increasingly becoming the preferred tool for digital-native enterprises like ASOS and Spotify, as well as among the largest global companies such as HP, HSBC, and KPMG. We are delighted with the early response to GitHub Copilot in VS Code, with over 1 million registered users in just the first week of launch.
Overall, GitHub now has 0.15 billion developers, growing 50% over the past two years.
Now let's talk about the future of work. Microsoft 365 Copilot is the user interface of AI, which greatly enhances employee productivity and provides a range of intelligent agents to simplify employee workflows. We see that both L and S customers are adopting at an accelerating pace; not only have we gained new Microsoft 365 Copilot customers, but most of our existing enterprise customers are also returning to purchase more license seats.
Among the customers who purchased during the first quarter after Copilot's launch, their total number of licensed seats has increased more than tenfold over the past 18 months. For example, Novartis has added thousands of licensed seats every quarter over the past year, and now has 40,000 seats. Barclays, Carrier Group, Pearson, and the University of Miami all purchased 10,000 or more seats this quarter. Overall, the number of people using Copilot has once again achieved a quarter-on-quarter doubling growth.
Employees are using Copilot more than ever. The intensity of use has grown more than 60% quarter-on-quarter, and we have also expanded our collaboration with Copilot Chat, which was announced earlier this month. Copilot Chat, along with Copilot Studio, is now available to every employee so they can use agents directly in the workplace. Through Copilot Studio, we have made it as easy to create agents as it is to create an Excel spreadsheet.
More than 160,000 organizations have already used Copilot Studio, collectively creating over 400,000 custom agents in the past three months, with a more than twofold quarter-on-quarter growth. We have also launched our first-party agents to assist with meetings, manage projects, resolve common HR and IT query issues, and access SharePoint data. We continue to see partners like Adobe, SAP, ServiceNow, and Workday building their third-party agents and integrating with Copilot. The drive for Copilot as an AI user interface and our momentum in agents comes from our rich data cloud, which is the largest source of organizational knowledge globally.
Billions of new emails, documents, and chat records are added every day, hundreds of millions of Teams meetings, and millions of SharePoint sites. This is the Enterprise Knowledge Cloud. It is growing rapidly, with a year-on-year growth of over 25%. More broadly, we see Copilot plus agents disrupting business applications.
We are actively investing in it. With Dynamics 365, we are gaining market share as organizations like Ecolab, Lenovo, RTX, Total Energy, and Vizent shift from traditional vendors to our AI-driven applications. In healthcare, the monthly doctor-patient interaction of DAX Copilot exceeds 2 million, with a quarter-on-quarter growth of 54%. It is used by top medical service providers like Brigham and Women's Hospital, Michigan Medicine, and Vanderbilt University Medical Center to enhance physician productivity.
Speaking of Windows, as support for Windows 10 is about to end, we see momentum building. Customers are choosing the latest Windows 11 devices as they offer enhanced security and advanced AI capabilities. This holiday season, 15% of high-end laptops in the USA are Copilot plus PCs, and we expect that most PCs sold in the coming years will be Copilot plus PCs. We also see more and more developers, from Adobe and CapCut to WhatsApp, building applications that leverage the built-in NPU.
They will soon be able to run DeepSeek's R1 distilled model locally on Copilot and PC, as well as leverage the vast GPU ecosystem available on Windows. Besides Copilot and PC, the most powerful AI workstation for local development is a Windows PC running WSL 2, supported by NVIDIA RTX GPUs. Now let's talk about security issues. We continue to make progress on our security future plans and put what we have learned into practice, launching over 80 new product features in the past year.
In terms of security Copilot, private and public sector organizations like Johannesburg City, Eastman, Intesa, National Australia Bank, and NTT are able to improve incident resolution speed by 30%. Data governance is becoming increasingly important, and customers are now using Microsoft Purview to audit over 2 billion Copilot interactions to ensure secure and compliant usage. Now let's discuss our consumer business, starting with LinkedIn. An increasing number of professionals are having high-value conversations on LinkedIn, with comment volume growing by 37% year-on-year.
Short video continues to grow on the platform, with video creation growing at twice the rate of other post formats. We are also innovating through agents to help recruiters and small businesses find qualified candidates faster, and our recruiting business has regained market share in subscriptions. LinkedIn Premium achieved over $2 billion in annual revenue for the first time this quarter. Subscription user growth has nearly increased by 50% over the past two years, with nearly 40% of subscription users utilizing our AI capabilities to enhance their profiles, and LinkedIn marketing solutions remain the leader in B2B advertising.
Now let's talk about search advertising and news. We have regained market share in Bing and Edge. Edge has over 30% market share in the Windows system in the USA and has gained market share for 15 consecutive quarters.
Our investments to improve ad rates are paying off, and advertisers increasingly view our network as an important platform for optimizing ROI. Our Copilot consumer application is seeing increased engagement and retention rates due to its improved speed, unique personality, and innovative features like Copilot Vision. Just today, we offered the Think Deeper feature powered by o1 to all Copilot users around the world for free. Now let's talk about gaming. We are focused on improving the profitability of the business to prepare for long-term growth, primarily driven by high gross margin content and platform services.
We are making this plan a reality. Call of Duty 6 became the best-selling game on Xbox and PlayStation this quarter and surpassed the player count of any other paid release in the series' history in its launch quarter. We have also seen enthusiastic reviews for Treasure Hunt and the Great Circle, which has been played by over four million people. We continue to see strong momentum in Xbox Cloud Gaming, with a record 0.14 billion hours streamed this quarter. Overall, Game Pass set a new quarterly record in revenue, and its PC subscriber base grew over 30%, as we focus on driving full paying subscriptions across all terminals. In summary, we continue to innovate across the entire tech stack to help our customers succeed in this AI era, and I am excited about the many opportunities ahead. Now, I will hand the mic over to Amy.
Amy Hood, Executive Vice President and Chief Financial Officer:
Thank you, Satya, good afternoon everyone.
In this quarter, our revenue was 69.6 billion USD, an increase of 12%. Gross margin grew by 13%, and grew by 12% at fixed exchange rates, while operating profit grew by 17%, and increased by 16% at fixed exchange rates. Our EPS was 3.23 USD, a growth of 10%. We achieved another quarter of double-digit top and bottom line growth.
These results were driven by strong demand for our Cloud Computing and AI products and services, while we improved our operating leverage through better-than-expected operating profit growth. As you heard from Satya, our AI business annual revenue run rate exceeded 13 billion USD and was above expectations. Commercial bookings increased by 67%, growing by 75% at fixed exchange rates, well above expectations, largely due to commitments from OpenAI. In our core annuity sales actions, contracts above 0.1 billion USD for Azure and Microsoft 365 both grew. The commercial remaining performance obligation increased to 298 billion USD, a 34% growth, increasing by 36% at fixed exchange rates.
Approximately 40% will be recognized as revenue in the next 12 months, a year-on-year growth of 21%. The remainder will be recognized after the next 12 months, growing by 45%. In this quarter, our annuity blend ratio was 97%. Forex had no significant impact on our results and was generally consistent with our expectations for corporate revenue, more personal computing revenue, total corporate sales costs, and operating expenses. Forex impact on revenue in our Business sector exceeded expectations. Microsoft Cloud revenue was 40.9 billion USD, growing by 21%. Microsoft Cloud gross margin was at 70%, in line with expectations, and decreased by two percentage points year-on-year, mainly due to the expansion of our AI infrastructure. The company's gross margin increased by 1 percentage point year-on-year to 69%, primarily due to the sales mix shift towards higher-margin business, along with improvements in gaming and search, partially offsetting the expansion of our AI infrastructure. Operating expenses grew by 5%, below expectations. Moreover, operating margin increased by two percentage points year-on-year to 45%. Better-than-expected margin expansion was achieved through efficiency gains in our Business while we invested to expand AI infrastructure and build AI applications. At the company level, as of the end of December, the number of employees grew by 2% compared to last year and remained relatively unchanged compared to the previous quarter.
Now, let's look at our departmental results. The revenue of the Productivity and Business Processes segment was 29.4 billion USD, an increase of 14%, with a 13% growth at fixed exchange rates, despite the adverse forex impact mentioned earlier. The results exceeded expectations, largely driven by Microsoft 365 commercial. Microsoft 365 commercial Cloud revenue grew by 16%, increasing by 15% at fixed exchange rates, slightly above expectations, mainly due to the better-than-expected performance of E5 and Microsoft 365 Copilot. For M365 Copilot, we continue to see growth in adoption, expansion, and usage. The growth in Average Revenue Per User (ARPU) was again driven by E5 and M365 Copilot. Paid M365 commercial seats grew by 7% year-on-year, primarily due to the expansion of our installed base across all customer segments, although mainly in our small and medium enterprises and frontline worker products. M365 commercial product revenue grew by 13%, mainly due to better-than-expected transactional purchases at the launch of Office 2024, along with the aforementioned stronger-than-expected performance of the M365 suite. M365 consumer Cloud revenue grew by 8%, slightly above expectations.
We see continued growth in M365 consumer subscriptions, increasing by 10% to 86.3 million USD, while shifting towards the M365 basic edition. LinkedIn revenue increased by 9%, mainly due to continued growth across all lines of business. In our Talent Solutions business, results were slightly below expectations, primarily due to a continued soft hiring market in key verticals. Dynamics 365 revenue grew by 19%, increasing by 18% at fixed exchange rates, slightly above expectations, mainly due to growth across all workloads.
Departmental gross margin grew by 13%, increasing by 12% at fixed exchange rates, with margins declining year-on-year, mainly due to the expansion of our AI infrastructure. Operating expenses grew by 6%, while operating profit grew by 16%, increasing by 15% at fixed exchange rates. Next is the Asia Vets segment. Revenue was 25.5 billion USD, up 19%, with forex impact being more adverse than expected.
Excluding forex impacts, results for Azure non-AI services, on-premise Servers, and Enterprise and Partner services were slightly below expectations, partially offset by better-than-expected performance of Azure AI services. Azure and other Cloud services revenue grew by 31%. Azure's growth included 13 percentage points contributed by AI services, which grew 157% year-on-year and exceeded expectations, although demand continues to exceed our available capacity. Our non-AI services' growth was slightly below expectations, primarily due to challenges in market execution, particularly for those clients we mainly reach via our scale actions.
As we balance driving non-AI consumption and AI growth. In our on-premise Servers business, revenue fell by 3%, slightly below expectations, mainly due to slower-than-expected buying ahead of the Windows Server 2025 launch. Enterprise and Partner services revenue fell by 1%, below expectations, primarily due to lower-than-expected performance in Enterprise Support Services and Industry Solutions. Departmental gross margin grew by 12%, increasing by 13% at fixed exchange rates, with margins declining by four percentage points year-on-year, mainly due to the expansion of our AI infrastructure.
运营费用增长了10%,而营业利润增长了14%。现在来看看更多个人计算部门。收入为14.7 billion美元,与去年同期相比基本持平,这主要得益于Windows OEM预装、搜索方面的第三方合作伙伴关系的使用,以及《使命召唤》在游戏方面的推出表现。Windows OEM和设备收入同比增长了4%,超出了预期,这主要得益于商业库存建设,以应对Windows 10支持结束以及围绕关税的不确定性。搜索和新闻广告收入(不包括技术成本)增长了21%,按固定汇率计算增长了20%,超出了预期,这主要得益于第三方合作伙伴关系的使用。增长继续由Edge和Bing的费率扩张和健康的广告量增长所推动。
在游戏方面,收入下降了7%,按固定汇率计算下降了8%,因为内容和服务的增长继续被硬件的下降所抵消。Xbox内容和服务收入增长了2%,超出了预期,这主要得益于暴雪和动视内容的超出预期的表现,包括《使命召唤》。部门毛利增长了13%,按固定汇率计算增长了12%。毛利率同比增长了六个百分点,这主要是由于销售组合向高利润率业务的转变,以及在游戏和搜索方面的强劲利润率改善执行。运营费用下降了1%。营业利润增长了32%,按固定汇率计算增长了30%,这主要得益于继续优先考虑高利润率机会。现在回到公司整体结果。资本支出,包括融资租赁,为22.6 billion美元,符合预期,而用于PP&E的现金支出为15.8 billion美元。
我们超过一半的云和AI相关支出用于长期资产,这些资产将在未来15年甚至更长时间内实现货币化。剩余的云和AI支出主要用于服务器,包括CPU和GPU,以根据需求信号为客户提供服务,包括我们的客户合同积压。运营现金流为22.3 billion美元,增长了18%,这主要得益于强劲的云账单和收款,部分被更高的供应商、员工和税收支付所抵消。自由现金流为6.5 billion美元,同比下降了29%,这反映了前面提到的资本支出。本季度,其他收入和支出为负2.3 billion美元,低于我们10月份的指导,这主要是由于我们对邮轮投资的减值费用。我们的有效税率略低于预期,为18%。最后,我们通过股息和股票回购向股东返还了9.7 billion美元。现在,让我们来看看我们对第三季度的展望,除非另有特别说明,否则都是以美元为基础的。
首先,外汇。自10月份以来,随着美元的走强,我们现在预计外汇将使总收入增长减少两个百分点。在各个部门中,我们预计外汇将使生产力和业务流程以及智能云部门的收入增长减少两个百分点,而在更多个人计算部门中减少大约一个百分点。与我们10月份对第三季度外汇影响的指导假设相比,这将使总收入减少大约1 billion美元。我们预计外汇将使销售成本增长减少大约两个百分点,运营费用增长减少大约一个百分点。
我们的展望中有许多趋势与我们在第二季度看到的趋势在第三季度继续。对我们微软云的差异化云和AI产品和服务的需求应该会推动又一个强劲增长的季度。在商业预订方面,由于相对平坦的到期基数以及去年在大型Azure合同方面的强劲表现,我们预计同比增长将大致持平。我们预计将在我们的核心年金销售动作中保持一致的执行,并对我们平台的长期承诺。
提醒一下,大型长期Azure合同的时机不太可预测,这可能会导致我们的预订增长率出现季度波动。微软云毛利率应该大约为69%,同比下降,这主要是由于扩大我们的AI基础设施的影响。接下来,是部门指导。在生产力和业务流程方面,我们预计收入将在11%到12%之间按固定汇率增长,或者在29.4 billion到29.7 billion美元之间。
Microsoft 365商业云收入增长应该在14%到15%之间按固定汇率计算,与我们超出预期的第二季度结果相比相对稳定。我们预计通过E5和M365 Copilot继续实现ARPU增长,并且我们再次预计由于安装基础的规模,座位增长将有所放缓。对于M365商业产品,我们预计收入将与去年同期大致持平。提醒一下,M365商业产品包括M365套件的Windows商业本地组件。
因此,我们的季度收入增长可能会因合同组合而有所不同,主要取决于期间内的收入确认。M365消费者云收入增长应该在中到高个位数之间,由M365订阅推动。对于LinkedIn,我们预计收入增长将在低到中个位数之间,尽管我们预计所有业务都将增长,但第二季度的趋势和人才解决方案将在第三季度继续对增长构成阻力。在Dynamics 365方面,我们预计收入增长将在中等两位数之间,这主要得益于所有工作负载的持续增长。
For Cloud Computing, we expect revenue to grow between 19% and 20% at constant exchange rates, or between 25.9 billion and 26.2 billion USD. Revenue will continue to be driven by Azure, which may see quarterly fluctuations due to contract mix, primarily dependent on revenue recognition during the period. We expect third quarter revenue growth to be between 31% and 32% at constant exchange rates, mainly owing to strong demand for our service portfolio. As shared in October, with more AI capacity coming online, the contribution from our AI services will increase.
In terms of non-AI services, healthy growth continues. However, we expect continued impact from previously mentioned execution challenges in the second half of the year. Although AI capacity constraints are anticipated in the third quarter, by the end of this fiscal year, we should be able to generally meet recent demand, thanks largely to our significant capital investments. In our on-premise server business, we expect revenue to decline in the mid-single digits, primarily due to reduced transactional purchases.
In the area of Enterprise and Partner Services, we expect revenue growth to be in the low to mid-single digits. In more personal computing, we anticipate revenue between 12.4 billion and 12.8 billion USD, continuing to prioritize high-margin opportunities. Windows OEM and device revenue should decline in the mid-single digits. We expect Windows OEM revenue to be roughly flat year-over-year, as our outlook assumes inventory levels will normalize. Actual results may vary due to current tariff uncertainties. Device revenue will decrease. Search and news advertising revenue (excluding technical costs) is expected to grow in the low double digits, primarily due to continued growth in ads and revenue per search for Edge and Bing, gaining market share across all areas. Growth is expected to moderate from the previous quarter, mainly due to additional Forex impacts and a return to more normal levels of utilization for earlier mentioned third-party partnerships. Search growth, excluding technical costs, will outpace overall search and news advertising revenue growth, with our overall search and news advertising revenue growth expected to be in the mid to high single digits. In gaming, we expect revenue growth to be in the low single digits. We anticipate Xbox content services revenue growth in the low to mid-single digits, primarily due to first-party content and Xbox Game Pass. Hardware revenue is expected to decline year-over-year. Now returning to company guidance. We expect Cox to grow between 19% and 20% at constant exchange rates, or between 21.65 billion and 21.85 billion USD, with operating expenses expected to grow 5% to 6% at constant exchange rates, or between 16.4 billion and 16.5 billion USD. Other income and expenses are expected to be around negative 1 billion USD, primarily driven by equity-method investments. Reminder, we do not recognize market-value gains or losses on equity-method investments. Finally, we expect an effective tax rate of about 18% for the third quarter. Now, let's look at some additional thoughts for the remaining time in this fiscal year and beyond. First, Forex. Since October, with the strengthening of the USD, we now expect Forex to reduce revenue and cost of sales growth by more than one percentage point in the fourth quarter, and to reduce operating expense growth by about one percentage point.
Next, regarding capital expenditures. We anticipate quarterly spending in the third and fourth quarters will remain similar to that of our second quarter. In fiscal year 2026, we expect to continue investing based on strong demand signals, including customer contract backlogs we need to deliver, which covers our entire Microsoft Cloud. However, the growth rate will be lower than in fiscal year 2025, and our spending will begin to shift back to short-term assets that are more correlated with revenue growth. Reminder, our long-term infrastructure investments are interchangeable, allowing us to meet customer needs globally, including AI workloads, and maintain agility. As always, there may be quarterly spending differences due to cloud infrastructure construction and timing of finance leasing deliveries. For the full fiscal year, we still expect revenue and operating profit to achieve double-digit growth as we focus on efficiencies in cost of sales and operating expenses. Given the operational leverage achieved throughout the year, including efficiencies in scaling AI infrastructure and using our own AI solutions, we now expect operating margin to see a slight year-over-year increase in fiscal year 2025. Finally, we expect the full-year effective tax rate for fiscal year 2025 to be between 18% and 19%.
To summarize, we are committed to providing real-world AI solutions that help clients grow and improve their outcomes. We are confident in our leadership position as clients grow. Before moving into the Q&A session, I have a special thank you. Brett Iversen will transition to a new role as the head of our Americas sales finance team.
On behalf of the company, thank you for your immense influence on investor relations over the past four years, and for your collaboration with Satya and me. I would also like to welcome Jonathan Neilson, who previously was our finance lead for security products, and he will be returning to the investor relations department to lead this team. Now, let's move into the Q&A session, Brett.
Brett Iversen, Vice President of Investor Relations:
Thank you, Amy.
We will now enter the Q&A session. Out of respect for others on the call, we ask participants to ask only one question. Operator, could you repeat your instructions?
Operator:
Q&A session.
Thank you for your question. Our first question comes from Morgan Stanley's Keith Weiss. Please go ahead.
Keith Weiss:
Thank you for taking my question. I would also like to echo Amy's comments, Brett, congratulations on your new role. It has been a pleasure working with you, and I wish you all the best in your new position. Looking at this quarter's performance, business bookings have been another very strong quarter.
But once again, we are slightly disappointed with Azure, which is at the low end of the guidance range. Amy, I hope you can delve into what some of the execution issues might be and what solutions are in place. Do we still feel confident about the acceleration in the second half following the June quarter and last quarter? Thank you very much.
Amy Hood, Executive Vice President and Chief Financial Officer: Thank you, Keith.
Let me take some time to talk about what we observed in the second quarter and provide some additional context regarding the execution issues mentioned in the short term. First, let me be very specific. These issues occurred in the non-AI ACR segment. Our Azure AI results were better than we expected, mainly due to the outstanding work of the operations team, who advanced some delivery dates by even a few weeks.
When you are operating under capacity constraints, a few weeks really matter, and the team's excellent execution is reflected in the revenue results. The real challenge in the non-AI area lies in what we refer to as scaling actions. So think primarily about these customers, with whom we engage through partners and more indirect sales methods. The real issue arises when these customers are approached in this manner; they are trying to balance how to conduct AI workloads while continuing with migrations and other foundational work. Then we changed our sales actions in the summer, really trying to balance both aspects.
When you do this, you learn with customers and partners how to find a balance in investments, marketing expenditures, and important human resources in order to help customers with these transitions. I believe we will make some adjustments to ensure we achieve this balance because when you make these changes in the summer, you can see the effects when those changes take effect in the system, and whether the balance is achieved. So the team is working hard to address these issues, and they are already making adjustments.
I expect we will see some impacts in the second half of the year because when dealing with scaling actions, it takes time to adjust. I am satisfied that the team understands and is addressing these issues. So hopefully this information is helpful to you. Then we briefly discussed the situation in the third quarter. We talked about 31 to 32, and we published 31 in this quarter. We are pleased with the AI results and discussed our ability to achieve revenue. So again in the third quarter, we are in quite a constrained capacity position, which aligns with what I expected when I spoke to you last October. When I talk about being in a constrained capacity state, it requires two things. You need space, which I usually refer to as long-term assets, right? That is infrastructure and land, and then you need equipment. We continue to do this, and you have seen our spending direction shift, as we have been investing long-term. We have been lacking power and space. So as the investments we have made over the past three years come to fruition, we will be approaching that balance by the end of this year.
So confidence in the AI area remains, in terms of sales, utilization, and being buoyed by signals. What we are seeing is waiting to see how non-AI ACR plays out in the second half through scaling actions. But overall, the only real change is the scaling actions, from my perspective. Keith, I hope this helps.
Unidentified Speaker:
Yes, I think, Amy, I just want to add one thing, Keith, regarding your question. As Amy mentioned, the AI growth rate is actually better than we expected, and we have addressed some supply issues. More importantly, some workloads are scaling well. When you delve into these AI workloads, another positive aspect is that even for regular storage, data services, application services, etc., as we mentioned.
So whether it's ChatGPT or Copilot, or even the emerging AI workloads within enterprises. This is all very good. Enterprise workloads, whether it's SAP or VMware migrations, are also in good shape. It's just a subtle issue, as Amy mentioned, of how to truly adjust incentives during the transition period of the platform; you really need to ensure you are leaning towards new design victories. You are not just doing what last generation did. This is what Amy referred to as the art of finding the right balance.
But let me put it this way. It is better to win new victories rather than just protect past achievements. This is certainly something we will always lean towards.
Unidentified Speaker:
Thank you, Keith.
Operator, the next question.
Operator:
The next question comes from Mark Moerdler of Bernstein Research. Please go ahead.
Mark Moerdler:
Thank you very much for taking my question.
Could you provide more information about the factors driving the significantly higher-than-expected revenue growth for Microsoft's AI? We have already discussed the Azure AI segment. However, could you provide more details on this aspect? Our estimate is that the scale of Copilot is much larger than we anticipated, and the growth rate is also faster. Any additional information regarding Microsoft's AI exceeding expectations would be greatly appreciated. Thank you.
Amy Hood, Executive Vice President and Chief Financial Officer: Thank you, Mark, your question is very valuable. Yes, as we discussed, the results are better than expected. There are several aspects, as you've rightly pointed out. The first is the Azure segment, which we just talked about.
The second part, you are correct, the performance of Microsoft Copilot has also exceeded expectations. Importantly, we have seen strong performance in terms of seats, both new and expanded seats, as Satya mentioned, and usage, which, while it doesn't directly affect revenue, certainly does indirectly, because people are getting more value from it. Additionally, the price per seat is actually quite good, indicating value. So, Mark, these are the main areas that exceeded our expectations.
Analyst:
Thank you, Mark.
Brett Iversen, Vice President of Investor Relations:
Operator, next question.
Operator:
The next question comes from Brent Thill at Jefferies. Please go ahead and ask your question.
Brent Thill:
Thank you, Satya. You mentioned DeepSeek several times in your opening remarks. I think everyone would be interested in your views. Are we seeing AI scaling at lower costs? Have we reached a milestone that you can see, or do we still need some time to get there? Thank you for your thoughts.
Satya Nadella, Chairman and Chief Executive Officer: Yes.
Thank you, Brent. Yes, in my speech, I talked about the evolution of AI, which is no different from the evolution of conventional computing cycles. It's always about bending the curve and then adding more points on that curve. So, there’s Moore's Law running at full speed.
Then, on top of that, there’s the AI scaling law, whether it’s pre-training or inference time computation, which compounds, and these are all software. You should understand it this way, what I've mentioned in my speech is that we've observed for a while now that the improvements in each cycle are 10 times, simply because of the achievements from all the software optimizations regarding inference. So that’s what you see. On top of that, I believe DeepSeek indeed has some real innovations.
These are even some things discovered by OpenAI in o1. So, of course, all of this will be commoditized and widely used. And the biggest beneficiaries of any software cycle are the customers, right? Because ultimately, if you think about it, the shift from client-server to Cloud Computing Service means more people are buying servers; it's just that it's called Cloud Computing Service now. So when token prices drop and inference computing prices drop, that means people can consume more, and there will be more applications being written.
Interestingly enough, when I mention these quite powerful models, it's hard to imagine that we are in early 2025 where you can run a model on a PC that requires quite a large-scale cloud infrastructure. So this optimization means that AI will become more ubiquitous, and this is good news for large-scale Cloud Computing Service providers like us and for PC platform providers like us.
Analyst:
Thank you.
Unidentified speaker:
Thank you, Brett.
Operator, the next question.
Operator:
The next question comes from Karl Keirstead of UBS. Please go ahead.
Karl Keirstead:
Thank you. Perhaps this question could also be answered by Satya, it is not related to the numbers, but Satya, I would like to ask you about the news on Stargate and the changes in the relationship with OpenAI announced last week.
It seems that most investors interpreted this as Microsoft definitely still being very committed to the success of OpenAI but choosing to play a more supportive role in meeting OpenAI's future capital expenditure needs. I hope you can elaborate on Stargate and Amy, whether investors should draw any conclusions about your thoughts on capital expenditure needs for the coming years from this decision. Thank you.
Satya Nadella, Chairman and Chief Executive Officer:
Yes, thank you for your question.
We are still very satisfied with our partnership with OpenAI, and as you can see, they have committed to using Azure in a big way, and even in the bookings we confirmed, this is just the first payment, so you will see that given the role we play in it, there will be more benefits in the future. Of course, their success is our success, as all the other business arrangements we detailed in the blog align with this announcement. But on the overall issue you mentioned, I would say that we are building quite a flexible fleet, right? We are ensuring the right balance between training and inference. It is geographically distributed.
We are working very hard on all the software optimizations, right? I mean, not only the software optimizations done by DeepSeek but all the work we have done, for example, over the years with OpenAI to lower the price of the GPT model. In fact, we have done a lot of work on inference optimization, which has always been a key driving factor. A key point in AI is that you not only launch cutting-edge models, but if they are too expensive to service, then that’s not good, right? It won’t generate any demand. So you need to do this optimization to reduce inference costs and make it feasible for widespread use. So that’s the fleet physics we are managing. And remember, you don’t want to buy too much at once because Moore's Law gives you double the performance every year, and your optimization can give you ten times the performance boost. You want to continually upgrade the fleet, modernize the fleet, renew the fleet, and ultimately have the right monetization ratio to what you believe the training expenditure should be. So, I am very satisfied with the investments we are making; it is flexible and allows us to better scale the business in the long run.
Amy Hood, Executive Vice President and Chief Financial Officer:
Perhaps, Karl, let me reiterate some of my comments on capital expenditures because I think it will help further clarify what Satya said regarding what a flexible fleet means. We have, I think we've talked about, close to 300 billion USD in RPO. This is the commitment to deliver contracts to customers, and the quicker and more efficiently we complete these deliveries, the better we will be, not just in the OpenAI partnership, which is just a part of it, but for our entire platform, which we need to deliver for customers. I think a point that is sometimes overlooked is when we say flexibility, we are not just referring to the primary use cases we have been talking about, which is inference, but also post-training training, which is a key component, and then there is the operation of the commercial cloud, which is essential underneath every layer of a modern AI application.
It needs to be distributed and it needs to be global. All of this is important because it means you are operating at the highest efficiency. So the capital expenditure investment you see, as you mentioned, front-end is this infrastructure building, allowing us to really catch up on the AI infrastructure we need, but it can also be viewed as the construction itself, Datacenter, as well as some of the things we need to catch up on in Cloud Computing.
Then you will see a shift towards more CPUs and GPUs. This shift will be more directly related to revenue, and it will be related to the partnerships with OpenAI or other partnerships you inquired about. So what I want everyone to understand is that the growth in capital expenditure is experiencing this cyclical transition, closely tied to the delivery of customer contracts, regardless of who the end customer is.
Karl Keirstead:
Thank you.
Brett Iversen, Vice President of Investor Relations:
Operator, the next question.
Operator:
The next question comes from Brad Zelnick of Deutsche Bank. Please go ahead.
Brad Zelnick:
Thank you very much for accepting my questions, and I also want to congratulate and thank Brett.
Satya, when considering Microsoft’s extensive Copilot product lineup, which has been in the market for over a year now, with product accuracy continuously improving and inference costs declining.
How do you view the journey moving forward from now, and perhaps the ability to bring products to market to meet the broadest range of customer and client needs? Thank you.
Satya Nadella, Chairman and Chief Executive Officer: Thank you, Brad, that’s a valuable question. In fact, you have recently seen two announcements we've made. One is regarding M365 Copilot.
We now have Copilot Chat. So this will be widely deployed across the installed base because you can enable it immediately through IT, and everyone can start using web-based chat with all enterprise controls right away. It has Copilot Studio built in, so that means they can start building agents. So we think this is a great combination along with full Copilot, and I believe it will actually accelerate in terms of seat usage and agent building.
So that’s one aspect. Another aspect is that even on the consumer side, we just launched o1 yesterday, now featuring 'Deep Thinking' capabilities on Copilot, powered by o1. It's now rolled out globally, right? So you can see the benefits of inference optimization, and the reduction in costs means you can drive broader adoption of features that used to be high-level capabilities. We will definitely do this across the entire product lineup.
The same will happen in GitHub Copilot and also in Security Copilot. So you will see we are doing this across the length and breadth of our entire product lineup.
Brad Zelnick:
Thank you.
Unidentified Speaker:
Thank you, Brad.
Brett Iversen, Vice President of Investor Relations:
Operator, the next question.
Operator:
The next question is from Brad Reback at Stifel. Please go ahead.
Brad Reback:
Great.
Thank you very much. Satya, if you look a few years down the line, is there any way to know how many inferences conducted on Azure will use proprietary models versus how many will use open-source models? That being said, does this ultimately affect Microsoft? Thank you.
Satya Nadella, Chairman and Chief Executive Officer: Yes, that’s a great question. Because in some respects, what you’re seeing are the vast number of models being used in any application, right? When you dig deep into products like Copilot or GitHub Copilot, you’ve already seen many different models.
You build models, you fine-tune models, you distill models. Some of those models are distilled into open-source models. So there will be that combination. And we have also always believed that having cutting-edge models is a good thing.
You always want to build your applications with the highest aspirations, using the best models available at the time, and then optimize from there. So that’s the other side. There’s a sort of timeliness, right? The given COGS profile at the start doesn’t have to be the final one, because you can continuously optimize latency and COGS and bring in different models. And actually, all this complexity, by the way, needs to be managed by a new application service, a new application server.
So we are heavily investing in Foundry, because from an application developer’s perspective, you kind of want to keep up with the tide of these emerging models. You want to have a perpetual way for your applications to benefit from all this innovation without having to bear all the development costs, or what people call DevOps costs, or what people call AIOps costs. So we are also heavily investing in application servers for any workload, in order to be able to benefit from these different models, whether they are open-source, closed-source, or different weight classes. At the same time, from an operational perspective, it’s faster and easier.
Analyst:
That's great, thank you.
Brett Iversen, Vice President of Investor Relations:
Thank you, Brad. Operator, the next question.
Operator:
The next question comes from Brad Filz of Bank of America. Please go ahead.
Analyst:
Oh, that's great, thank you very much. It's exciting to hear about Copilot's robust performance. I'm very interested in understanding the source of this strong performance.
Is it department-level trades, customers transitioning from proof of concept to department-level trades, or are there multiple department-level trades within enterprises? You've mentioned an increase in usage trends. I'm very eager to learn about the common use cases you've observed that give you confidence it will translate into future monetization. Thank you.
Satya Nadella, Chairman and Chief Executive Officer: Yes, I think the initial batch of seats was in places where there was greater faith in instant productivity, like the sales team, finance department, or supply chain department, where there is a lot of, for example, SharePoint data that you would want to combine with network data to produce beneficial results.
But what happened next, very much like what we saw in these previous generations of productivity products, was that people collaborated across functions and roles, right? For instance, even in my daily habits, I use chat, I use work tags, I get results, and then I immediately share pages with colleagues. I somewhat call it thinking with AI and working with people. This model then requires you to scale it more broadly across the enterprise. You can achieve this through teams and in various ways. What we did to make it easier is to start with adding this from Copilot Chat. So this provided enterprise customers with more flexibility, giving them something more universal.
Analyst:
Great, thank you very much.
Brett Iversen, Vice President of Investor Relations:
Thank you, Brad. Operator, we still have time to answer one last question.
Operator:
The last question will come from Brent Bracelin of Piper Sandler.
Please continue to ask questions.
Brent Bracelin:
Thank you for accepting my question. Good afternoon. I want to return to the topic of business bookings and commercial RPO, which I believe increased by $39 billion, the highest level we have seen on a quarterly basis.
Business bookings grew by 75%, adjusted for constant exchange rates. This is twice what we have seen over the past decade. I know this metric has a certain degree of volatility, but this quarter seems to be related to the momentum of backlog and bookings. Can you talk about the breadth of this growth? Is it widespread, or are there a few large deals? Any detail would be very helpful. Thank you.
Amy Hood, Executive Vice President and Chief Financial Officer: Thank you, Brent. That's a great question. We talked about one of the main drivers, which is the commitment made by OpenAI regarding Azure.
What I would say is that while this is obviously a large component, you will continue to see commitments from OpenAI. So I wouldn't want to separate this concept as a one-time thing, it's a sustained relationship that will continue to grow, that absolutely will. To address your question, what other factors are involved in this number? First, our core actions are performing very well. Our core actions include, as you mentioned, the renewals of our existing contracts, the additions to those contracts, and upselling, for example, Copilot or GitHub Copilot or other processes, which I think is important.
We also had a good E5 quarter, and when we talk about a lot of things regarding M365 Copilot, sometimes I forget to also talk about the momentum of the suite. We have seen that this quarter as well, and we are very pleased with that. The last component is the large Azure commitments. As you said, these look exactly as we expected, which is a good platform commitment signal. As you mentioned, this is a very broad number. There are two forms of these Azure commitments. One is that existing customers have fulfilled their commitments and are making bigger commitments, which is a good platform commitment signal. Then you have new customers making commitments. We have seen that this quarter as well. So as you said, sometimes a large number that seems like this may make you feel like it is just one thing. I think you are right. One part is one thing, but much of it is our good consistent execution on workloads.
Analyst:
Thank you.
Satya Nadella, Chairman and Chief Executive Officer:
Thank you, Brent. This concludes the Q&A session of our Earnings Reports conference call today. Thank you for joining us.
We look forward to talking to all of you again soon.
Amy Hood, Executive Vice President and Chief Financial Officer:
Thank you, everyone.
Operator:
This concludes today's meeting. You may disconnect your line, and have a great day.
The event has ended.
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