Microsoft Corporation (MSFT) — Q2 2026 Earnings Call Transcript

Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chairman and Chief Executive Officer; Amy Hood, Chief Financial Officer; Alice Jolla, Chief Accounting Officer; and Keith Dolliver, Corporate Secretary and Deputy General Counsel. On the Microsoft Corporation Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides the reconciliation of differences between GAAP and non-GAAP financial measures. More detailed outlook slides will be available on the Microsoft Corporation Investor Relations website when we provide Outlook commentary on today's call. On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid in further understanding the company's second quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency when available, as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rate only. We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission in the transcript and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Corporation Investor Relations website. During this call, we will be making forward-looking statements, predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call, in the Risk Factors section of our Form 10-K, Forms 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. With that, I'll turn the call over to Satya.

Thank you very much, Jonathan. This quarter, the Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year over year, reflecting the strength of our platform and accelerating demand. We are in the beginning phases of AI diffusion and its broad GDP impact. The total addressable market will grow substantially across every layer of the tech stack as this diffusion accelerates and spreads. In fact, even in these early innings, we have built an AI business that is larger than some of our biggest franchises that took decades to build. Today, I'll focus my remarks across the three layers of our stack: Cloud and Token Factory, agent platform, and high-value agentic experiences. When it comes to our cloud and token factory, the key to long-term competitiveness is shaping our infrastructure to support new high-scale workloads. We are building this infrastructure out for the heterogeneous and distributed nature of these workloads, ensuring the right fit with the geographic and segment-specific needs for all customers, including the long tail. The key metric we are optimizing for is tokens per watt per dollar, which comes down to increasing utilization and decreasing total cost of ownership using silicon systems and software. A good example of this is the 50% increase in throughput we were able to achieve in one of our highest volume workloads, OpenAI inferencing, powering our co-pilots. Another example was the unlocking of new capabilities and efficiencies for our Fairwater data centers. In this instance, we connect both Atlanta and Wisconsin sites through an AI WAN to build a first-of-a-kind AI super factory. Fairwater's two-story design and liquid cooling allow us to run higher GPU density and thereby improve both performance and latencies for high-scale training. All up, we added nearly one gigawatt of total capacity this quarter alone. At the silicon layer, we have NVIDIA, AMD, and our own Maya chips delivering the best overall fleet performance, cost, and supply across multiple generations of hardware. Earlier this week, we brought online our Maya 200 accelerator. Maya 200 delivers 10 plus flops at FP4 precision with over 30% improved total cost of ownership compared to the latest generation hardware in our fleet. We will be scaling this starting with inferencing and synthetic data generation for our superintelligence team, as well as doing inferencing for Copilot and Foundry. Given that AI workloads are not just about AI accelerators, but also consume large amounts of compute, we are pleased with the progress we are making on the CPU side as well. Cobalt 200 is another big leap forward delivering over 50% higher performance compared to our first custom-built processor for cloud-native workloads. Sovereignty is increasingly top of mind for customers, and we are expanding our solutions and global footprint to match. We announced data center investments in seven countries this quarter alone, supporting local data residency needs. We offer the most comprehensive set of sovereignty solutions across public, private, and national partner clouds so customers can choose the right approach for each workload with the local control they require. Next, I want to talk about the agent platform. Like in every platform shift, all software is being rewritten. A new app platform is being born. You can think of agents as the new apps. To build, deploy, and manage agents, customers will need a model catalog, tuning services, harness for orchestration, services for context engineering, AI safety, management observability, and security. It starts with having broad model choice. Our customers expect to use multiple models as part of any workload that they can fine-tune based on cost, latency, and performance requirements. We offer the broadest selection of models of any hyperscaler. This quarter, we added support for GPT-5.0.2 as well as Claude 4.5. Already over 1,500 customers have used both Anthropic and OpenAI models on Foundry. We are seeing increasing demand for region-specific models, including Cohere, as more customers look for Sovereign AI choices. We continue to invest in our first-party models, which are optimized to address the highest value customer scenarios, such as coding and security. As part of Foundry, we also give customers the ability to customize and fine-tune models. Increasingly, customers want to capture the tacit knowledge they possess inside model weights as their core intellectual property. This is probably the most important sovereign consideration for firms, as AI diffuses more broadly across our GDP, and every firm needs to protect their enterprise value. For agents to be effective, they need to be grounded in enterprise data and knowledge. That means connecting their agents to systems of record and operational data, analytical data, as well as semi-structured and unstructured production and communications data. This is what we are doing with our unified IQ layer spanning fabric, Foundry, and data powering Microsoft 365. In the world of context engineering, Foundry knowledge and fabric are gaining momentum. Foundry knowledge delivers better context with automated source routing and advanced agentic retrieval while respecting user permissions. Fabric brings together end-to-end operations, real-time, and analytical data. Two years since it became broadly available, Fabric's annual revenue run rate is now over $2 billion with over 31,000 customers, and it continues to be the fastest-growing analytics platform on the market with revenue up 60% year over year. All up, the number of customers spending $1 million plus per quarter on Foundry grew nearly 80%, driven by strong growth in every industry. Over 250 customers are on track to process over 1 trillion tokens on Foundry this year. There are many great examples of customers using this capability on Foundry to build their own agentic systems. Alaska Airlines is creating natural language flight search. BMW is speeding up design cycles. Land O'Lakes is enabling precision farming for co-op members. Symphony AI is addressing bottlenecks in the CPG industry. Foundry remains a powerful on-ramp for the entire cloud. The majority of Foundry customers use additional Azure solutions like developer services, app services, databases as they scale. Beyond Fabric and Foundry, we're also addressing agent building by knowledge workers with Copilot Studio and AgentBuilder. Over 80% of the Fortune 500 have active agents built using these low-code, no-code tools. As agents proliferate, every customer will need new ways to deploy, manage, and protect them. We believe this creates a major new category and significant growth opportunity for us. This quarter, we introduced Agent 365, which makes it easy for organizations to extend their existing governance, identity, security, and management to agents. That means the same controls they already use across Microsoft 365 and Azure now extend to agents they build and deploy on our cloud or any other cloud. Partners like Adobe, Databricks, Genspace, Glean, NVIDIA, SAP, ServiceNow, and Workday are already integrating Agent 365. We are the first provider to offer this type of agent control plane across clouds. Now let's turn to the high-value agentic experiences we are building. AI experiences are intent-driven and are beginning to work at task scope. We are entering an age of macro delegation and micro steering across domains. Intelligence using multiple models is built into multiple form factors. You see this in chat, in new agent inbox, apps, coworker scaffoldings, agent workflows embedded in applications and IDEs that are used every day, or even in our command line with file system access and skills. That's the approach we are taking with our first-party family of copilot spanning key domains. In consumer, for example, Copilot experiences span chat, news, feed, search, creation, browsing, shopping, and integrations into the operating system, and it's gaining momentum. Daily users of our Copilot app increased nearly 3x year over year. With Copilot Checkout, we have partnered with PayPal, Shopify, and Stripe so customers can make purchases directly within the app. With Microsoft 365 Copilot, we are focused on organization-wide productivity. WorkIQ takes the data underneath Microsoft 365 and creates the most valuable stateful agent for every organization. It delivers powerful reasoning capabilities over people, their roles, their artifacts, their communications, and their history and memory—all within an organization's security boundary. Microsoft 365 Copilot's accuracy, powered by WorkIQ, is unmatched, delivering faster and more accurate work-grounded results than the competition. We have seen our biggest quarter-over-quarter improvement in response quality to date. This has driven record usage intensity, with the average number of conversations per user doubling year over year. Microsoft 365 Copilot is becoming a true daily habit, with daily active users increasing 10x year over year. We're also seeing strong momentum with the Researcher Agent, which supports both OpenAI and Claude, as well as Agent Mode in Excel, PowerPoint, and Word. All up, it was a record quarter for Microsoft 365 Copilot seat additions, up over 160% year over year. We saw accelerating seat growth quarter over quarter and now have 15 million paid Microsoft 365 Copilot seats and multiples more enterprise chat users. We are seeing larger commercial deployments. The number of customers with over 35,000 seats tripled year over year. Fiserv, ING, NAST, the University of Kentucky, the University of Manchester, the US Department of Interior, and Westpac all purchased over 35,000 seats. Publicis alone purchased over 95,000 seats for nearly all its employees. We are also taking share in Dynamics 365 with built-in agents across the entire suite. A great example of this is how Weesa is turning customer conversations data into knowledge articles with our knowledge management agent in Dynamics, and how Sandrik is using our sales qualification agent to automate lead qualification across tens of thousands of potential customers. In coding, we are seeing strong growth across all paid GitHub Copilot subscriptions. Copilot Pro Plus subscriptions for individual developers increased 77% quarter over quarter, and all up, we now have 4.7 million paid Copilot subscribers, up 75% year over year. Siemens, for example, is going all in on GitHub, adopting the full platform to increase developer productivity after a successful Copilot rollout to over 30,000 developers. GitHub AgentHQ is the organizing layer for all coding agents like Anthropic, OpenAI, Google, Cognition, and xAI in the context of customers' GitHub repositories. With Copilot CLI and Visual Studio Code, we offer developers the full spectrum of form factors and models they need for AI-first coding workflows. When you add WorkIQ as a skill or an MCP to our developer workflow, it's a game changer, surfacing more context like emails, meetings, documents, projects, messages, and more. You can simply ask the agent to plan and execute changes to your codebase based on an update to a spec in SharePoint or using the transcript of your last engineering and design meeting in Teams. We are going beyond that with GitHub Copilot SDK. Developers can now embed the same runtime behind Copilot CLI, with multimodal, multistep planning tools, and MCP integration streaming directly into their applications. In security, we added a dozen new and updated security Copilot agents across Defender, Entra, Intune, and Purview. For example, iCertus' SOC team used Security Copilot Agent to reduce manual triage time by 75%, which is a real game changer in an industry facing a severe talent shortage. To make it easier for security teams to onboard, we are rolling out Security Copilot to all our E5 customers, and our security solutions are also becoming essential to manage organizations' AI deployments. 24 billion copilot interactions were audited by Purview this quarter, up 9x year over year. Finally, I want to talk about two additional high-impact agentic experiences. First, in healthcare, Dragon Corporation Pilot is the leader in its category, helping over 100,000 medical providers automate their workflows. Mount Sinai Health is now moving to a system-wide Dragon Copilot deployment after a successful trial with its primary care physicians. All up, we helped document 21 million patient encounters this quarter, up 3x year over year. Second, regarding science and engineering, companies like Unilever in Consumer Goods and Synopsys in EDA are using Microsoft Discovery to orchestrate specialized agents for R&D end to end. They're able to reason over scientific literature and internal knowledge, formulate hypotheses, spin up simulations, and continuously iterate to drive new discoveries. Beyond AI, we continue to invest in all our core franchises to meet the needs of our customers and partners, and we are seeing strong progress. For example, when it comes to cloud migrations, our new SQL Server has over 2x the IaaS adoption of the previous version. In security, we now have 1.6 million security customers, including over a million who use four or more of our workloads. Windows reached a big milestone, with 1 billion Windows 11 users, up over 45% year over year. We had share gains this quarter across Windows, Edge, and Bing, double-digit member growth in LinkedIn with 30% growth in paid video ads. In gaming, we are committed to delivering great games across Xbox, PC, cloud, and every other device, and we saw record PC players and paid streaming hours on Xbox. In closing, we feel very good about how we are delivering for customers today and building the full stack to capture the opportunity ahead. With that, let me turn it over to Amy to walk through our financial results and outlook, and I look forward to rejoining for your questions.

Thank you, Satya, and good afternoon, everyone. With growing demand for our offerings and focused execution by our sales teams, we again exceeded expectations across revenue, operating income, and earnings per share while investing to fuel long-term growth. This quarter, revenue was $81.3 billion, up 17% in constant currency. Gross margin dollars increased 16% in constant currency, while operating income increased 21% in constant currency. Earnings per share was $4.14, an increase of 24% in constant currency when adjusted for the impact of our investment in OpenAI. FX increased reported results slightly less than expected, particularly in intelligent cloud revenue. Company gross margin percentage was 68%, down slightly year over year, primarily driven by continued investments in AI infrastructure and growing AI product usage that was partially offset by ongoing efficiency gains, particularly in Azure and Microsoft 365 commercial cloud, as well as sales mix shift to higher margin businesses. Operating expenses increased 5% in constant currency, driven by R&D investments in compute capacity and AI talent, as well as impairment charges in our gaming business. Operating margins increased year over year to 47%, ahead of expectations. As a reminder, we still account for our investment in OpenAI under the equity method. As a result of OpenAI's recapitalization, we now record gains or losses based on our share of the change in their net assets on their balance sheet as opposed to our share of their operating profit or losses from their income statement. Therefore, we recorded a gain which drove other income and expense to $10 billion in our GAAP results. When adjusted for the OpenAI impact, other income and expense was slightly negative and lower than expected, driven by net losses on investments. Capital expenditures were $37.5 billion this quarter; roughly two-thirds of our CapEx was on short-lived assets, primarily GPUs and CPUs. Our customer demand continues to exceed our supply. Therefore, we must balance the need to have our incoming supply better meet growing Azure demand with expanding first-party AI usage across services like Microsoft 365 Copilot and GitHub Copilot, increasing allocations to R&D teams to accelerate product innovation, and continued replacement of end-of-life server and networking equipment. The remaining spend was for long-lived assets that will support monetization for the next fifteen years and beyond. This quarter, total finance leases were $6.7 billion and were primarily for large data center sites. Cash paid for PP&E was $29.9 billion. Cash flow from operations was $35.8 billion, up 60% driven by strong cloud billings and collections. Free cash flow was $5.9 billion and decreased sequentially, reflecting the higher cash capital expenditures from a lower mix of finance leases. Finally, we returned $12.7 billion to shareholders through dividend and share repurchases, an increase of 32% year over year. Now to our commercial results. Commercial bookings increased 23% in constant currency, driven by the previously large Azure commitment from OpenAI, reflecting multiyear demand needs as well as the previously announced Anthropic commitment from November, and healthy growth across our core annuity sales motions. Commercial remaining performance obligation increased to $625 billion, up 10% year over year, with a weighted average duration of approximately two and a half years. Roughly 25% will be recognized in revenue in the next twelve months, up 39% year over year. The remaining portion recognized beyond the twelve months increased 56%. Approximately 45% of our commercial RPO balance is from OpenAI. The significant remaining balance grew 28% and reflects ongoing broad customer demand across the portfolio. Microsoft Cloud revenue was $51.5 billion, growing 26% in constant currency. Microsoft Cloud gross margin percentage was slightly better than expected at 67% and down year over year due to continued investments in AI that were partially offset by ongoing efficiency gains noted earlier. Now to our segment results. Revenue from productivity and business processes was $34.1 billion and grew 16% in constant currency. Microsoft 365 commercial cloud revenue increased 17% in constant currency with consistent execution in the core business and increasing contribution from strong copilot results. ARPU growth was again led by E5 and Microsoft 365 Copilot. Paid Microsoft 365 commercial seats grew 6% year over year to over 450 million, with installed base expansion across all customer segments, though primarily in our small and medium business and frontline worker offerings. Microsoft 365 commercial products revenue increased 13% in constant currency ahead of expectations due to higher than expected office 2024 transactional purchasing. Microsoft 365 consumer cloud revenue increased 29% in constant currency, again driven by ARPU growth. Microsoft 365 consumer subscriptions grew 6%. LinkedIn revenue increased 11% in constant currency, driven by marketing solutions. Dynamics 365 revenue increased 19% in constant currency with continued growth across all workloads. Segment gross margin dollars increased 17% in constant currency, and gross margin percentage increased again driven by efficiency gains at Microsoft 365 commercial cloud, that were partially offset by continued investments in AI, including the impact of growing Copilot usage. Operating expenses increased 5% in constant currency, and operating income increased 22% in constant currency. Operating margins increased year over year to 60%, driven by improved operating leverage as well as the higher gross margins noted earlier. Next, in the intelligent cloud segment, revenue was $32.9 billion and grew 29% in constant currency. In Azure and other cloud services, revenue grew 39% in constant currency, slightly ahead of expectations, with ongoing efficiency gains across our fungible fleet enabling us to reallocate some capacity to Azure that was monetized in the quarter. As mentioned earlier, we continue to see strong demand across workloads, customer segments, and geographic regions, and demand continues to exceed available supply. In our on-premises server business, revenue increased 21% in constant currency ahead of expectations, driven by demand for our hybrid solutions including a benefit from the launch of SQL Server 2025, as well as higher transactional purchasing ahead of memory price increases. Segment gross margin dollars increased 20% in constant currency. Gross margin percentage decreased year over year, driven by continued investments in AI and sales mix shift to Azure, partially offset by efficiency gains in Azure. Operating expenses increased 3% in constant currency, and operating income grew 28% in constant currency. Operating margins were 42%, down slightly year over year, as increased investments in AI were mostly offset by improved operating leverage. Now to more personal computing. Revenue was $14.3 billion and declined 3%. Windows OEM and devices revenue increased 1% and was relatively unchanged in constant currency. Windows OEM grew 5% with strong execution, as well as a continued benefit from Windows 10 end of support. Results were ahead of expectations, as inventory levels remained elevated with increased purchasing ahead of memory price increases. Search and news advertising revenue excluding TAC increased 9% in constant currency, slightly below expectations driven by some execution challenges. As expected, the sequential growth rate moderated as the benefit from third-party partnerships normalized. In gaming, revenue decreased 9% in constant currency. Xbox content and services revenue decreased 6% in constant currency and was below expectations, driven by first-party content with impact across the platform. Segment gross margin dollars increased 2% in constant currency, and gross margin percentage increased year over year, driven by sales mix shift to higher margin businesses. Operating expenses increased 5% in constant currency, driven by the impairment charges in our gaming business noted earlier, as well as R&D investments in compute capacity and AI talent. Operating income decreased 3% in constant currency, and operating margins were relatively unchanged year over year at 27%, as higher operating expenses were mostly offset by higher gross margins. Now moving to our Q3 outlook, which unless specifically noted otherwise, is on a US dollar basis. Based on current rates, we expect FX to increase total revenue growth by three points. Within the segments, we expect FX to increase revenue growth by four points in productivity and business processes and two points in intelligent cloud and more personal computing. We expect FX to increase COGS and operating expense growth by two points. As a reminder, this impact is due to the exchange rates a year ago. Starting with the total company, we expect revenue of $80.65 to $81.75 billion or growth of 15 to 17%, with continued strong growth across our commercial businesses, partially offset by our consumer businesses. We expect COGS of $26.65 to $26.85 billion, growth of 22 to 23%, and operating expense of $17.8 to $17.9 billion, or growth of 10 to 11% driven by continued investment in R&D, AI compute capacity, and talent against a low prior year comparable. Operating margins should be down slightly year over year. Excluding any impact from our investments in OpenAI, other income and expense is expected to be roughly $700 million, driven by a fair market gain in our equity portfolio and interest income, partially offset by interest expense which includes the interest payments related to data center leases. We expect our adjusted Q3 effective tax rate to be approximately 19%. Next, we expect capital expenditures to decrease on a sequential basis due to normal variability from cloud infrastructure build-outs and the timing of delivery of finance leases. As we work to close the gap between demand and supply, we expect the mix of short-lived assets to remain similar to Q2. Now our commercial business. In commercial bookings, we expect healthy growth in the core business on a growing expiry base when adjusted for the OpenAI contracts in the prior year. As a reminder, the significant OpenAI contract signed in Q2 represents multiyear demand needs from them, which will result in some quarterly volatility in both bookings and remaining performance obligation growth rates going forward. Microsoft cloud gross margin percentage should be roughly 65%, down year over year driven by continued investments in AI. Now to segment guidance. In productivity and business processes, we expect revenue of $34.25 to $34.55 billion or growth of 14 to 15%. In Microsoft 365 commercial cloud, we expect revenue growth to be between 13-14% in constant currency, with continued stability in year-over-year growth rates on a large and expanding base. Accelerating copilot momentum and ongoing E5 adoption will again drive ARPU growth. Microsoft 365 commercial products revenue should decline in the low single digits, down sequentially, assuming office 2024 transactional purchasing trends normalize. Microsoft 365 consumer cloud revenue growth should be in the mid to high 20% range, driven by growth in ARPU as well as continued subscription volume. For LinkedIn, we expect revenue growth to be in the low double digits. In Dynamics 365, we expect revenue growth to be in the high teens with continued growth across all workloads. For intelligent cloud, we expect revenue of $34.1 to $34.4 billion or growth of 27 to 29%. In Azure, we expect Q3 revenue growth to be between 37-38% in constant currency against a prior year comparable that included a prior year's result with some volatility. As mentioned earlier, demand continues to exceed supply, significantly accelerating growth rates in both Q3 and Q4. We will need to continue to balance the incoming supply we can allocate here against other priorities. As a reminder, there can be quarterly variability in year-on-year growth rates depending on the timing of capacity delivery and when it comes online, as well as from in-period revenue recognition depending on the mix of contracts. In our on-premises server business, we expect revenue to decline in the low single digits as growth rates normalize, following the launch of SQL Server 2025. Increased memory pricing could create additional volatility in transactional purchasing. In more personal computing, we expect revenue to be $12.3 to $12.8 billion. Windows OEM and devices revenue should decline in the low teens. Growth rates will be impacted as the benefit from Windows 10 end of support normalizes and as elevated inventory levels come down through the quarter. Therefore, Windows OEM revenue should decline roughly 10%. The range of potential outcomes remains wider than normal, in part due to the potential impact on the PC market from increased memory pricing. Search and news advertising excluding TAC revenue growth should be in the high single digits. Even as we work to improve execution, we expect continued share gains across Bing and Edge with growth driven by volume. We expect sequential growth moderation as the contribution from third-party partnerships continues to normalize. In Xbox content and services, we expect revenue to decline in the mid-single digits against a prior year comparable that benefited from strong content performance, partially offset by growth in Xbox Game Pass. Hardware revenue should decline year over year. Now some additional thoughts on the rest of the fiscal year and beyond. First, FX. Based on current rates, we expect FX to increase Q4 total revenue and COGS growth by less than one point with no impact on operating expense growth. Within the segments, we expect FX to increase revenue growth by roughly one point in productivity and business processes and more personal computing, and less than one point in intelligent cloud. With the strong work delivered in H1 to prioritize investment in key growth areas and the favorable impact from a higher mix of revenue in our Windows OEM and commercial on-premises businesses, we now expect FY '26 operating margins to be up slightly. We mentioned the potential impact on Windows OEM and on-premises server markets from increased memory pricing earlier. In addition, rising memory prices would impact capital expenditures, though the impact on Microsoft cloud gross margins will build more gradually, as these assets depreciate over six years. In closing, we delivered strong top-line growth in H1, and are investing across every layer of the stack to continue to deliver high-value solutions and tools to our customers. With that, let's go to Q&A, Jonathan. Thanks, Amy.

We'll now move over to Q&A. Out of respect to others on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions?

Excellent. Thank you guys for taking the question. I'm looking at a Microsoft Corporation print where earnings are growing 24% year on year, which is a spectacular result. Great execution on your part, top line growing well, margins expanding. But I'm looking at after-hours trading, the stock is still down. I think one of the core issues that is weighing on investors is CapEx is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected. I think that fundamentally comes down to a concern about the return on investment on this CapEx spend over time. So I was hoping you could help us fill in some of the blanks a little bit in terms of how should we think about capacity expansion and what that can yield in terms of Azure growth going forward. More to the point, how should we think about the ROI on this investment as it comes to fruition? Thanks, guys.

Thanks, Keith. Let me start, and Satya can add some broader comments, I'm sure. I think the first thing I want to note is that I do think many investors are trying to draw a direct correlation between the CapEx spend and Azure revenue numbers. We tried last quarter, and again this quarter, to talk more specifically about all the places that the CapEx spend, especially the short-lived CapEx spend across CPU and GPU and how that will show up. Sometimes I think it's probably better to think about the Azure guidance we give as an allocated capacity guide about what we can deliver in Azure revenue. As we spend the capital and put GPUs online, we are making long-term decisions. The first thing we're doing is addressing the increased usage in sales and the accelerating pace of Microsoft 365 Copilot, as well as GitHub Copilot as our first-party apps. Then we ensure that we invest in the long-term nature of R&D and product innovation. Much of the acceleration you have seen in our products over the past bit is because we are allocating GPUs and capacity to many talented AI folks we've been hiring. The remainder ultimately goes toward serving the Azure capacity that continues to grow in terms of demand. If we had allocated the GPUs that just came online in Q1 and Q2 entirely to Azure, the KPI would have been over 40. It’s essential to realize that this is about investing in all layers of the stack that benefit customers. I hope that sheds light on our thoughts regarding capital growth.

I think Amy covered it well. As an investor, when you consider our capital and the GM profile of our portfolio, you should think about Azure, Microsoft 365 Copilot, GitHub Copilot, Dragon Copilot, and Security Copilot—all of these have a GM profile and lifetime value. Acquiring an Azure customer is crucial, but so is acquiring business through Microsoft 365, GitHub, or Dragon Copilot, which are all incremental businesses and total addressable markets for us. We don't want to maximize just one business; we want to allocate capacity while we're supply constrained in a way that builds the best lifetime value portfolio. Additionally, as Amy mentioned, remember that compute is also R&D, which is a significant aspect of this.

Excellent. Thank you.

Thank you very much for taking my question, and congrats on the quarter. One of the other questions we believe investors want to understand is how to think about your line of sight from hardware CapEx investment to revenue and margins. You capitalize servers over six years, but the average duration of your remaining performance obligations is two and a half years, up from two years last quarter. How do investors get comfortable that, since a lot of this CapEx is AI-centric, you'll be able to capture sufficient revenue over the six-year use life of the hardware to deliver solid revenue and gross profit growth, hopefully similar to CPU revenue?

Thank you, Mark. Let me start at a high level, and Satya can add as well. When considering average duration, you need to remember it's a combination of various contract arrangements. Many of these, such as Microsoft 365 or our business application portfolio, involve shorter three-year contracts and therefore have a naturally shorter duration. The majority of the remaining part is Azure contracts which are longer duration. You observed this quarter when you saw the extension of that duration from around two years to two and a half. Much of the capital we're spending today and the GP we're buying are already contracted for most of their useful life, meaning that much of the risk you're referring to is mitigated as they are sold for the entirety of their useful life. Part of the shorter dated RPO is due to some of the Microsoft 365 contracts. If you look at Azure only RPO, it's extended. Much of that is based on CPU, not just GPUs. On GPU contracts for some of our largest customers, those are contracted for the entire useful life of the GPU, so the risk you're concerned about isn't present.

I would add that in addition to what Amy mentioned, which is that the contracts are already sold for their useful life, we do also use software to continuously run even the latest models on the fleet that is aging. This gives us that duration. At the end of the day, we want to maintain an optimal balance, which is why we think about aging the fleet consistently. It’s not about buying a lot of gear in one year, but rather about utilizing Moore's Law to add efficiency and optimize across all of it.

Mark, perhaps it should be noted that, as you go through the useful life, you actually become increasingly efficient in delivery. So where you've sold the entirety of its life, the margins improve over time. That may serve as a good reminder for everyone as we observe this particularly in the CPU fleet.

That's a great answer. I really appreciate it, and thank you.

Thanks, Mark. Operator, next question please.

Thanks, Amy. On 45% of the backlog being related to OpenAI, I'm curious if you could comment. There are obviously concerns about durability, and I know there may not be much you can say, but I think everyone's concerned about exposure, and if you could perhaps talk through your perspective and what both you and Satya are seeing?

I would approach that question differently, Brent. The first thing to focus on is the reason we highlighted that number is that 55% or roughly $350 billion is related to the breadth of our portfolio, a breadth of customers across solutions, Azure, industries, and geographies. This RPO balance is significant, larger and more diversified than most peers. We have super high confidence in it. Consider that portion alone, growing 28%, it's impressive work, reflecting breadth and the adoption curve we're seeing, which is what I get asked most frequently. It's grown by segment, industry, and geo. If you're asking about how we fill up OpenAI and contract health, it’s a great partnership. We are excited to continue being their provider of scale. We sit under one of the most successful businesses built and continue to feel good about that. It has allowed us to remain a leader in application innovation.

Thanks, Brent. Operator, next question please.

Okay. Thank you very much. Amy, regardless of how you allocate the capacity between first party and third party, can you comment qualitatively on the amount of capacity that is coming on? I think the one gigawatt added in December was extraordinary and hints that capacity adds are accelerating, but many investors have their eyes on locations like Fairwater in Atlanta and Fairwater in Wisconsin. I would love for you to comment on the magnitude of the capacity adds regardless of how they're allocated in the coming quarters. Thank you.

Carl, we've stated we're working as hard as we can to add capacity quickly. You've mentioned specific sites like Atlanta or Wisconsin. Those are multiyear deliveries, so I wouldn't focus necessarily on specific locations. The critical task we have is adding capacity globally. A lot of that will be added in the United States, including the locations mentioned, but it also needs to be added across the globe to meet customer demand and increased usage. We'll continue to add both long-lived infrastructure, ensuring we secure power, land, and facilities. As needed, we’ll add GPUs and CPUs when ready, and we’ll strive for the highest efficiency possible. Overall, it’s not just about two specific places; those are multiyear timelines, and we’re driven to get it done across all locations where we are currently building.

Thanks, Carl. Operator, next question please.

Thank you so much. Satya, the 200 accelerator for inference looked quite remarkable, especially in comparison to TPUs and Tranium and Blackwell, which have been around a lot longer. Could you put that accomplishment in perspective in terms of how much of a core competency you think silicon might become for Microsoft? And Amy, are there any ramifications worth mentioning there in terms of supporting your gross margin profile for inference costs going forward?

Thanks for the question. A couple of things: we've been at this in various forms for a long time in terms of building our own silicon. We're thrilled about the progress with Maya 200. When we think about running GPT-5.0.2 and the performance achieved in the gems at FP4, it underscores that when a new workload arises, we can innovate from end to end—from the model to the silicon. The entire system is not just about silicon; it’s about how the networking works at rack scale, optimized for this particular workload. We’re closely collaborating with our superintelligence team and all our models. Everything we build will be optimized for Maya. As for context, we're in the early innings. If you look at the amount of silicon innovation and systems innovation since December, companies are now focused on low latency. We’re careful not to lock ourselves into one technology; we have great partnerships with NVIDIA and AMD. They are innovating as well. We want to maintain an optimal fleet that must have access to the best total cost of ownership. This thoughtful innovation is how we can take the lead.

Thanks, Mark. Operator, next question please.

Great. Thank you very much. Satya, we heard a lot about frontier transformations from Judson and Ignite. We've seen customers realize breakthrough benefits when they adopt the Microsoft AI stack. Can you help frame for us the momentum in enterprises embarking on these journeys and any expectation for how much their spending with Microsoft might expand in becoming frontier firms?

Thank you for that. One of the things we’re seeing is adoption across our major suites, including Microsoft 365, security, and GitHub. It’s fascinating—these three have had compounding effects for our customers. Take Entra as an identity system or Defender as a protection system across all three; it has been incredibly helpful. What you’re seeing now is, for example, WorkIQ. The most pivotal database for any company using Microsoft today is the data underneath Microsoft 365. It contains critical tacit information—employee details, their relationships, projects, artifacts, communications. This asset is vital for any business workflow context. Imagine deploying these tools as agents. They help coordinate and bring more leverage to your enterprise. Furthermore, the transformation includes how businesses rethink customer service, marketing, finance, etc. All these services in Fabric, Foundry, and our GitHub tooling are helping. The rise of low-code and no-code systems shows how this cohesion is transformative for companies.

Thanks, Brad. Operator, we have time for one last question.

Perfect. Thanks for squeezing me in. In recent quarters, besides the GPU side, we talked about CPU as well. You had some operational changes in January. Can you relate what you saw there and maybe frame it in a larger picture regarding clients realizing their move to the cloud is essential if they want to deliver proper AI? What are we seeing in terms of cloud transitions?

I didn't quite catch your question, Raimo. Were you asking about the SNC CPU side? Could you please repeat that?

Yes. I was inquiring about the CPU side of Azure due to the operational changes, as well as the recognition from clients that their transition to cloud is vital for proper AI capabilities, which drives momentum.

First, I want to emphasize that AI workloads shouldn’t be perceived solely as AI accelerator compute. The agent will spawn through tools, perhaps a container, primarily running on compute. When we think of building out our fleet, we think in ratios. For an AI training job, substantial compute and close storage are required. Consequently, in inferencing as well. Along with cloud migrations, one of the stats I cited was a considerable adoption of our latest SQL Server as an IaaS service in Azure, indicating that we continuously think about maintaining balance within our commercial cloud while being aware of demand for AI.

Yep. Okay. Perfect. Thank you.

Thanks, Raimo. That wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with you all soon. Thank you all.