MICROSOFT CORP Q4 2025 earnings call

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 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 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 investors in further understanding the company's fourth 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 business has 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 Investor Relations website. During this call, we will be making forward-looking statements, which are 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, and in the risk factor 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, Jonathan. It was a very strong close to what was a record fiscal year for us. All up, Microsoft Cloud surpassed $168 billion in annual revenue, up 23%. The rate of innovation and the speed of diffusion is unlike anything we have seen. To that end, we are building the most comprehensive suite of AI products and tech stack at massive scale. To provide more context, I want to walk up the stack, starting with Azure. Azure surpassed $75 billion in annual revenue, up 34%, driven by growth across all workloads. We continue to lead the AI infrastructure wave and took share every quarter this year. We opened new data centers across six continents and now have over 400 data centers across 70 regions, more than any other cloud provider. There is a lot of talk in the industry about building the first gigawatt and multi-gigawatt data centers.

We stood up more than 2 GW of new capacity over the past 12 months alone, and we continue to scale our own data center capacity faster than any other competitor. Every Azure region is now AI-first. All of our regions can now support liquid cooling, increasing the fungibility and the flexibility of our fleet. We are driving and riding a set of compounding s-curves across silicon systems and models to continuously improve efficiency and performance for our customers. Take, for example, the GPT-4o family of models, which have the highest volume of inference tokens. Through software optimizations alone, we are delivering 90% more tokens for the same GPU compared to a year ago. Beyond the AI fleet, we continue to build our commercial cloud to address customers' unique data residency and sovereignty requirements.

This quarter, we introduced the Microsoft Sovereign Cloud, the industry's most comprehensive solution spanning both public and private cloud deployments. All of this innovation is driving our strong results. We saw accelerating growth from migrations again this quarter. Nestlé, for example, migrated more than 200 SAP instances, 10,000+ servers, 1.2 PB of data to Azure with near-zero business disruption. That makes it one of the largest and most successful migrations in business history. The next big accelerator in the cloud will be quantum, and I'm excited about our progress. In fact, earlier this month, we announced the world's first operational deployment of a level two quantum computer in partnership with Atom Computing. This is how we will continue to think and make investments with decade-long arcs while making progress every quarter. The next layer is data, which is foundational to every AI application.

Microsoft Fabric is becoming the complete data and analytics platform for the AI era, spanning everything from SQL to NoSQL to analytics workloads. It continues to gain momentum with revenue up 55% year-over-year and over 25,000 customers. It's the fastest-growing database product in our history. Fabric OneLake spans all databases and clouds, including semantic models from Power BI, and therefore it is the best source of knowledge and grounding for AI applications and context engineering. Azure Databricks and Snowflake on Azure both accelerated as well. Cosmos DB and Azure PostgreSQL are both powering mission-critical workloads at scale. OpenAI, for example, uses Cosmos DB in the hot path of every ChatGPT interaction, storing chat history, user profiles, and conversational state. Azure PostgreSQL stores metadata critical to the operation of ChatGPT as well as OpenAI's developer APIs.

This year, we launched Azure AI Foundry to help customers design, customize, and manage AI applications and agents at scale. Foundry features best-in-class tooling, management, observability, and built-in controls for trustworthy AI. Customers increasingly want to use multiple AI models to meet their specific performance, cost, and use case requirements. With Foundry, they can provision inferencing throughput once and apply it across more models than any other hyperscaler, including models from OpenAI, DeepSeek, Meta, xAI's Grok, and very soon, Black Forest Labs and Mistral AI. We sim-shipped 15 models from OpenAI alone on Foundry this year, providing same-day access to state-of-the-art models deeply integrated with our infrastructure and tools. We are seeing accelerated adoption of our new Foundry Agent Service, which is now being used by 14,000 customers to build agents that automate complex tasks.

For example, Nasdaq is using Foundry to build agents that help customers prepare for board meetings, cutting prep time by up to 25%. All up, 80% of Fortune 500 already use Foundry. When we look narrowly at just the number of tokens served by Foundry APIs, we processed over 500 trillion this year, up over 7x. This is a good indicator of true platform diffusion beyond a few head apps and services. Talking about the app layer, these applications are becoming embedded in our daily work and life. Our family of Copilot apps has surpassed 100 million monthly active users across commercial and consumer. When you take a broader look at the engagement of AI features across our products, we have over 800 million monthly active users. Microsoft 365 Copilot is becoming the new way to organize work and workflow and work artifacts.

We rolled out our biggest update to Microsoft 365 Copilot to date this quarter, bringing together chat, search, create, notebooks, as well as agents into one intuitive scaffolding. With this innovation and continued product improvements, we are seeing real momentum. Customers continue to adopt Copilot at a faster rate than any other new Microsoft 365 suite, with strong usage intensity as shown by our week-over-week retention. We saw the largest quarter of seat adds since launch, with a record number of customers returning to buy more seats. Barclays, for example, will roll out Microsoft 365 Copilot to 100,000 employees globally, following a successful initial deployment of 15,000. UBS is expanding its deployment to all of its employees after initially rolling it out to 55,000 of them. Adobe, KPMG, Pfizer, Wells Fargo all purchased over 25,000 seats this quarter.

Tens of thousands of organizations have already used our researcher and analyst deep reasoning agents in the first weeks of availability. We have introduced group-level agents in Teams like Facilitator and Interpreter, which generate real-time translation and notes in meetings. Hundreds of partners like Adobe, SAP, ServiceNow, and Workday have built their own third-party agents that integrate with Copilot and Teams. We are also seeing more customers use Copilot Studio to extend Microsoft 365 Copilot and build their own agents. This year, customers created 3 million agents using SharePoint and Copilot Studio. With Copilot tuning, they can easily create agents fine-tuned on their company's data, workflow, and style that reflect their unique tone, language, and expertise. We're also seeing great traction among specific roles and functions, starting with developers.

GitHub Copilot continues to have great momentum in IDE with agent mode and new form factors like coding agent, which is capable of asynchronously executing developer tasks. We have 20 million GitHub Copilot users. GitHub Copilot Enterprise customers increased 75% quarter-over-quarter as companies tailor Copilot to their own code bases, and 90% of the Fortune 100 now use GitHub Copilot. More broadly, GitHub usage and repos are seeing explosive growth because of AI. AI projects on GitHub more than doubled over the last year. The surge in web coding projects and AI coding agents, whether it is Claude Code, Codex, Cursor, or GitHub Copilot, are generating more pull requests and more repos on GitHub. Our code review agent is being used heavily across the platform, performing millions of code reviews each month. In healthcare, we had a breakout year for Dragon Copilot.

Customers used our ambient AI solutions to document over 13 million physician-patient encounters this quarter, up nearly 7x year-over-year. For example, at Mercyhealth system, more than 1,000 physicians are already using Copilot to reduce administrative burden so that they can focus on providing better care. They have saved more than 100,000 hours to date and plan to expand to all 5,000 providers. As one physician put it, "The best thing to happen to my practice in 10 years." In security, we were the first in the industry to introduce agents to help defenders autonomously handle high-volume security and IT tasks. More broadly, AI is driving a fundamental change in the biz apps market as customers shift from legacy systems to agentic business applications.

Dynamics 365 took share this year, and we are winning customers in every industry, like Verizon with sales, Domino's Pizza Group with ERP, 1-800-Flowers with contact center. When it comes to consumer apps, we are innovating across all surfaces. In fact, on Monday, we introduced Copilot Mode in Edge. It's especially exciting to see the innovation coming back to browsers. Copilot Mode brings together Copilot composer, chat, discover, search, and actions to build the next generation of browser for the AI age. Our Copilot consumer app also continues to see strong growth in engagement and successful sessions. We are bringing Copilot to every Windows 11 PC. With Copilot Vision, you can share your screen with Copilot and get real-time insights and assistance on anything.

We are well positioned as we approach Windows 10 end of support in October, thanks to Windows 11 and Copilot+ PCs, which offer customers compelling security as well as AI value. Talking about security, it underlies our cloud and AI infrastructure as well as our Copilots and agents. We have launched over 100 new capabilities over the past year. Just last week, we added a modern data lake to our SIEM, Microsoft Sentinel, bringing together customer data across our first-party tools as well as third-party ecosystem over 350 connectors. We are also extending the systems customers already use for governance, identity, security, and management to protect every AI agent. Entra now extends identity permissions, policies, and access controls to agents. Defender secures nearly 2 million GenAI apps. Purview is used by 3/4 of the Microsoft 365 Copilot customers to protect their data.

Thank you, Satya, and good afternoon, everyone.

This year, we delivered over $281 billion in revenue, up 15% year-over-year, which reflects the broad strength of our products and services. Operating income was over $128 billion, up 17% year-over-year, as we invested against the expansive opportunity ahead. In our largest quarter of the year, we significantly exceeded expectations with strong execution by our sales and partner teams. As Satya shared, we're innovating faster than ever to deliver new value to our customers. This quarter, revenue was $76.4 billion, up 18% and 17% in constant currency. Gross margin dollars increased 16% and 15% in constant currency, while operating income increased 23% and 22% in constant currency. Earnings per share was $3.65, an increase of 24% and 22% in constant currency. For the first time, commercial bookings were over $100 billion, increasing 37% and 30% in constant currency on a strong prior-year comparable.

Strong execution across our core annuity sales motions, including healthy renewals, as well as an increase in the number of $10 million and $100+ million contracts for both Azure and Microsoft 365, helped drive these results. Commercial remaining performance obligation increased to $368 billion, up 37% and 35% in constant currency. Roughly 35% will be recognized in revenue in the next 12 months, up 21% year-over-year. The remaining portion recognized beyond the next 12 months increased 49%. This quarter, our annuity mix was again 98%. FX was roughly in line with expectations on total company revenue, segment-level revenue, COGS, and operating expense growth. Microsoft Cloud revenue was $46.7 billion ahead of expectations and grew 27% and 25% in constant currency.

Microsoft Cloud gross margin percentage was slightly better than expected at 68%, down 2.0 over year from the impact of scaling our AI infrastructure, partially offset by continued efficiency gains in Azure and M365 commercial cloud. Company gross margin percentage was 69%, down 1.0 over year, driven by sales mix shift to Azure and the lower Microsoft Cloud gross margin noted earlier. Operating expenses increased 6% and 5% in constant currency, and operating margins increased 2.0 over year to 45%. Better than expected revenue growth, coupled with a focus on operating efficiently, drove the margin expansion. At a total company level, headcount at the end of June was relatively unchanged year-over-year. Now to our segment results.

Revenue from productivity and business processes was $33.1 billion and grew 16% and 14% in constant currency, better than expected, driven by M365 commercial products and cloud services and M365 consumer products and cloud services. M365 commercial cloud revenue was ahead of expectations and increased 18% and 16% in constant currency, with two points of benefit from end-period revenue recognition. Business trends remained relatively stable to the prior quarter when excluding the end-period revenue recognition, with ARPU growth again driven by E5 and M365 Copilot. Paid M365 commercial seats grew 6% year-over-year, with a stall-based expansion across all customer segments, though primarily in our small and medium business and frontline worker offerings. M365 commercial products revenue increased 9% and 7% in constant currency ahead of expectations due to higher-than-expected Office 2024 transactional purchasing.

M365 consumer cloud revenue was better than expected, increasing 20%, driven by ARPU growth following the January price increase and subscriber growth of 8%. LinkedIn revenue increased 9% and 8% in constant currency, with growth across all businesses, though Talent Solutions continues to be impacted by weakness in the hiring market. Dynamics 365 revenue increased 23% and 21% in constant currency with strong execution in our core annuity sales motions, leading to growth across all workloads. Segment gross margin dollars increased 16% and 15% in constant currency, and gross margin percentage increased slightly, driven by the efficiency gains noted earlier, even as we deliver more AI features across our products and scale our AI infrastructure. Operating expenses increased 7% and 6% in constant currency, and operating income increased 21% and 19% in constant currency. Next, the Intelligent Cloud segment.

Revenue was $29.9 billion and grew 26% and 25% in constant currency ahead of expectations, driven by Azure and our on-premises server business. In Azure and other cloud services, revenue grew 39%, significantly ahead of expectations, driven by accelerated growth in our core infrastructure business, primarily from our largest customers. As a reminder, new cloud and AI workloads are built and scaled using the breadth of our services. Revenue from Azure AI services was generally in line with expectations. While we brought additional data center capacity online this quarter, demand remains higher than supply. In our on-premises server business, revenue decreased 2% and 3% in constant currency ahead of expectations, primarily driven by transactional purchasing, which also has higher end-period revenue recognition. Enterprise and partner services revenue increased 7% and 6% in constant currency, with growth in enterprise support services partially offset by a decline in industry solutions.

Segment gross margin dollars increased 17% and 16% in constant currency, and gross margin percentage decreased 4.0 percentage points over year, driven by scaling our AI infrastructure, partially offset by Azure efficiency gains noted earlier. Operating expenses increased 6% and 4% in constant currency, and operating income grew 23%. Now to more personal computing. Revenue was $13.5 billion and grew 9%, exceeding expectations, primarily due to Windows OEM as well as Xbox content and services. Windows OEM and devices revenue increased 3% year-over-year ahead of expectations as inventory levels remained elevated. Search and news advertising revenue ex tech increased 21% and 20% in constant currency, driven by continued growth in both volume and revenue per search, as well as roughly 8 points of favorable impact from third-party partnerships, including the benefit of a low prior-year comparable. In gaming, revenue increased 10%.

Xbox content and services revenue increased 13% and 12% in constant currency, driven by better-than-expected performance from first-party content and Xbox Game Pass. Segment gross margin dollars increased 15%. Gross margin percentage increased 3.0 points over year with improvement across all businesses. Operating expenses increased 4% and 3% in constant currency. Operating income increased 34% and 33% in constant currency, driven by continued prioritization of higher margin opportunities. Now back to total company results. Capital expenditures were $24.2 billion, including $6.5 billion of financed leases, where we recognized the full value at the time of lease commencement. Cash paid for PP&E was $17.1 billion. The difference is primarily due to financed leases. More than half our spend was on long-lived assets that will support monetization over the next 15 years and beyond. The remaining spend was primarily for servers, both CPUs and GPUs, and driven by strong demand signals.

Cash flow from operations was $42.6 billion, up 15%, driven by strong cloud billings and collections, partially offset by higher supplier payments. This quarter, free cash flow was $25.6 billion. Other income and expense was -$1.7 billion, primarily due to losses on investments accounted for under the equity method. Our effective tax rate was approximately 17%. Finally, we returned $9.4 billion to shareholders through dividends and share repurchases, bringing our total cash return to shareholders to over $37 billion for the full fiscal year. Now moving to our outlook. My commentary for both the full year and next quarter is on a US dollar basis unless specifically noted otherwise. Let me start with some full-year commentary for FY 2026. First, FX.

Assuming current rates remain stable, we expect FX to increase full-year revenue growth and COGS growth by approximately 2 points and to increase operating expense growth by 1 point. Next, building on the strong momentum we saw this past year, we expect to deliver another year of double-digit revenue and operating income growth in FY 2026. We will continue to invest against the expansive opportunity ahead across both capital expenditures and operating expenses, given our leadership position in commercial cloud, strong demand signals for our cloud and AI offerings, and significant contracted backlog. Capital expenditure growth, as we shared last quarter, will moderate compared to FY 2025 with a greater mix of short-lived assets. Due to the timing of delivery of additional capacity in H1, including large finance lease sites, we expect growth rates in H1 will be higher than in H2.

We remain focused on delivering revenue growth and increasing our operational agility, and as a result, we expect operating margins to be relatively unchanged year-over-year. Finally, we expect our FY 2026 effective tax rate to be between 19% and 20%. Now to our outlook for the first quarter. Based on current rates, we expect FX to increase total revenue growth by 2 points. Within the segments, we expect FX to increase revenue growth by roughly 3 points in Productivity and Business Processes and roughly 1 point in Intelligent Cloud and More Personal Computing. We expect FX to increase COGS and operating expense growth by roughly 1 point. In commercial bookings, we expect healthy growth on a growing expiry base. Bookings growth will again be driven by strong execution across our core annuity sales motions and long-term commitments to our platform.

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