Greetings and welcome to the Microsoft fiscal year 2026 third quarter earnings conference call. At the start of this supplemental supplemental call, a question and answer session will follow the formal presentation. If any further required information, please pause storage or until the end of that. As reminder, this conference is being recorded. As our moderator introduces Jonathan Nelson Vice President of Investments, we go ahead. Good afternoon and thank you for joining us today. On the call may are Tatiana Chairman and Chief Executive Officer, Amy Hood Chief Financial Officer, Alex Jola Chief Accounting Officer and Brian Dezel Deputy General Counsel and Corporate Secretary. On the Microsoft Investments website, you can find their earnings press release and financial summary slide deck, which is intended to supplement every material during today’s call and provide reconciliation differences between GAAP and non-GAAP measures. More detail will be available on the Microsoft Investments website, will be provided in the common trade 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 substitute for or superior to measures financial performance prepared in accordance with GAAP. They include additional clarifying items aiding investors in further understanding the company’s third quarter performance, in addition to the impact these items event have on financial results. All comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rate in constant currency when available, as framework reflecting how underlying businesses performed, excluding effects of foreign currency fluctuations. Where growth rates are stated in constant currency, we will refer to the growth rate only. We will post every material website immediately following the call until the complete transcript is available. Today’s call is being webcast live and recorded. If you ask question, it will be included 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 Investments website. During this call, we will be making forward-looking statements, which predictions, projections or other statements about future events. These statements are based on current expectations assumptions that are subject to risks and uncertainties. Actual results may differ from the expectations discussed today’s earnings press release. In the comments made during this conference call and in the respective sections of Form 10-K, Form 10-Q and other reporting filings with the Securities Exchange Commission, we do not undertake any duty to update any forward-looking statement. And with that, I’ll turn the call over to Jeff. Thank you very much, Jonathan. This record quarter powered by the continued strength of Microsoft Cloud with exceeded 54 billion dollars in revenue, up 29 percent year over year. Our AI business surpassed 7 billion dollar ARR up 123 percent. We are the beginning of one of the most consequential platforms that will change the entire tax tax as agents proliferate and become the dominant workload. This will drive expansion and change the valuation equation across the entire economy. To capture the opportunity we are executing against priorities first, we are building world leading cloud-native infrastructure for gigantic computing era. Second, we are building high value gigantic systems across core domains such as productivity, security, these two layers reinforce each other and we focus on driving competitive value differentiation for customers across each of the key value max their outcomes. Today, I’ll focus my remarks on board priorities starting with infrastructure. We optimize every layer of the stack from design to selection to system software to logical texture as well as optimization. This translates to operational gains. Our we reduced data lines for new GPUs in our biggest regions by nearly 20 percent in the beginning of year. Our Fairwater data center’s constant command line earlier this month experienced a schedule line up direct line revenue earlier and we delivered 40 percent improvement in infrastructure for our most used models across core pilots driven by software and hardware optimization work. All we added in another gigawatt capacity this quarter and remain on track to double our overall footprint in just two years. We’re moving aggressively to add capacity aligned to demand signals we see and we’ve announced new data centers across four continents. We also continue to modernize fleet with our first party innovation alongside the latest from NVIDIA and AMD. Across fleets millions of servers powered by custom networking security and virtualization solutions in moving Azure as well as our first party CPUs and accelerators. Our 200 billion dollar rate of growth over 30 percent improved over the latest fleet is now live in our Iowa and Arizona data centers. Copilot introduced over 625 updates over the past year up 50 percent. Microsoft’s Copilot now have access into multiple models by default with intelligent routing in agents with creative console you can use multiple models together to generate optimal responses. As of last week, agents now default experience across Copilot in Word Excel PowerPoint and the core work you now have new rated delegating complete work using Copilot. All the innovation is driving reduced intensity across Copilot. We see a surge in usage of first party agents with monthly active usage up six years a day. Copilot queries per user were nearly 20 percent quarter over quarter. To put this momentum perspective, weekly engagement is now at the same level as our as more and more users make Copilot a habit. When it comes to apps, we see a new pattern emerges customers shift from traditional seat model to seat plus consumption. The customer service category is the forefront of transformation nearly 60 percent of all service customers already purchasing usage based credits. For example, it should be used to prebuilt agents with dynamic response and manage customer queries across product market regulatory requirements reducing issue resolution time by over 30 percent. And our analytics products and linked intelligence which help higher order meetings in tasks like sourcing screening and drafting messages have already surpassed 450 million dollar annualized revenue on rate. When it comes to developers, GitHub itself is seeing unprecedented growth driven by proliferation of generative and we are hard at work to scale and meet the demand. We see this even with GitHub Copilot nearly 140 organizations now use GitHub Copilot and the price of products have nearly tripled year over year. The majority of users leverage multiple models. We also see rapid adoption of GitHub Copilot. See our usage nearly doubling month over month. And earlier this week, we announced our move to usage based pricing model for GitHub Copilot as we align pricing to actual usage and costs. When it comes to security, the physical side of security has changed as AI compresses the window between vulnerability exploitation to help mitigate this immediately we shift defender protections when updates for AI discovery vulnerabilities are released. And we are on course to productize new multimodal AI-driven scanning harness as well. Already the number of security Copilot customers increased 2x year over year. Our data security trusted agents alone handle over 2 million unique alerts this quarter and we are helping customers secure their AI deployments as well. 35 billion Copilot interactions have been logged by over 50 days seven x year over year. Finally, it comes to open source business. We’re doing the foundational work required to win back fans trending agents across Windows Xbox Bing Edge. In the near term, we focus on fundamental prioritizing quality and serving our core users better. You see this in the world where cross open source products with Windows recently announced performance improvements for all memory devices streamline the Windows updates experience brought back focus to core features and fundamental that matter most to our customers. And you also see this in Xbox where teams are coming to our fans and players and shaping the future of play. Last week’s game patches are one example of our response to customer feedback. Monthly active Windows devices surpassed
One point six billion and over time, Windows value will extend the level of meeting intelligence at the edge. Our Edge Brazil has taken share for twenty consecutive quarters and been multi-adv users reach one billion for the first time. LinkedIn has one point three billion members and we are seeing increased conversation and it’s leading to B sales and advertising channels for large and small business. We set new records for monthly Xbox users and quota as well as game streaming. And in Microsoft’s Microsoft Zoom, we now have nearly ninety-five million subscribers and early signals show increasing satisfaction as we make aging more difficult across every product line. We also handled a change in the way we work, are not all remain the same delivering customer value with high quality and top class innovation. And this is what gives me confidence in our ability to shape the next phase of growth for the company and our customers. With that, let me turn it over to me to walk you off in our results outlook. Thank you, Saji, and good afternoon everyone. We delivered solid expectations across revenue, operating income, and earnings per share driven by strong demand and execution. As a shareholder, our business annual revenue rate surpassed thirty-seven billion dollars this quarter, growing twenty-three percent year-over-year. And we accelerate our pace of innovation as we execute against the expanded operating head. This quarter, revenue was eighty-two point nine billion dollars, eighteen percent, fifteen percent constant currency. Gross margin dollars increased sixteen percent, thirteen percent constant currency. Operating income increased twenty percent and sixteen percent constant currency. Earnings per share was four dollars and twenty-seven cents, increased twenty-one percent and eighteen percent constant currency. What adjusted for the impact from investment in AI and effects roughly in line with guidance at the total company level. Company gross margin percentage was sixty-eight percent annually driven by continued investment in infrastructure and growing AI product usage. The impact from investment was partially offset by ongoing efficient gains for six billion Azure and Microsoft Cloud. Operating expenses increased nine percent and eight percent constant currency driven by continued investment AI, including R&D capacity talent and data to support product development across the portfolio. This quarter, growth was impacted by low prior year comparable for six billion sales and marketing and GA expenses. Operating margin increased slightly year-over-year to forty-six percent. Total company headcount declined year-over-year as we focus on building higher performing teams that operate with pace and agility. What adjusted for the impact from investment in AI, other income expense was nine hundred sixty-one billion dollars. Favorability was driven by game investment that was partially offset by losses on foreign currency measurement. Capital expenditures were thirty-one point nine billion dollars down sequentially due to normal variable from cloud infrastructure builds and timing of delivery of solutions. And this quarter, roughly two-thirds of our capex was for short-lived assets, primarily due to CPU’s. The remaining spend was for long-lived assets that will support innovation over the next fifteen years and beyond. This quarter, total expenses were four point seven billion dollars and were primarily for R&D and sales and cash paid for PPE was thirty point nine billion dollars, roughly in line with capital expenditures as the impact from the expenses was partially offset by differences between receipts and payments. Cash flow operations was forty-six point seven billion dollars, twenty-six percent driven by strong cloud billing collection, partially offset by increased operating investments and free cash flow was fifteen point eight billion dollars, reflecting higher capital expenditures. And finally, we returned ten point two billion dollars to shareholders through dividends and share repurchases. Now to our commercial results. Commercial bookings grew seven percent, excluding the impact from AI driven by consistent execution and our core new deals motion bookings increased four percent and six percent constant currency, including Azure commitments from AI. Commercial remaining performance allocation twenty-six percent in line with the short seasonality, excluding AI. Our P&L increased six hundred twenty-seven billion dollars, up nine percent year-over-year with the weighted average duration of approximately two and a half years, including AI. Roughly twenty-five percent of revenue in the next month up thirty-nine percent year-over-year. The remaining portion of the year in the next month increased a hundred and thirty-eight percent. Microsoft Cloud revenue was fifty-four point five billion dollars, increased nine percent and twenty-five percent constant currency, reflecting strong demand across the platform and our first AI applications and services. Microsoft Cloud gross margin percentage slightly better than expected at sixty-six percent annually driven by continued investment in AI, partially offset by the ongoing efficient gains the earlier. Now to our segment results. Revenue from productivity processes was thirty-five billion dollars, increased seventeen percent and thirteen percent constant currency. And sixty-five commercial cloud revenue increased nineteen percent and fifteen percent constant currency ahead expectations, strong execution and improving product quality drove accelerating Azure cloud sales this quarter with paid seats now over twenty billion. Our growth was again led by both AI and increased Azure cloud, and paid increased sixty-five commercial seats grew six percent year-over-year with the stalled base expenditure across all customer segments, the primarily in our small business and frontline offerings. Azure cloud commercial product revenue increased one percent and decreased three percent constant currency down sequentially as of twenty twenty four. Product usage trends continued to rise as expected. Azure cloud consumer cloud revenue was thirty-three percent and twenty-nine percent constant currency again driven by our growth. Azure cloud consumer subscriptions grew seven percent, thinking revenue increased twelve percent and nine percent constant currency with growth across all lines of business. Then Microsoft Cloud revenue increased twenty-two percent and seventeen percent constant currency with continued gains across all workloads. Booking growth was impacted by weaker yields as customers spend between the traditional PC and the emerging PC consumption model. Segment margin dollars increased eighteen percent and thirteen percent constant currency. Gross margin percentage increased slightly again driven by efficient gains in sixty-five commercial cloud that were partially offset by continued investment in AI, including cloud operations and usage of cloud. Against the low prior year comparable, operating expenses increased eleven percent and nine percent constant currency driven by the share R&D investment in earlier as well as higher cloud advertising spend. Operating income increased twenty-one percent and fourteen percent constant currency and operating margins increased year-over-year to sixty percent. Next, the intelligent cloud segment revenue was thirty-four point seven billion dollars, increased thirty percent and twenty-eight percent constant currency. And Azure cloud services revenue grew forty percent and thirty-nine percent constant currency again the prior year that included accelerating growth, resulted ahead expectations as we delivered capacity earlier in the quarter and they’ve increased consumption across both AI and non AI services. Strong customer demand across workloads, customers segments and geographic regions continues to see available capacity. And our enterprise business revenue increased slightly and decreased three percent constant currency with ongoing customer shift to cloud offerings. Segment margin dollars increased nineteen percent and eighteen percent constant currency. Gross margin percentage increased year-over-year driven by continued AI investment and increased GitHub cloud usage partially offset by ongoing efficient gains in Azure. Operating expenses increased nine percent and seven percent constant currency driven by the share R&D investment noted earlier. Operating income grew twenty-four percent and twenty-three percent constant currency and operating margins were forty percent. Now to our personal computing revenue was thirteen point two billion dollars and declined one percent and three percent constant currency. Windows OEM devices revenue decreased two percent and three percent constant currency. Windows OEM increased slightly and with the ahead expectations as OEM channel partners continue to inventory, given increasing memory prices. Search advertising revenue expect increased twelve percent and nine percent constant currency with growth driven by higher volume and revenue per search across edge and Bing and gaming revenue decreased seven percent and nine percent constant currency. Xbox content services revenue decreased five percent and seven percent constant currency against the prior year comparable that benefited from strong first-party content performance. Segment margin dollars increased six percent and four percent constant currency and gross margin percentage increased year-over-year driven by sales adjusted to higher margin businesses.
Against the low prior year comparable, operating expenses increased seven percent and six percent in constant currency, driven by investment and other related expenses, including business, as well as continued investment in R&D, mentioned earlier. That benefited from higher profit, operating income increased four percent and one percent in constant currency, and operating margin increased year over year to twenty eight percent. Now, moving to our two four outlook, with less specifically otherwise, is on U.S. basis. Based on current expectations, revenue growth roughly one point improvement in the processes and personal computing, with no meaningful impact to cloud. Overall impact to revenue is expected to be less than one point, and expected increase in revenue roughly one point with no impact to operating income growth. Starting with our commercial business, commercial bookings, when adjusted for the impact of AI, we expect healthy growth on a growing expense base, with consistent execution in core and new sales motions, again, eight significant prior year comparable. Microsoft cloud revenue percentage should be roughly sixty four percent down year over year, driven by continued investment in AI, increased GitHub Copilot usage. Just as we announced this month, transitioning GitHub Copilot that will pricing with usage value that takes effect on June first this year. Now, to segment guidance, expected business processes expected revenue of thirty seven to thirty seven point three billion U.S. dollars, or growth of twelve to thirteen percent. And then, three sixty five commercial cloud, when adjusted basis, with revenue growth to be between fifteen and sixteen percent in constant currency, when normalized for prior year comparable, that benefited from two points of indirect revenue recognition. And on a pure basis, expected revenue growth to be between thirteen and fourteen percent in constant currency. Building on the Copilot momentum we saw in Q three, we expect HPC add to increase sequentially, which will drive continued RPO growth. M three sixty five commercial products revenue should run in single digits, significantly benefited from higher than expected office twenty twenty four transactional pricing. As a reminder, M three sixty five commercial products and cloud’s components can be variable due to indirect revenue recognition mix. M three sixty five consumer cloud revenue growth should be below twenty percent range, down sequentially, as a result of the benefit from last year’s pricing increase, growth will again be driven by RPO and increase subscription volume. Rolling in expected revenue growth of approximately ten percent, and then M three sixty five expected revenue growth to be below double digits, down sequentially, with impact from strong prior year comparable and booking trends earlier. For intelligent cloud, we expect revenue of thirty seven point nine five to thirty eight point two five billion U.S. dollars, or growth of twenty seven to twenty eight percent. And after, we continue to focus on accelerating delivery capacity and increasing efficiencies, and therefore we expect two four revenue growth to be between thirty nine and forty percent in constant currency, against a strong prior year comparable that included accelerating growth, broadening customer demand, continued to exceed supply, and we continue to balance the incoming supply with an allocation against other higher priority first application R and D and N life services. As a reminder, year over year operating can vary quarter to quarter, based on capacity timing and contract mix. In our on premise service, we expect revenue to decline in single digits with ongoing customer shift to cloud offerings, in personal computing, we are looking strong prior year comparable, now getting complex team market demand impacted by memory prices, and focusing on delivering quality value to consumers. Therefore, we expect revenue to be eleven point seven five to twelve point two five billion U.S. dollars, Windows OEM revenue should decline in the high teens, roughly six points of impact from prior year comparable that benefited from Windows enterprise support, six points from inventory levels that expect to come down for the quarter, and six points from lower team market as prices increase due to memory costs. The range potential outcomes remain wider than normal, therefore Windows OEM devices revenue should decline in the mid teens. Third advertising revenue expected growth should be in the high single digits, driven by revenue growth and volume, with continuing gains in advertising and end end X box content services. We expect revenue to decline low teens, reflecting prior year comparable that benefited from strong first party content, as well as recent price changes for Xbox games. As we focus on delivering value to gamers, hardware revenue should decline year over year. Therefore, at the total company level, revenue should be between eighty six point seven and eighty seven point eight billion U.S. dollars, or growth of thirteen to fifteen percent, with accelerating commercial growth, particularly offset by our continuing business. Our two four outlook for cloud operating expenses include roughly nine hundred million dollars in one time cost for the recently announced retirement program. Therefore, we expect costs of twenty nine point four to twenty nine point six billion U.S. dollars, or growth of twenty two to twenty three percent, including roughly three hundred fifty million dollars from the retirement program. And operating expenses nineteen point three to nineteen point four billion U.S. dollars, or growth of approximately seven percent, including roughly five hundred fifty million dollars from the retirement program. Even as we invested through the year, additional capacity to serve growing AI platform, app services demand, and close of these one time costs, we expect full year F twenty six operating margins to be up about one point year over year, excluding any impact from investments in AI. Other income expenses expected to roughly negative one hundred million dollars, as interest income will be more than offset by expense, which includes entertainment related data center demands, we expect our two four effective tax rate to be approximately nineteen percent. Next, capital expenditures, we expect to spend to increase over four billion dollars, as we continue to bring more capacity online. Sequential increase includes roughly five billion dollars from higher component pricing, as well as the impact from analysis, which adds value given the full value for quarter in the period of weeks coming next. And we expect mixed service to remain similar to Q three. For calendar year twenty twenty six, we expect to invest roughly a hundred and ninety billion dollars in capital expenditures, which includes approximately twenty five billion dollars from impact of higher component pricing. We remain confident in the return on these investments, given higher demand signals, increasing product usage, as well as efficiency we’re already driving across the platform. Even with these additional investments, and continued efforts to bring GPU CPU and storage capacity online faster, we expect to trend least to twenty twenty six. Despite these trends, and continue to balance incoming supply, we expect Azure growth to show modest acceleration in the second half of the calendar year compared with the first half. Now, like to share some closing thoughts as of next fiscal year. First, we continue to evaluate our operations to increase our pace and agility, and therefore we expect headcount to increase year over year. Operating expense growth will be in the mid to high single digits, reflecting ongoing investment in R and D, including the AI investment in two data and talent to accelerate product innovation. Next, as a reminder, we will look strong prior year comparable impacted Windows end enterprise support, elevated OEM inventory levels, as well as increased office and server transactional pricing. And finally, we remain focused on delivering a platform that enables customers to build and run AI solutions, and driving innovation in first party applications and services. And therefore, we expect another year of double digit revenue and operating income growth of twenty seven. In closing, we are committed to delivering innovation that helps customers create new business value, as we enter the final quarter of our fiscal year. With that, let’s go to Q and A. Thanks, Amy. We’ll now move on to Q and A. Hello, Mr. McCall. We request questions, please. Any other questions? Operator, please your instructions. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad, and the confirmation call will indicate your line is the question queue. You may press star two if you would like to remove your question from the queue. For further assistance, please call one. Maybe necessary to get your hands before pressing the star keys. And our first question comes from line of Keith Weiss with Morningstar. Please proceed. Excellent. Thank you guys for taking the question. Any questions on another release order? Uh, maybe focus to five core buyers. Uh, super impressive. I think we had most people’s expectations. One last uh broader question on demand. Uh, we’ve been about strong demand for a while. Uh, we see the NCSA is there on E. A. Definitely.
啊，and what you’re seeing in your business. Maybe in short-term increments about how that man translates into commercial bookings, and how that might be changing and different contracting cycles. Um, between different forms of that in that in real time, you can already see it. And then longer-term, maybe it’s something that, um, what is supporting this man over time, over a long-term interval? Because while we see things from my perspective, those overall higher expectations are increasing, and people are really increasing. So, um, how do you think about um getting more than and then more bookings? It’s thinking about being a seat or a worker plus an agent. And when I think about models, start to thinking about um, like some business books and some business, and really applying far more broadly than seeing people thought about that. And so, it starts to mean that over time, bookings will actually also look a little different. It’ll still have that first seat and logic, but it’ll also have more just like using other, and may not all follow the bookings in the same way. You’ll just build reasons, and that use case requires a customer. So, let’s start just talking a little bit. Then you’ll keep spinning and keep using those agents in the correct value or growth direction. Um, and I think it’s probably healthy to sort of start to think about that transition in a broader way. Why may not see in short-term bookings? I think if I were to name how to think about the opportunity, I would probably think about it more like, Yeah, I think that we have to think that the base assumptions of the use of the law to the coding security will become a use and an usage that’s the best way to think about. So, we’re really happening with coding that we see it already. But now, so the business model changes the way the speaker. You also start to think about how to use it because where these dollars come from and the day it will come from, yeah, and how come these where the agents that are being more users will use it. So that sort of starts with customers where these people produce these products, these products, these products. All costs will be increasing because of usage. Also, revenue increasing because of usage because of the customers. Um, and that’s what we start seeing when people start using more and more agents more inside what they’re capable of. All the complexities start to get um, and so when you start seeing that complexity increasing, the more growing revenue increasing costs. That’s what drives usage. May not be by the people who start most in the past. This more getting into usage and into usage, and that’s what um. And maybe just take a quick second. Just a big thank you to you and all the people who work with you over many, many quarters. And just say we’re really appreciative of your coverage over this time and congratulations on this last earnings call. Thank you. Thank you. Okay. Okay. Thank you. Okay. Next question, please. Next question comes from one of our customers. Would you please proceed? Okay, great. Thank you. Maybe any questions you have for a little bit on the capex guidance? Just provide it. Obviously, quarters a fairly material pickup in capex in the second half of the calendar year, maybe to the tune of 120 billion. I’m just curious. Your confidence in working through the fiscal component constraints to hit that number. Does it involve the greater use of partners, and how are you thinking about allocating that increased capacity between third party and first party? Do you have a general framework you’d advise us to keep in mind? Thank you. Sure. Thanks, thanks, all. No, actually, feel I feel quite good about the way the work through the fiscal liberation. I think it’s a natural logic of the supply chain to be able to put that, you know, some of that is probably depending capacity on a lot of the short-term nature of being able to get to use, use, or edge. Put in place to be able to, you know, start to support even better the demand signals we’ve been seeing. Try to somehow all of that being priced, and just help give you some volume. Um, and obviously, it leaves more short-term assets when you see that type of impact to price on the number. Uh, we also say in terms of the valuation, you should assume. Um, you always talk a little bit about what you’re seeing and how are um looking for third-party support and contacts to see if you’re more able to use some efficiencies to make sure able to be more as we can. That’s to that balance across our our core pilot usage. I think you’ve seen and you’ve really has really been on a different trajectory than we saw up to this point. That pilot crossing, the pilot crossing to the um, and I have some confidence in also the pilot crossing theory. Um, then if you think about talking about some acceleration um into what I would call the first half of calendar, the first half of FY 2027, the second half of the calendar year, um, it’s beginning in in to our ability to increasing put pressure on efficiencies, being able to speed up deliveries, into where this year is made that what I would call revenue-ready as quickly as we can. So I would expect um, the pressure between first party usage and being able to measure the multiple firsts. Um, as I said, um, what we’re doing is to be able to get things as quickly as we can and have the capex number that we see in the second half of the year. Okay. Thank you. Thank you. Okay. Next question, please. Next question comes from one of our fellow with Jeffrey. Please proceed. Thanking me, one of the big pushbacks we all get is that AI can be really expensive. Yeah, you Google and Amazon are showing higher margins than I do report. Um, what are investors missing in why the AI potential better margin for for the industry over time? Thanks, Frank. I think we’ve been we’ve been talking about sort of where these differences are then in the cycle compared to even the cycle we saw with the cloud, which now seems very marginal. How margins were actually better and they remain better in the business versus where we saw in the cloud transition looking back. And so, I do feel like we’ve been really focused on making sure the business model reflects how these applications are getting built and the value that they’re bringing. So when you think about that higher value tends to capture more in something usage-based models, and I think that something is probably a little underappreciated as we look into more than before. I also think then important to make sure we leverage the AI. Um, the AI gets from our partners. Um, is obviously free us for a long time, so we’re able to take that and apply it and to build our margins and um, how we also see the more core on the first party hardware stack. Um, being able to make sure we can take margins that.
The interest rates well, and of course, just efficient work. We really did an acceleration phase. You know, trying to get as much capacity as we can get into production. But you know, when you go through that, you also have to focus on efficient work. That’s efficient work on the hardware side, as well as efficient work on the software side. To be able to deliver these more, I do believe that one of the real focus that we gotta all have is that, and it’s the fact that the question the data, the data, which is the new usage model, has to make sure you’re delivering credible high value customers. So what we do is make sure the focus starts with customer usage that creates that, that creates that you have the output. Then the expansion here and the arrival is very good. Thanks. All right. Next question, please. The next question comes from one of Mark Moore’s with Bernstein Research. Please proceed. Thank you for taking my question. And gradually, on the the quarter you deliver and the the growth and some of the commentary made on guidance. That um, what I’d like to drill in a little bit is on the question of of the capex spending they’re making. Obviously, the corporate profits growing fast, Azure’s growing fast, AI’s growing even faster with the overall business, but the bit of disconnect makes investors a bit nervous between how fast the capex growing and how fast the seeing revenue growth. Some some color about how the timing works out, or you know how much needs to be spent on replacement equipment for the new build that that as we look for the the quarter, the spending on capex that the quarter is looking to be very very healthy, and the margin is looking good. Thank you. Thanks Mark. Let me maybe start with whether which given size and the growth rates. We’re talking about acceleration from where we are, which is the third and fourth and third number of the second half calendar. We start to see that growth rates on the side of the business have the amount of spend being done on software that which is really the thing that correlates to revenue growth. These, the third and third number is that going into 15th as or some bumping from these contracts that can kind of get um, you know, I think in some ways this just reminds us of the last level, and when the um is so expensive and when sources generally, I think growing seems to be the sentiment between the client and me, and um, it gives you a lot of confidence and rely on certainly and starting with the platform side. Then what you’re really asking is whether as we see the use usage consumption model number at the service layer, um, we’re starting to see the end of that. I think if you look past um the last quarter, I think we saw some acceleration with some good amount of increase in that corporate quarter number of quarter, guiding for that to be better than before. I think that’s where starting to see, right, I think the thing that investors have been more curious about is almost starting to see that slower revenue growth. And I think that’s the first place you point to. We also point to it. I think we start to get um, in get rates, see revenue growth rates, usage consumption models, um, result acceleration in the top line, and then in general, I think we can start to see that rates. And so we think about um spending that amount of capital putting into production, seeing some labor churn and revenue having the book business. You know, I think over six hundred billion dollars of revenue is still delivering. That before we’re starting to see accelerations, see something on the corporate. Um, I do feel very good about current quarter number and our real focus will be how much of that we can pull in as fast as we can. I I just want to be transparent that we have revenue that’s there that can be grown faster, or efficiency is obviously the be on doing that. Um, and then this capex is quickly can and converting revenue quickly as can. I mean, I mean just that one point here, we just think at some level, one of the things that we learned even the last quarter was when I and um, and the more complexity and content is, where is the cap and the category comments of cap and um, so this and it’s fascinating that we are in 2026 and most exciting that clients were excited about the quality and so we see that means we have structural revision in knowledge work, or increasing quality with that, and then coupled that with the right business model, which is what we’re stressing more time, which is user plus usage. And then you take even the book business, we have that sort of a trend, and if if anything we want to explore, we are getting capex to get capacity in time for the increase in usage, which is going to be very key. And you got to remember the model capability is essential, so you know we should think about even more in Excel. It sort of finding what understanding and that just for the model short, and so you have to be ready for those. It’s really a pleasure. And again, gradually, um, quarter. Thanks Mark. All right. Next question, please. The next question comes from one of Jeff Moore’s with Goldman Sachs. Please proceed. Hi, gentlemen. Thank you. What’s that? I have a question from the question from Paul. Given the technical question, I’m just just lost. The next question comes from one of Warren from Paul. What do you think working what not working? And now we’re calling your question. Next question, please. Thank you for the question. So I think the way to think about even quality, um, the more structural quality and knowledge work is something that, and knowledge work is that you’re calling, but if you focus on and to supply quality, the first thing you think about is the form factor and the shape of the product and how it’s built. So that, um, that now with reasoning, uh, what I choose that sort of form factor, then there is all the different research and analysis that you use with that, or even customers, uh, that customers are building, building. And then on top of that, you now have this additional factor you think about a different project or session and quality that starts with that. You use you ask questions, you get insights, you ask it do, even generate artifacts, you open artifacts, and will excel on point to further refine it. So in other words, you can do the conversation, um, and then of course, we now have even a complete form factor. You think that the tasks you’re already interactively working, but you’re dealing with tasks with code. So these are all the ways form factors, and one of the most interesting things to keep in mind is the usage. Is it the same level as? Uh, so this is not even the previous question. Uh, people using it find it useful. This is like they have it, and then usage. Um, the other thing that is important to think about what makes these form factors useful is intelligence and intelligence is a function of two things. It’s intelligence of having multiple models coupled to facts that the you know the meaning, the document, the email, the teams, and all of that. Everything that all of that rich, wide, constant data collection is not some static data. It’s the most important data in any company that is constantly changing. So that’s the context. The models brought together with the hardness that’s multi-modal. This is then the same thing we do when we have whether we do an enterprise five business security, or we do to the couple hardness from the models, and then have the context rich, true because customers are going to use multiple models fact to look at the core, so that’s creating all all of that. And you combine these examples of why you want to even excel in how you generate using all this and check with corex. That’s the type of things that you want. Uh, users have access.
Yes. And so that really, the and then coupled that with the business model of user usage plus user user pricing, I feel like that’s what’s happening. And just seeing that all play out. Thank you very much. All right, next question, please. The next question comes from one of Kirk McTurn with Oracle AI. Please proceed. Yes, thank you very much. Next question, Amy Osbury, can you talk a little about the change in open AI agreement? If there’s anything we should be aware of from modeling perspective or from financial perspective, what what changes versus where we were a couple weeks ago? And I guess I’ll start for you. It seems like an opportunity for the different perspective from model perspective. You know, any other takeaway we should be taking from where we got landed with open AI this new framework? Thanks. Yeah, maybe I’ll start. Overall, I feel good about a partnership with open AI. I’m always very focused on any partnership ensuring that the way we construct and all that, and that how you can maintain the partnership in this case, it starts with frankly ID and reference. We have a strong model, royalty free with all the IP rights that we will have access to all the way to the review and we fully plan to exploit it in the example that I talked about in my remarks earlier, and that we’re thankful for that. And that’s one part of the agreement. The second part, of course, is the them as customer of ours. There are large customer of ours, not just on the AI accelerator side, but also on all the other compute side. And so we want to serve them well. And then, of course, we have royalty, and so overall, I think the the construction they’ve grown and we’ve grown, and customers also have different expectations in terms of more diversity. So therefore, we’re all involved the partnership, but I feel very good about where we are. Yeah, I think the only thing keeping my interest having our revenue share, especially 20/30, and that predictability that is real positive for us. And then as you point out, that’s how you point out the IP. You know, that’s royalty free with the elimination of our share. Thank you. Thank you. All right, we have time for one last question. The last question will come from one of Richard Luria with Oracle Markets. Please proceed. A wonderful, ah, question, Amy. Thank you so much for squeezing me in. Wanting to go back to the discussion that happened today on AI-based models and consumption, and maybe have a couple of questions over time looking at agreement with with the change, how they’re totally different. Maybe I wanted to really to you know, you announced seven, which will come out. That’s dramatically change consumption patterns. You’re doubling down on that element, and it’s increasing the customer’s want predictability of AI-based models. We’re seeing with all the kind of uses issues that come into play in AI kind of control. Can you maybe understand how to bring all these pieces together? You know, how to maintain predictability with the customer base while increasing the growing consumption? And maybe you know, for the past three five years in the future, what we how should we think about what next? All consumption versus traditional seat based looks like. Thanks. Yeah, I mean, the high level, maybe, um, to it, but I think you said it, which is customers want predictability, especially for budgets and procurement, and the seat based seat based pricing is just entitlement to some consumption rights. And so that’s the way to think about, which is there’s base usage rights that get bundled in or packaged into seats that can be in ways for people to buy some, you know, essentially consumption packs that happen to be assigned to seats or agents, and and then beyond a certain level, there’s overages that go into procurement. Even there, if you have commitments, long-term commitments to consumption, you get discounting that’s appropriate with it. So I feel like that’s the direction to travel. And then the other thing you mentioned is how is this going to shift from a customer perspective? How are you valued by that? Where do you see the value drops as as simple as that? Where do you see the outcome? The evaluation, the token, whether it’s improving revenue, improving efficiency, and that’s what will define when we talk about ID budgets. ID budgets are going to have to be shaped by combination of business outcomes, making their way into into ID budgets and maybe reallocation from other line items on the income statement, like that. Thanks, Richie. That wraps up the Q and A portion today. Thank you for joining us today. And we look forward to meeting all of you soon. Thank you. Thank you. This concludes the conference. You made this connection one at a time. Enjoy the rest of your day.
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