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微软2027财年Q1业绩直播
Key Takeaways (AI-Generated)
Financial Performance
- Revenue $92.3B (+19% YoY); EPS $4.89 (+18%). Microsoft Cloud revenue surpassed $63B, growing 30% YoY.
- Azure revenue rose 48%; Foundry revenue tripled YoY. M365 Commercial Cloud grew 18%. Devices/Consumer fell 3% due to Windows OEM decline.
- Operating income increased 21% (22% constant currency). Capital expenditures were $45.2B; free cash flow reached $18.6B.
Business Highlights
- Copilot update unified features; daily users up ~50% QoQ. GitHub agent PRs increased 6x in six months. Copilot Fusion announced for multi-model orchestration.
- Foundry has >120k customers; Fabric paid customers up >50% YoY. Healthcare automated 30M patient encounters (+70% YoY).
- Added 24 data centers across 5 continents. Minecraft hit record engagement/revenue. Modern Warfare 4 launched with best reviews in a decade.
Financial Guidance
- Q2 Revenue expected $96–$97.1B (+18–19%). Azure growth guided at 49–50% constant currency. M365 Commercial Cloud growth ~19% constant currency.
- Microsoft Cloud gross margin ~65%. Q2 CapEx >$50B; calendar year CapEx ~$170B. Operating expenses grow 9%; effective tax rate ~20%.
Opportunities
- AI Integration: Copilot as 'new OS for work'; expansion into Dynamics, LinkedIn, and healthcare workflows drives adoption.
- Infrastructure Growth: Adding data centers globally; engineering efficiencies improve GPU/CPU utilization and reduce data center lifetimes.
- Strategic Partnerships: Collaboration with OpenAI on models and hardware partners (NVIDIA, AMD) for next-gen PCs enhances ecosystem reach.
Risks
- Market Demand: Weaker PC market and elevated inventory levels negatively impacted Windows OEM revenue by 27%.
- Supply Chain: Delays in third-party capacity deliveries affected capital expenditure timing and created Azure supply constraints.
- Financial Costs: Interest expense from data center finance leases impacts other income/expense, potentially reducing net financial gains.
Full Transcript (AI-Generated)
Operator
Greetings and welcome to the Microsoft Fiscal Year 2027 First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jonathan Nielsen, Vice President, Investor Relations.
Jonathan Nielsen
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 Brian Defoe, Deputy General Counsel and Corporate Secretary. 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 provide 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 first 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 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 subjects 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 10K, Forms 10Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. And with that, I'll turn the call over to Satya.
Satya Nadella
Thank you very much, Jonathan. It was a fast start to our fiscal year. Microsoft Cloud revenue surpassed $63 billion with growth accelerating to 30% year over year. We are focused on three things, designing AI to empower people, ensuring every organization has sovereignty over its own learning, and building trust with controls that ensure agent safety and security. Now let's talk about how we are making progress on those goals as we build a new tech stack starting with Copilot. We announced our biggest update to Copilot today this quarter, bringing together chat, Co work, autopilot and code into one unified experience. It's one product experience across commercial and consumer and comes with all of office built in. We think of Copilot as the new OS for work.
Customers are increasingly turning to Copilot to get real work done. Automated tasks is nearly doubled since July. Daily users are up nearly 50% quarter over quarter and over 5X year over year. User satisfaction improved nearly 20% quarter over quarter to another all time high. And 90% of copilot queries use auto mode, which dynamically routes tasks across models optimizing for quality, speed and cost. These improvements are translating into larger purchases. The number of customers with more than 50,000 copilot seats increased over 8X year over year including Cap Gemini, HCL Tech, Hitachi Group, Truest Financial and UK Revenue and Customs Department. And just last week, Volkswagen announced plans to deploy Copilot to more than 330,000 employees, one of the largest deployments to date in Europe.
We're also seeing strong momentum with E7, which brings together copilot, E5, Entra and Agent 365. Thousands of customers in every industry have purchased the suite to date, including Amadeus, BlackRock, Fiserv and NSW Health Department and Zeiss. Our business model is expanding from perceived subscriptions to include consumption, expanding our Tam and ARPU. The subscription brings increasingly capable everyday intelligence to every use user. Typically IT funds this, consolidating frontier advances for everyone across the organization. And as agents take on higher value, work consumption opens up business funded demand with spending tied directly to the value these agents deliver. The number of Copilot customers actively consuming credits through usage based billing grew over 75% over the quarter.
When it comes to software development, all major coding agents have shown up to work on GitHub. Agent generated PRS have increased 6X over the past six months and agents now open more than 1/3 of all PRS on the platform. We are very hard at work on reliability as agentic activity on GitHub Source. At Get Up Universe this morning we shared how we are expanding capacity and rebuilding the core Git architecture for the agentic wave. Also at Universe we announced broad availability of Copilot Fusion, which is all about bringing multi model orchestration to software development. It delivers frontier level quality up to 40% faster and add up to 77% lower cost. Credit consumption from agentic features on GitHub has more than doubled since usage based billing went into effect. And we're also helping developers secure their code and turn AI generated code into high quality software. Get up advanced security revenue increased over 50% year over year as customers use its AI capabilities to scan entire repos and fix vulnerabilities in real time.
In the business application space, we are extending this vision of Copilot as the new OS for work, bringing the business logic and capabilities of Dynamics 365 directly into Copilot and helping every organization stand up their own Infinite SAS factory. This quarter, we introduced 30 new Copilot skills across Dynamics 365, which enables customers to access CRM and ERP capabilities directly in the flow of work. In recruiting, more than 10 million LinkedIn members use our LinkedIn AI powered job search daily and 25,000 customers are using our agentic hiring solutions. Recruiters using hiring Assistant are finding interview quality applicants 33% faster while reviewing 83% fewer profiles to find qualified match. In healthcare, we automated 30 million patient encounters this quarter, up 70% year over year, helping clinicians spend less time on administrative work and more time with patients. 10 providers including Advocate Health, Mass General, Brigham Mercy, Intermountain Health and others have used our solutions to document over 1,000,000 encounters each since the beginning of the calendar year.
And in science, our FDA teams are working with customers to use discovery to accelerate scientific progress. A great example of Saint Gabon, which used discovery to accelerate the development of low carbon construction materials. Underneath our first party agentic experience is a common platform. It starts with Foundry, which is becoming an increasingly important driver of our growth. Foundry helps organizations build learning loops grounded in their business context and deploy agents safely at scale. We now have over 120,000 Foundry customers with revenue more than tripling year over year. Foundry's model choice and feature set coupled with its deep integration across our stack is driving differentiation. Azure Open AI directly benefited in the last quarter with big advances in Open AI models. And when you couple this with our model choice built into Foundry, customers are able to build solutions optimizing across quality, cost and performance. In fact, the number of customers building agentic solutions with multiple models increased 5X year over year and revenue from open source models on foundry increased 10X.
We also continue to make rapid progress with our first party models. Our goal is to advance the cost to Outcome Frontier, which means delivering capabilities comparable to leading models within three to six months of their release at a fraction of the training cost, thereby allowing us to transfer those cost benefits to customers. And you see this in our products today. Mai Cyber now powers over 40% of the scans in our Regentic—code scanner at 18% lower cost per scan. Mai Transcribe is the most accurate and cheapest transcription model in the world, supporting Dragon Copilots multilingual workflow. Mai Code Flash has 3,000,000 users in GitHub copilot last month alone, helping developers get more out of their AI credits. Microsoft Decision One is our new model for structured decision making, outperforming both LLMS and other decision models and latency and quality. Over 4000 customers including Atos Group, Equinor and RBI have already used it in the first month since its release. And we recently completed pre training Mai Base 2, which outperforms other open weight models we tested with four to 12 times greater training computer efficiency. This base model will be used in the upcoming Mai models across thinking, code and Cyber Beyond models.
We are making the harness behind our own Copilot experience available to customers in Foundry. It gives customers a Microsoft managed way to build agents that reason use tools, complete complex long running work while preserving the choice of model. Another critical layer is data. We now have 44,000 paid Fabric customers, up more than 50% year over year. We are bringing Foundry and Fabric closer together so you can build your own agents right next to data. Over 19,000 customers now use Foundry and Fabric as enterprises connect and operate agents over real time operational, analytical and non structured data. Customers are also rapidly deploying our AI optimized databases including Postgre SQL, SQL DB, Hyperscale, Cosmos DB to give agents fast, secure access to the data and context they need. Postgre SQL growth accelerated for the 4th consecutive quarter and the number of Postgre SQL customers also using Foundry accelerated to 90% year over year.
We also have one of the most important databases for any enterprise, which is the knowledge underneath Microsoft 365 spanning people, their relationships, documents, emails, meetings, chats, projects and other artifacts. Work IQ makes this context available to every agentic workload, and with Microsoft IQ, we're bringing together Work IQ, Fabric IQ, and Foundry IQ as a unified context for agentic systems. Nearly 60,000 customers are accessing Context across Microsoft IQ, up 25% quarter over quarter as enterprises deploy more agents they also need. To govern them at scale with Agent 365, we provide a platform for. For AI observability, enabling customers to manage, secure and optimize the performance and cost of their agents, over 50 million agents are now in the registry, up over 30% quarter over quarter. And finally, as agents gain greater access to enterprise data and system security becomes even more critical, our approach is to separate intelligence from authority, enforcing identity permissions, monitoring and containment outside the model itself.
Last week, we expanded perception with new capabilities to help customers secure and contain agentic insiders, including expanded agent discovery across local and cloud environments, dynamic permissions that enforce least privileged access for each task, and continuous risk assessment. We also introduced teams of Guardian agents that continuously monitor agent activity to help prevent unsafe actions before they occur. And we are seeing encouraging feedback on perception overall from preview customers, including KPMG, Nationwide Building Society, Northern Trust, Celantes. More broadly, we are helping customers secure and govern AI use across the enterprise. Customers have used Microsoft Purview to audit over 7.6 billion agent activities to date, up 5X quarter over quarter. Underlying everything I've talked about so far is our infrastructure. We are building against a growing book of business with a fungible fleet that allows us to dynamically allocate capacity to the highest value opportunities across compute, data foundry and copilot.
Accelerating demand led to us adding 24 new data centers across 5 continents this quarter. And we are bringing capacity online faster, reducing Dr. lifetimes by about 20% quarter over quarter for new GB three hundreds in our biggest regions, which make up the majority of the GPU deployments. At the same time, we continue to get more from the infrastructure we already have by optimizing across the data center design, silicon system software and models. For example, we increase the throughput for Copilot workloads by over 50% quarter over quarter. We continue to scale our fleet with the latest innovations from NVIDIA, AMD alongside our own Myer systems. We have docked our first NVIDIA Vera Rubin GPUs and very excited about it. Maya 200 is already delivering up to 1.7 times more tokens per Watt across the AI. Experiences in teams in Copilot and Maya 300 will drive further gains, delivering 40% more tokens per Watt compared to the leading GPU based systems. Our growth extends beyond GP US. We continue to see strong adoption of our cloud native Cobalt CP US improving price performance for general purpose cloud workloads. All up, Azure growth was broad based across both enterprises and small and medium business segments and spanning both core cloud services and AI infrastructure.
Finally, let me turn to devices in consumer. In Windows, we are executing on our vision to bring hybrid intelligence to every desk in every home, making every PC the secure agent box. As more capable models run locally, we see an opportunity to make it more intelligence effectively unmetered. We are working with the broader hardware ecosystem to bring these capabilities to a new generation of PCs across AM DS, Ryzen AI 400 Series, Intel Core Ultra Series 3, Qualcomm Snap, Agon X2 series, And earlier this month, we also announced new PCs powered by Nvidia's RTX Spark and DGX Station for Windows. With these new devices, you can run last year's Frontier models on your laptop and last quarter's model at your desk. We are bringing together Windows and Agent 365 S agents can work with secure boundaries on device. We introduce Microsoft Execution Containers, a policy driven execution layer that governs and contains agents across Windows and other platforms integrated with Agent 365 for governance and observability. Agents like Open AI codecs, Anthropic, Clod Code, Metamuse are adopting MXC and customers like Meta are starting to deploy it across their enterprise environments.
In search and advertising, Bing and Edge once again took share in LinkedIn. Engagement continues to deepen across our more than 1.4 billion members, with time spent viewing content in the feed up 15% year over year. And finally, in gaming, we remain focused on building great games and reaching players wherever they choose to play across console, PC, mobile and cloud. Minecraft delivered a record quarter, reaching all time highs in both engagement and revenue, while World of Warcraft had its largest beta in. Franchise history. We enter the holiday season with one of our strongest first and third party lineups in years, including Modern Warfare 4, which launched last week to the best reviews for a Call of Duty game in more than a decade and Grand Theft Auto 6, which is coming to Xbox next month. In closing, based on the demand we see, the strength of our products and the efficiency we are driving across the stack, I've never been more confident in the long term returns for our investments. With that, let me turn it over to Amy.
Amy Hood
Thank you, Satya, and good afternoon, everyone. Our results exceeded expectations across revenue, operating income and earnings per share, driven by strong demand across the Microsoft cloud. This quarter, revenue was $92.3 billion, up 19%. Gross margin dollars increased 17% and gross margin percentage was 68%. Operating income increased 21% and 22% in constant currency. Earnings per share was $4.89, an increase of 18% and 19% in constant currency. When adjusted for the impact for our investment in Open AI and FX was roughly in line with guidance. Operating expenses increased 6%, driven by continued investments in R&D, compute capacity and talent. Operating margins increased slightly year over year to 50%, driven by strong revenue growth, platform efficiency gains and focused investments across our portfolio, partially offset by sales mix shift to Azure. When adjusted for the impact for our investments in Opening Eye. Other income and expense was negative $234 million, slightly lower than expected.
Capital expenditures were $45.2 billion as some third party capacity deliveries we expected in Q1 were delayed. Roughly 3/4 of our CapEx was for short lived assets, primarily CP US and GP US, including higher memory and storage costs as we continue to invest in the infrastructure required for our customers to build and scale AI applications. The remaining spend was for long lived assets. This quarter finance leases were $7.4 billion. As a reminder, we recognize the full principal value of finance leases and CapEx at the time of lease commencement. And cash paid for PP and E was $39.4 billion. Cash flow from operations was $58 billion, up 29% driven by strong cloud Billings and collections. And free cash flow was $18.6 billion, reflecting higher capital expenditures. And finally, we returned $10.2 billion to shareholders through dividends and share repurchases.
Now to our segment results reported under the updated segment structure announced in September. Revenue from agents in infra was $76.8 billion and grew 25%, reflecting strength across the connected layers of our platform. Commercial bookings decreased 12% and 11% in constant currency, driven by the impact from large Azure commitments in the prior year, partially offset by healthy growth in our commercial sales motions, including a large Azure commitment this quarter. Commercial remaining performance obligation grew 73% to $677 billion with a smaller sequential decline relative to historical seasonality due to the large Azure commitment this quarter. Our RPO has a weighted average duration of 2.3 years and roughly 30% will be recognized in revenue in the next 12 months of 29% year over year. The remaining portion recognized beyond the next 12 months increased 98%.
Now to Microsoft Cloud. Revenue was $63.9 billion and growth accelerated to 30% and 31% in constant currency with sequential dollars added nearly doubling year over year, reflecting strong demand across Azure and M365 Commercial cloud. Azure revenue was ahead of expectations and increased 48% even with the three P capacity delays noted earlier, driven by foundry and improved CPU monetization. Foundry revenue more than tripled year over year with upside driven by efficiency gains across our GPU fleet that allowed us to allocate additional capacity to customers as well as higher revenue per token that we benefited from in the quarter across our CPU fleet. Engineering work enabled us to identify and monetize underutilized capacity this quarter, helping us serve more of the growing demand with our existing capacity. The timing of engineering efficiencies like these as well as three PGP lease deliveries, our own capacity build outs and ARPU changes from model mix can create quarterly variability in the year over year growth rate.
M365 commercial cloud revenue increased 18% and 19% in constant currency when adjusted for the prior year comparable that benefited from one point of in. Revenue Recognition On a reported basis, revenue growth was 17% and 18% in constant currency. Results were ahead of expectations, driven by stronger GitHub Copilot adoption and usage. Partially offset by weaker sales execution in our M365E3 and stand alone skews, we continue to evolve our sales motions to balance those more traditional skew per seat rhythms with the newer premium E7M365 Copilot and usage based productivity offerings. Year over year growth was driven by both ARPU and seats. ARPU growth was led by our premium seat based offerings including M365 Copilot, E5 and E7 which has already reached millions of paid seats with additional contribution from usage based offerings, primarily GitHub Copilot and Copilot. Revenue growth accelerated quarter over quarter with continued adoption across M365, GitHub and security. Paid M365 commercial seats grew 5% with some impact from the weaker sales execution noted earlier. Growth is driven by installed base expansion across all customer segments, though primarily in our SMB and frontline worker offerings.
M365 Consumer Cloud revenue increased 17% and 16% in constant currency, down sequentially as we begin to lap the benefit from the price increase in the prior year. Productivity and server licensing revenue decreased 3% and 2% in constant currency, primarily driven by a decrease in transactional purchasing as we lap the benefit from product launches in the prior year, partially offset by a greater mix of contracts that carry higher in. Revenue recognition. Industry Solutions Cloud revenue increased 10% with growth in Dynamics 365 and LinkedIn Talent Solutions, though booking trends continued to moderate. And in Frontier and Support Services revenue increased 4% and 5% in constant currency driven by support. Microsoft Cloud gross margin percentage declined year over year to 66% driven by sales mix shift to Azure, partially offset by product level margin improvements primarily in Azure. And for the segment. Gross margin dollars increased 20% and 21% in constant currency. Operating expenses increased 10% driven by the R&D investments noted earlier. Operating income grew 24% and 25% in constant currency and operating margins decreased slightly year over year to 53% as strong revenue growth, platform efficiency gains and focused investments across our portfolio were more than offset by sales. Makeshift to Azure,
Now to devices and Consumer revenue was $15.5 billion and declined 3%. Search and advertising revenue ex TAC increased 12% and was ahead of expectations driven by higher volume and rate across LinkedIn, Edge and Bing. Xbox revenue decreased 2% and Xbox Content and Services revenue decreased 2% and 1% in constant currency driven by declines in 3rd party content and Xbox Game Pass, partially offset by growth in first party content and Windows OEM and devices revenue decreased 22%. Windows OEM revenue was below expectations and decreased 27% and 28% in constant currency driven by the Windows 10 end of support demand in the prior year, inventory draw downs by OEM and channel partners and weaker PC market demand. Inventory levels remain elevated. Segment gross margin dollars were relatively unchanged through over year and operating expenses decreased 3% driven by Xbox, partially offset by the continued investments in R&D noted earlier. Operating income increased 2% and 3% in constant currency and operating margins increased year over year to 35% driven by lower amortization of intangible assets from the Activision acquisition, partially offset by the impact from a lower mix of Windows OEM revenue.
Now moving to the outlook for our second quarter, which unless specifically noted otherwise is on AUS dollar basis. Based on current rates, we expect FX to have no meaningful impact on total revenue, COGS or operating expense growth or on revenue growth in either segment. Starting with segment guidance, we expect revenue from agents and infra of 80.1 to 80.7 billion U.S. dollars or growth of 24 to 25%. In commercial bookings, we expect healthy growth in our commercial sales motions. The results will be impacted by the significant Azure commitment signed in the prior year. Timing related to significant Azure commitments like these will result in material volatility in bookings, making quarterly growth rates less indicative of underlying sales execution in Azure. We expect revenue growth of 49 to 50% in constant currency with continued efficiency gains across our CPU and GPU fleet helping to offset some 3 PGPU as a service contracts that have been delayed to H2. Customer demand continues to exceed available supply and looking beyond Q2 year over year growth will continue to reflect the timing and scale of engineering efficiencies delivered in the quarter and new capacity adds as well as a strong. Prior comparable that included accelerating growth in the second-half and then for 65 commercial Cloud, we expect growth of approximately 19% in constant currency with FX expected to reduce reported growth by less than a point.
We expect continued momentum across our premium per seat offerings and usage based offerings along with some improvement in execution across E3 and our stand alone SKUs. Growth will be driven primarily by ARPU with additional contribution from seats and we continue to expect revenue growth to accelerate through the year And 365. Consumer cloud revenue should grow in the low teens, down sequentially as we lap the price impact noted earlier. Productivity and server licensing revenue should decline in the mid to high single digits, down sequentially due to a lower expected mix of contracts that carry higher in. Revenue recognition. Quarterly growth can vary materially based on contract mix, product launch timing and other transactional purchasing trends. In Industry Solutions Cloud, we expect revenue growth to be in the mid to high single digits with continued impact from the bookings trends noted earlier. And in Frontier and Support Services, we expect revenue to grow in the low to mid single digits. Microsoft Cloud gross margin percentage should be roughly 65% down year over year as continued improvement and product level margins is more than offset by sales mix shift to Azure.
In devices and consumer, we expect revenue to be 15.9 to 16.4 billion U.S. dollars. Search and advertising revenue expect growth should be in the low double digits driven by consistent trends and rate and volume with overall search and advertising revenue expected to grow at a similar rate. And an Xbox content and services, we expect revenue growth to be in the mid to high single digits up sequentially driven by the timing of contact launches across both 3rd and 1st party. With content launch patterns through the year, we expect growth to be the strongest in the second quarter with some deceleration in Q3 and further moderation in Q4. Hardware revenue in Q2 should decline year over year, when does OEM and devices revenue should decline in the mid 30s. Growth will continue to be impacted by elevated inventory levels, PC market demand and a prior year comparable that benefited from Windows 10 end of support. As in prior quarters, the range of potential outcomes remains wider than normal. We expect these trends to continue to the rest of the fiscal year. Therefore, at a total company level, revenue should be between 96 and 97.1 billion U.S. dollars or growth of 18 to 19%. We expect COGS at 32.7 to 32.9 billion U.S. dollars or growth of 26 to 27% and operating expense of 18.5 to 18.6 billion U.S. dollars or growth of 9% driven by continued investment in R&D, compute capacity and talent. Our cost guidance across both COGS and OpEx includes an estimate for the recently announced employee voluntary exit offer. Operating margins should be down slightly year over year excluding any impact from our investments in Opening Eye. Other income expense expected to be roughly negative $300 million as interest income will be more than offset by interest expense, which includes the interest payments related to data center finance leases and we expect our Q2 effective tax rate to be approximately 20%.
Next, capital expenditures in Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion due to the three P capacity delays noted earlier in the second-half of the fiscal year. We currently expect CapEx spend to accelerate primarily from CPUs inclusive of higher memory and storage costs and GPUs, as well as the three P capacity deliveries that shifted to H2. And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time. Given our strong business performance, we expect to continue to remain free cash flow positive and FY20 7 to complement cash generated by the business and preserve financial flexibility. We will access additional sources of funding when we believe it is attractive to do so. In closing, we're off to a strong start to FY20 7 with accelerated growth across the Microsoft cloud. Product improvements along with efficiency gains across our data center infrastructure and our first party apps and agents are increasing the value and improving the outcomes we deliver to our customers. Delivering that value to our customers positions us for durable long term growth. With that, let's go to Q&A. Jonathan.
Jonathan Nielsen
Thanks, Amy. We'll now move over to Q&A. Out of respect for others on the call, we request the participants please only ask one question. Operator, can you please repeat your instructions?
Operator
Thank you. Ladies and gentlemen, if you would like to ask a question, please press *1 on your telephone keypad and a. Confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. One moment please as we pull for questions. And our first question comes from the line of Adam Wood with Morgan Stanley. Please proceed.
Adam Wood
I thanks so much. Alongside lower than expected CapEx and there's better cloud gross margin sequentially. Can I ask, as incremental AI capacity comes online, what do you see is likely to be the more important driver of returns over the next few years, improving utilization and unit costs within this year or your ability to monetize more layers of each workload across fabric, foundry and Copilot?
Satya Nadella
Thanks for the question, Adam. Mom, I would say all of the above, but I think the way we are coming up this is we have one pool and we want to get the pool to be as efficient and fungible, right? That's sort of the place where if I sort of think about all of the physics of how we are building out the data centers. All of the operational rigor with which we can bring up the. Capacity and then of course, how do we run the workloads that are optimized on that infrastructure. And once you do that, then it's just a function of how we allocate it by looking at the demand signal. And even there even in our new segment reporting, I think you kind of see it, which is Copilot, Copilot stateful database underneath it is work IQ that gets used in Foundry, which is where people will build, let's say a multi agent system for supply chain that stands both on structure and structured. Of course it uses a Postgres database in Azure. And so and then by the way, all the agentic work is registered in the agent 365 and perception manages the security of it, right. So to us at least we look at all of this as the same infrastructure. Of course we report to you in a variety of different products. But your core question of where is the margin going to come from, where's the leverage is going to come from? It's not going to come from anyone. It's going to come from every one of them and it compounds when we work them across. I think that's. And Adam, I'm sorry if we missed the front half of your question. I I think we at least caught caught the back cap. That's great. Thanks, Adam.
Adam Wood
Yeah, that's very helpful. Thank you.
Operator
Operator, next question please. The next question comes from the line of Carl Kiersten with UBS. Please proceed.
Carl Kiersten
OK, thank you. Amy and Sochi, I'm wondering if you could unpack what I thought was one of the key metrics from this call and that is the guidance for Azure growth of 49 to 50% constant currency in December. I can imagine there's a number of variables, the capacity you're putting up, the allocation to 3rd party customers, probably open AI strength, but perhaps you could comment a little bit on what what some of the key drivers are given how good that number seems, at least to me. Thank you.
Amy Hood
Thanks, Carl for the question. Maybe I'll start by talking a little bit about Q1 and I think that'll help to think through Q2 and and even going forward. And it's not unrelated really to Adam's question at at some level as well in Q1, I would say the engineering teams have really delivered very, very good work in terms of improving efficiency at the platform layer. That is not just a statement around the efficiency of of GPUs, it's a statement around the efficiency of every layer, how the app utilizes the platform and how Foundry utilizes the platform as well as the Azure platform itself. Those efficiencies, you know, they're sort of ground out every week and you have good ideas, a lot work, some don't and you stay at it. So they're not maybe as predictable in terms of how much impact we'll get in quarter Q1. They did a very good job and you saw some of that result in us being able to put more allocation into Foundry in the quarter. That's a great thing because we're, as I said in the call, we still have a demand that exceeds supply. So where we can have our engineering teams deliver those efficiencies, we do really try to put it into foundry when we can because it's so important that Satya talked about into how customers broadly are building what I would call against the new stack. Secondly, and you mentioned it, token pricing will create a little bit of variability. We had higher token pricing than we expected in the quarter with some high quality models that were able to take advantage of and see good margins on do benefit us in the quarter. That did happen in Q1. And I think also in that number in Q1 was the efficiency that I talked about applied not just to our GPU fleet. But I think people sort of underestimated when the example Satya gave for Adam's question, that's a GPUCPU storage memory workload. I mean, it takes all of the pieces. And so our ability to also create additional capacity within our existing fleet gave us some room to be able to convert that actually pretty quickly as well in Q1. So in Q2, we've got those efficiency grains, which is great and those will continue into Q2. We need to find some more, which we're counting on enable to. Get to that guidance that I gave 'cause I have faith in the teams work in Q1 continuing into Q2. But we also need that work to be able to help us a little bit 'cause we had some supply we were counting on Q2 move out into H2. And so, you know, I think and to your point, there's also some unknown on some token pricing through the quarter, that stuff can change. So you know, I think I feel good in terms of the efficiency gains that we saw when we're able and when I'm able to see those and put them in, I feel good about guiding to that. But as other things are, are are less predictable. I mean hope that's helpful. On the on the levers, Carl.
Carl Kiersten
Yeah, it is. Thanks, Amy.
Operator
Thanks, Carl. Operator, next question please. The next question comes from the line of Mark Margler with Bernstein Research. Please proceed.
Mark Margler
Thank you very much for taking my question. Congratulations on the solid quarter and the solid guidance. It's really nice to see all how well you, you guys are executing. I'd like to get a sense on the drivers of the AI strength in Azure being from enterprise versus digitally native in general or AI native with inferencing, starting RAM and Microsoft the go to for enterprises. How do we think, Amy, about the mix of enterprise customer workloads with an overall workload at this point and Satya with the strong growth of the Azure AI platform offering, can you give us color on what's driving that? Is it again and enterprises that's digitally native, obviously it's a mix of both, but any color that shows the ramp of that enterprise I think would be valuable.
Satya Nadella
Yeah, thanks for the question, Mark. Maybe I'll start and maybe you can add to it. The I was even here in Europe just last week and it was great to see the quality of the agentic systems right that are just broadly getting deployed right when you deliver deploys. What is their automated auto taking and trade coupon dispute management stuff All as a fully agentic touchless system. Rolls Royce deploys the system to really manage all of their maintenance of whatever their their dead jet engines with 30,000 parts, a pretty complex supply chain. Both planning, execution, inventory management system. You know, all built on foundry agentic systems, RBI, which is an Austrian bank, you know, showed me 20 plus business processes end to end. And they were talking about like whether it's in for credit or what have you, how they are able to now do that so much more optimally, right. So the the breadth, the quality, their ability, Oh, by the way, the multi model nature of it right there. Look, they start with the frontier model. Many of them, in fact, the Unilever one, they just dropped an Mai model trained using our traces. So even the degree of sophistication of what I think of as model optimization, workload optimization, token optimization was just great to see. So the breath is starting finally does feel like the enterprise workloads that feel like to me, you know, like the database, this, you know, applications enterprises built in the past that I grew up with is happening now when it comes to AI. And in fact, if anything, some of the, the, you know, the, the shiny object stuff is waning, right? Which is not about the next big thing. They're really more about, wow, can I build a system? Can I own the, the weights? Can I manage my cost? Can I have reliability? What about security? And so in that sense, the enterprise breath motion is starting. But like everything else in the enterprise stuff is not like 1/4 over quarter. It's a, you know, a decade long thing. And that's what I've been waiting for her as opposed to like for customers who buy a lot of capacity from you and you can show a few quarters of growth and that's not a business as far as I'm concerned. So I want the breadth. We are well positioned on the breadth and and we have you know large customers who want to buy from us and we're open for business with it. And as long as the pricing is right, we may sell them some. If not, we will be patient about building the breadth business. Thanks, Mark.
Operator
Operator, next question please. The next question comes from the line of Gabriella Borges with Goldman Sachs. Please proceed.
Gabriella Borges
Hi, good evening. Thank you, Sacha. Stay on this topic of breath, because you had a comment in the prepared remarks talking about how Mei can now be comparable to leading models within three to six months of their release. At the same time, you have open AI at 11 percent of revenue in the quarter. So maybe just take a step back and give us your latest thinking on how you think token mix and token value is going to evolve between the Frontier and AI and maybe what some of your more sophisticated enterprise customers are doing from a proprietary AI strategy standpoint. Thank you.
Satya Nadella
Yeah. So I think in fact I would say there you should think of three things perhaps as in the toolbox for any workload. The first is a new model drops and it's got some great performance and you want, you can eval Max on whatever that matters to you, IE the outcome that matters to you by using it. People should use it. We saw that with some of the Open AI models in the last quarter. They were fantastic models and we're obviously very thrilled about the progress Open AI has made with Astra and also what's to come. And I thought we saw some good demand on that. Then the next thing people do is, hey, can I actually put multiple of the Frontier models because these got, these are very different prices. In fact, this morning artificial analysis have the, you know what I think is the real benchmark, which is the coding agents using our fusion and I think we were #2 and #3 there, which is awesome to see, right? Which is you can now get Frontier performance 45% faster, 75% cheaper. Like why? Who would want to not take that, right? Which is like if you're a coding agent user, you want in fact Anthropic and open AI by the way, to compete for your workload, not like once a quarter, but for every task. And that to me is what the value of these routers and auto fusion stuff routing does. And we are very excited about it. And then the last thing is another important one. A lot of customers are saying, hey, look, take the Unilever one, right? It's their system. They they will ultimately take even the traces after having done even a bunch with Frontier models. And they just want to train their own model. So it can be open weights or in this case it was Mai model. And so I think all of that needs to be as options that are available. And then depending on pricing, depending on the need of the customer, they will exercise it. And there's a temporality to it. It's never like, oh, I start one place and that's where I stop, right? It's like I might start at the frontier, I may go to an open weight, I may go to an Mai model, I may go back to the frontier for the next drop for a few months come out. Like that's how I think that how dynamic dynamic these workloads out. And that's where when we think about foundry or when we think about fabric or when we think about copilot and get a copilot, we really want to build a model system that delivers customers value continuously versus you know get, you know them being stuck in any one thing. Thank you for the thanks, Gabriella.
Operator
Operator, next question please. The next question comes from the line of Brent Phil with Jefferies. Please proceed.
Brent Phil
Thanks, Amy, Good to see as you're approaching 50%, you have another line item approaching 50% and that's your operating margin. I think many ask, you know how can you sustain this level of growth with A50 in the top and A50 in the bottom. Maybe you can discuss operational improvements you you continue to put forward to to maintain that that high level on the bottom line. Thanks,
Amy Hood
Brett. Let me first say the best solution here is revenue growth. And so I would say I tend to start and focus there even though I think many people seem to think I start at the bottom of the PNL and work up. The right answer is you always start at the top of the PNL and work down. And So what we've been focused on, and I think really it's almost inherent in all of the commentary, is we change segments because we're changing how we deliver products and services to customers. We're changing it because we're delivering new and different products with a lot, a lot of value in them and those products are far more integrated than they were before. I think when you see that revenue accelerate at the top line, of course it does in a pretty healthy way contribute to positive margin and positive margin dollars, which I think I need people to also focus on. The second piece is there's real focus on a. Efficiency, because efficiency when we say the word, I think people believe it's cost related, the outcome is cross related. But the real benefit of efficiency is stability, it's security, it's reliability is that it delivers the highest quality unit at the lowest possible cost. And so it's operational excellence. And so I think when you think about you can deliver product excellence, which is what we're really focused on. I think we did a very good job on product quality in the past quarter, which I think teams should be proud of in lots of places. I think then you have this sort of operational focus on improvement and then it is a real focus in terms of operating expense to make sure it's going toward building the new thing or providing security and quality. And I think that's we've made AI think a very active choice to be really focused on those two things, especially in this environment and how important it is. And I think when you do those things and you happen to be in a good market with Brett's and Brett and customers and a global business, we've seen a a good result this quarter in particular. You know, when you're delivering a lot of efficiency gains in 1/4 and you can deliver revenue growth without spending additional costs, you of course see a benefit, which we did. But I feel good about what's behind that number, which is I think a focus on the right levers. Thanks, Brent.
Operator
Operator, next question please. Two BHK flats for rent in Kanpur. Hello. Hi. Our next question comes from the line of Brad Reback with Stifel. Great. Sorry about that. I did not hear my name on M365 consumption. When you all shifted GitHub from a per seat model to a consumption model that unlocked a ton of revenue growth for y'all. As you think about the tools in place now unlock on the consumption side for the core and 365 customer. Do you think the unlocks is fast and without sales effort or is it going to take a, you know, a fair amount of effort to get those meters spinning? Thanks.
Satya Nadella
Yeah, thanks for the question. I think on the on the coding side, it will be faster just because I think people are used to paying on this pay go as the sort of the general market and how it works. And if anything, hopefully you know, some of the things that we announced even at Get up Universe today with Fusion are a more attractive way, right? Because you even if you think about it right, you buy a bunch of credits and you want to use those credits most efficiently. That's the promise of Get up Copilot Fusion. So we are very optimistic about making progress on that. And then when it comes to Copilot itself, right, we are trying to make sure that we in some sense are driving more and more value into the subscription with every model drop and essentially consolidating the frontier gains for broad deployment. And in many instances, as my remarks said, IT funds this, right. That's the thing that you want to have standard issue across the board and at the same time you have your pay as you go or consumption meters for places where you need it. And so, so both of those options are open. And I think that's why the fact you know, in with Copilot Amy reference, which is we're, we're trying to make sure that customers understand both options. They're able to use the almost the two options in the optimal way that benefits them. We don't want them to overbuy one thing and then feel like they're talking maxing because that doesn't serve anybody's purpose. We want to make sure that they understand the value of the subscription and how it's a continually improving value. It's not even static. And at the same time you can exercise this consumption meter. And so that that's a little bit of the degree of sophistication in both in our sales motions, even a customer's understanding that's I think coming together we feel very good about the progress, but a lot more to do. And I think I would say it's also why we've made the investment into the frontier company here coupled with changes in our sales motion, which I talked a little bit about. You know, we need both of those things to make sure customers are what I think we want them to utilize both the Copilot license to its fullest and understand when the consumption meter is delivering value to them. The investment in the FDE organization or the Frontier Core Co as well as new motions within our modern work in Microsoft 365 sales teams are both meant to do that. And I think to Saki's point, it will, it will be a slower move outside of coding, But I also still think we're still seeing encouraging signs and, and I I'm, I'm still positive about that. Thank you.
Brad Reback
Thanks, Brad.
Operator
Operator, we have time for one last question. The next question will come from the line of Tal Liani with Bank of America. Please proceed.
Tal Liani
Hey, just clarification on something you just said, did you? Disclose the copilot numbers this quarter, but my question is? More about the capital commitment or the capital strategy, you said in the preferred remarks that you will approach raising capital if need be in the future. Can you discuss your strategy around it between debt and equity and other sources? How do you intend to raise capital if need be? Thanks.
Amy Hood
Oh, great. I'll, I'll take that was my, I think what I said is if, if it's, if it's attractive and makes sense. We're lucky. We have a lot of flexibility in terms of our capacity to raise financing. I've talked about this before. There's a form of financing called leasing and we've been using that one as a vehicle. There's also we're, we're fortunate to have access in the debt markets given that where our rates ratings are and and sort of we haven't been able to and we haven't yet, I would say tap that. And then of course there's other options. But I think the way I see it is we're feeling good that we're free cash flow positive. We feel good that the return on every dollar CapEx we're spending, we're confident in that. And therefore, we feel like we have lots of options to be able to tap the financing markets when they make sense and they're attractive. And we did not disclose to answer your direct question, update on the Copilot number of this quarter, we talked about momentum in revenue and usage. Thank you.
Jonathan Nielsen
Thanks, Tal. That wraps up the Q and a portion of today's earnings call. Thank you for joining us today and we look forward to speaking with you, all of you soon. Thank you.
Operator
Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
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