Microsoft Corp at Morgan Stanley Technology, Media & Telecom Conference Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : <_ALACRA_META_ABSTRACT>Excellent. So exciting times going on within the software landscape and within Microsoft overall. I thought maybe to start off with, we could talk about the most recent quarter. Very strong Q2, fiscal Q2, in terms of bookings growth. You talked about 75% constant currency bookings growth. You talked about strong $100 million-plus Azure AI contracts. Can you help us understand what that means about sort of the overall demand environment? What is Microsoft seeing out there when it comes to commercial demand?

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : And in terms of duration, CRPO grew 21% on a constant currency basis. So it wasn't just duration, it was just kind of overall contract value improving.

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. On the opposite side of the equation, Azure came in, in line with your guidance, but a little bit disappointing for investors. You're no longer talking to Q4 like you were earlier in the year, and you talked about a little bit of the go-to-market mix being off in terms of the core versus the Azure side of the equation. A couple things to unpack there. One, on the go-to-market side, dig in with us kind of what happened in sort of those incentive programs. What kind of pushed it awry a little bit?

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. I want to dig into that last point that you made about when you sell the Gen AI solution, it pulls through additional. Because I think that's a concern that's arisen in a lot of my investor conversations is, is this Gen AI instead of selling the core? But it sounds like you guys are seeing both, that both get pulled through when people are building out these workloads.

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. The question that I get most often from investors after or have gotten most after Q2 is, after your June quarter, you talked to us about increasing supply in the back half of the year, giving you confidence in acceleration in Azure. After this quarter, you pulled away from guiding to Q4, so not saying anything about Q4. What's changed? Why do you have more confidence in June than you do now in terms of what's going to happen in Q4?

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. It would seem like there's a possibility for part one to help fix part two in that if you're seeing good attach of non-AI onto sort of AI workloads as the capacity opens up, as you're able to provision more of those AI workloads, it should pull through more of the core. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 04, 2025 / 4:30PM, MSFT.OQ - Microsoft Corp at Morgan Stanley Technology, Media & Telecom Conference

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. I want to dig into the capacity constraints and sort of the build-out in capacity. You guys have been ramping up CapEx for a couple of years now and spending really big dollar amounts and big growth in those dollar amounts. Can you help us understand the process of solving a capacity constraint like that? It's not just buying a bunch of GPUs, you need the data centers. What's the process in getting that fixed?

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. So if I take that answer and think about it in context of the guidance that you gave into the back half of the year of relatively flat CapEx spending in line with what we saw in Q2, it sounds like there's a level deeper within that that because the 15-year depreciation asset has been built out, we're going to see a shift in that 50-50 away from the long-term depreciation asset, and you're going to start filling up those data centers with the server kits with the six-year depreciation asset.

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. I want to talk to some of the key leads that investors look at to try to understand what's going on within Microsoft. I think one of the big ones was the announcement of Stargate and the changing in the nature of the relationship between OpenAI and Microsoft, where you guys moved from an exclusive relationship to one where you have right of first refusal. Why did that make sense for Microsoft? Why does Microsoft want to be in, maybe not front and center when it comes to Stargate, but sort of a little bit more of a backseat participant, if you will? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 04, 2025 / 4:30PM, MSFT.OQ - Microsoft Corp at Morgan Stanley Technology, Media & Telecom Conference

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. One of the things that both you and Satya have talked about a lot on the conference calls is the nature of the AI workloads that we're seeing on Azure tend to veer towards inference, the vast, vast majority are inference and training workloads. And I think Satya's even said he's turned away some training workloads. Can we look at that Stargate announcement through that type of lens

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. That makes a ton of sense. So if you think about the comment that you made that exiting FY25, you expect to see supply and demand relatively in balance. It speaks to a comfort that you have with kind of your capacity planning on a go-forward basis. I think investors worry a lot about availability of power, right, ability to sort of build out data center capacity. Do you see constraints in that way, or do you guys have like a good roadmap in terms of what gets you comfortable with having the necessary capacity on a go-forward basis?

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. I want to ask you about DeepSeek. And it's definitely a -- it was an announcement and sort of a level of innovation that there's ways that went through the investor community when thinking about what that implies for generative AI on a go-forward basis. Was it as surprising, like within Microsoft, or was this more aligned to kind of the cost curves that you guys were already thinking about when it comes to these large language models, the level of performance improvements? Or said another way, did it change either your capacity planning or how you were thinking about the monetization of these models on a go-forward basis?

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : So I think Satya talked about that in terms of Jevons paradox, my favorite paradox.

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Of all the paradoxes I think about.

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : We'll do that in a different session.

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : So in that dynamic, what gives Satya that confidence is that we've seen this dynamic roll through before with sort of the commoditization of underlying compute, underlying storage, like when you're bringing down those input costs, you've seen the result of that, it drives further workload growth.

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : I want to switch gears a little bit and talk about Microsoft 365 Copilot, the other kind of big AI initiative from Microsoft that investors focus a ton on. I would say from an investor perspective, we've kind of come into a trough of disillusionment in terms of we were expecting a lot out of a new product really quickly. And as often seen in investors, we proved to be impatient in seeing that come through. From the Microsoft perspective, how is the Microsoft 365 Copilot rollout going versus your expectations?

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. And can you help us think about the product evolution? There's been debate in the marketplace about Copilot versus agents. And when I hear Microsoft talk about it, to me it feels more like a continuum, that the Copilots are going to gain more agency and act more like agents on a go-forward basis. How are we going to see that within the product portfolio?

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Got it. I'm going to sneak in just one last question on margins. What we've seen throughout FY25 thus far is as more Gen AI comes online, we're seeing pressures on gross margins, and I guess more cloud come online. But you've been able to offset a lot of that with OpEx efficiencies. Is that a paradigm we could see on a go-forward basis? And to what extent is Microsoft utilizing the technologies themselves, utilizing Gen AI, enabling to drive more of that OpEx efficiency?

Question: Keith Weiss - Morgan Stanley & Co. LLC - Analyst : Outstanding. Amy, thank you so much for joining us. That was a fascinating conversation.