Microsoft Corp at UBS Global Technology and AI Conference Summary

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

Question: Karl Keirstead - UBS AG - Analyst : <_ALACRA_META_ABSTRACT>Yeah. Rajesh, when I went online to look at all the parts of Microsoft that report up to you, it took me a little while because there are so many. But I summed up the revenue stream. It was a very, very large number. So a very big part of Microsoft's portfolio sums up to this gentleman. Can you talk a little bit about what some of the common threads are between the different parts of the portfolio that report into you?

Question: Karl Keirstead - UBS AG - Analyst : Got it. That makes sense. I think the -- there are several areas we're going to talk about. But clearly, one of the largest pieces is the M365, Office 365 portfolio, where it's still amazing to me that that business, as large as it is and as ubiquitous a product it is, is still growing by 15%. Amy gave some good stats around seat growth and ARPU growth. But maybe you could just describe a little bit about the underlying growth drivers to get to that 15%. What's really behind the numbers, Rajesh, in a way that might help us get confidence in the durability of, let's say, a teens growth rate?

Question: Karl Keirstead - UBS AG - Analyst : We'll talk about a few of those things but maybe let's start with the seat side. I think in the most recent quarter, you guys announced 6% seat growth. Again, still amazing, given the scale of that business. Obviously, investors for all SaaS businesses are worried about headcount cuts. Now, the pace at which that seat growth is declining, to me, speaks more to just scale and maturity. I don't really see any strong evidence that there's an AI-induced seat pressure in that number yet. Do you mind opining a little bit on that dynamic?

Question: Karl Keirstead - UBS AG - Analyst : Yeah. And then, on the ARPU lift coming from customers embracing M365 and, in particular, E5, how far into that opportunity, Rajesh, are we? If you could remind the audience: Is that still a security-led decision, given the number of security features you're putting in E5?

Question: Karl Keirstead - UBS AG - Analyst : Got it. Rajesh, you mentioned that, now, M365 Copilot might rank behind the E5 adoption as key driver of ARPU growth. Given the importance of that, let's talk a little bit about that. (multiple speakers) Microsoft obviously hasn't yet -- at least, maybe someday you will -- give a metric on Copilot, such as seat growth, et cetera. What's your advice to the audience, in terms of what we on the outside can monitor to get some sense of the traction that Copilot is having? Is it more anecdotal comments ranking it as a key driver of ARPU? Is that it? Or is there anything else, Rajesh, you recommend we watch for?

Question: Karl Keirstead - UBS AG - Analyst : Okay. That usage improvement, I can tell you -- I don't think you were in the audience but maybe some Microsoft members were -- I did a panel this morning with a couple of the lead IT executives at UBS. As you know better than anybody, we've become a very large Copilot customer. So I asked our executives this question. I think the stuff they shared with me was that UBS employee Copilot usage is up something, like, 9x on a year-over-year basis. That's a testimony to what you're describing, in terms of usage improvement.

Question: Karl Keirstead - UBS AG - Analyst : Okay. Is there anything Microsoft can do to help large Copilot customers, like UBS, drive usage? How is Microsoft helping us get there?

Question: Karl Keirstead - UBS AG - Analyst : Rajesh, in terms of other drivers that might -- the catalyst for unlock needs to come from your partners, not from Microsoft, is the model performance. I think a lot of us listened to Sam Altman a couple of weeks back in a pod he did, where he was actually almost admitting that OpenAI needs to make the models even better as an unlock to get more people using AI applications like Copilot. Where do you think we are on the model evolution? Do we need to wait essentially for GPT-6 to get the next big step-function improvement in Copilot that would then drive even more usage? How dependent do you think the usage trajectory is on underlying model performance?

Question: Karl Keirstead - UBS AG - Analyst : Let's press maybe a little bit on the enterprise Agentic adoption, which you're describing as some interesting things coming that could be an unlock. Rajesh, we do talk to some people who are more at the skeptical end of the spectrum, where they say that it's going to be a long haul to get companies really embracing agents, especially agents acting relatively autonomously. You sound a lot more optimistic. What's the gap here that gives you that confidence? Where do you think, generally, enterprises are in investing heavily in Agentic apps?

Question: Karl Keirstead - UBS AG - Analyst : Okay. That's exciting. Let me ask you a couple of more questions about Copilot, then we'll move on to other parts of your portfolio. One of the interesting announcements that Microsoft made recently was that, well, Copilot has, to date, been run largely on OpenAI models. You announced a partnership where customers can access essentially an Anthropic version of Copilot. Can you describe that decision? What's the thinking behind that?

Question: Karl Keirstead - UBS AG - Analyst : Okay. Last one I want to ask you on Copilot is around competition. I'm sure when you and the leadership team launched M365 Copilot, you were under no illusion that you would have that market to yourself. It's always competitive in every corner of the software space. But one of your key partners, OpenAI, now is trying to scale into their targets, partly on the back of ChatGPT for enterprise, which many organizations might use alongside Copilot; maybe in some cases, instead of. Google with Gemini, now, is pushing Gemini for enterprise. So getting a little bit more competitive. What are your thoughts, Rajesh, on the ability of Microsoft to stay ahead of those two rivals, in particular?

Question: Karl Keirstead - UBS AG - Analyst : Yeah. Rajesh, I had so many other questions on other parts of your portfolio like Teams and Windows that I don't even have time for. But I noticed we have two minutes left and I do want to get to one last one that I know is of interest to this group. That is the compute capacity. Microsoft obviously needs to stand up an enormous amount of compute capacity for multiple constituents. You've obviously got partners like OpenAI that have demands on you. You've got enterprise customers like UBS that, over time, if not today, need Azure-based compute capacity.

Question: Karl Keirstead - UBS AG - Analyst : But this conversation is about, really, Microsoft's first-party applications because you need to ensure that the Copilot and Agentic AI experience is robust. You need to make sure that you've got enough compute capacity to serve your first-party apps. The question is: How big a constraint is that? How big of a problem is it, given that Microsoft, as Amy described to all of us, is very compute-constrained, right now? How do you ensure, Rajesh, that you knock on Amy's door and make sure that she's carving out sufficient compute for your business?

Question: Karl Keirstead - UBS AG - Analyst : Got it. Okay. I think that's all the time we have. Rajesh, I learned a lot. Thank you. I'm very proud to work for what's now become a pretty significant Microsoft Copilot and Azure customer in --

Question: Karl Keirstead - UBS AG - Analyst : Thank you. Thank you so much.