Microsoft (NASDAQ:MSFT) reported first-quarter financial results on Wednesday. The transcript from the company’s first-quarter earnings call has been provided below.
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View the webcast at https://www.microsoft.com/en-us/investor/events/fy-2027/earnings-fy-2027-q1
Summary
Microsoft reported a strong start to FY27 with revenue of $92.3 billion, up 19%, driven by robust demand for Microsoft Cloud, which saw a 30% year-over-year growth.
The company maintained a significant strategic focus on AI development, particularly through the expansion of Copilot, which has seen user growth and larger deployments, such as Volkswagen’s 330,000 employees.
Azure revenue increased 48%, supported by Foundry and improved CPU monetization, despite some capacity delays.
Microsoft is expanding its infrastructure with 24 new data centers and optimizing existing capacity for better efficiency.
The outlook for Q2 includes expected revenue between $96 and $97.1 billion, with Azure growth projected at 49% to 50% in constant currency.
Full Transcript
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 star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jonathan Nielsen, Vice President of Investor Relations.
Jonathan Nielsen (Vice President of Investor Relations)
Good afternoon and thank you for joining us today. On the call Satya Nadella, Chairman and Chief Executive Officer, Amy Hood, Chief Financial Officer, Alice Joller, Chief Accounting Officer, and Brian Defoe, Deputy General Counsel and Corporate Secretary. On the Microsoft Investor Relations site you can find our earnings press release and Financial Summary Slide Deck, which is intended to supplement our prepared remarks during today’s call and provides the reconciliation of differences between GAAP and non-GAAP financial measures.
More detailed Outlook slides will be available on the Microsoft Investor Relations website when we provide Outlook commentary on today’s call. On this call we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered 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 underlying business performed excluding the effect of foreign currency rate valuations. Where growth rates are in constant currency, we will refer to the growth rate only. We’ll post our prepared remarks to our website immediately following the call until the complete transcript is available. Today’s call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript and in any future use of the recording.
You can replay the call and view the transcript on the Microsoft Investor Relations website. During this call we will be making forward-looking statements which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today’s earnings press release, in the comments made during this conference call, and the Risk Factors section of our Form 10-K, Forms 10-Q and other reports and filings with the Securities and Exchange Commission.
We do not undertake any duty to update any forward-looking statement and with that I’ll turn the call over to Satya.
Satya Nadella (Chairman and Chief Executive Officer)
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 to date this quarter, bringing together chat, cowork, 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 have 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 Capital, Gemini, HCLTech, Hitachi, Tris Financial, and the 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, New South Wales Health Department, and Zeiss. Our business model is expanding from per-seat subscriptions to include consumption, expanding our TAM and ARPU.
The subscription brings increasingly capable everyday intelligence to every user, typically IT-funded, 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 a third of all PRs on the platform. We are very hard at work on reliability as agentic activity on GitHub. At Universe this morning, we shared how we are expanding capacity and rebuilding the core Git architecture. 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 at 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. GitHub 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 SaaS factory. This quarter, we introduced new Copilot skills across Dynamics 365, which enable customers to access CRM and ERP capabilities directly in the flow of work. In recruiting, more than 10 million members use our LinkedIn AI-powered job search daily, and 25,000 customers are using our AgentIQ hiring solutions. Recruiters using Hiring Assistant are finding interview-quality applicants 33% faster while reviewing 83% fewer profiles to find a qualified match.
In healthcare, we automated million patient encounters this quarter, up 70% year over year, helping clinicians spend less time on administrative work and more time with patients. Ten providers, including Advocate Health, Mass General Brigham, Mercy, Intermountain Health, and others, have used our solutions to document over 1 million encounters each since the beginning of the calendar year. And in science, our teams are working with customers to use Discovery to accelerate scientific process. A great example is Saint-Gobain, which used Discovery to accelerate the development of low-carbon construction materials.
Underneath our first-party agentic experiences 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 OpenAI directly benefited in the last quarter with big advances in OpenAI models, and when you couple this with our model choice built into Foundry, customers are able to build solutions optimizing across quality, cost, 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 code scanner at 18% lower cost per scan.
MAI Transcribe is the most accurate and cheapest transcription model in the world, supporting Dragon Copilot’s multilingual workflow. MAI Code Flash had 3 million 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 in latency and quality. Over 4,000 customers, including Atos, Equinor, and RBI, have already used it in the first months since its release.
And we recently completed pre-training MAI Base 2, which outperforms other open-weight models we tested with 4 to 12 times greater training compute efficiency. This base model will be used in upcoming MAI models across Thinking, Code, and Cyber. Beyond models, we are making the harness behind our own Copilot experiences 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 their 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 unstructured data. Customers are also rapidly deploying our AI-optimized databases, including PostgreSQL, SQL DB Hyperscale, and Cosmos DB, to give agents fast, secure access to the data and context they need.
PostgreSQL growth accelerated for the fourth consecutive quarter, and the number of PostgreSQL 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. WorkIQ makes this context available to every agentic workload, and with Microsoft IQ, we’re bringing together WorkIQ, Fabric IQ, and Foundry IQ—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 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 systems, security becomes even more critical. Our approach is to separate intelligence from authority, enforcing entity 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, and Cellentis.
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 5 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 five continents this quarter, and we are bringing capacity online faster, reducing dock lead times by about 20% quarter over quarter for new GB3 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, systems, software, and models. For example, we increased the throughput for Copilot workloads by over 50% quarter over quarter. We continue to scale our fleet with the latest innovations from NVIDIA and AMD alongside our own Maia systems. We have docked our first NVIDIA Rubin GPUs and are very excited about it. Maia 200 is already delivering up to 1.7 times more tokens per watt across the AI experiences in Teams and Copilot, and Maia 300 will drive further gains, delivering 40% more tokens per watt compared to the leading GPU-based systems. Our growth extends beyond GPUs. We continue to see strong adoption of our cloud-native Cobalt CPUs, improving price-performance for general-purpose workloads. All up, Azure growth was broad-based across both enterprise and small and medium business segments and spanning both core cloud services and AI infrastructure.
Finally, let me turn to Devices and Consumer. In Windows, we are executing on our vision to bring hybrid intelligence to every desk and every home, making every PC the secure agent box. As more capable models run locally, we see an opportunity to make it more intelligent, unmetered. We are working with the broader hardware ecosystem to bring these capabilities to a new generation of PCs across AMD’s Ryzen AI 400 series, Intel Core Ultra Series 3, Qualcomm Snapdragon 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 so agents can work with secure boundaries on-device. We introduced 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 OpenAI, Codex, Anthropic, and Meta Muse 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 we 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 (Chief Financial Officer)
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 per our investment in OpenAI, NFX 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 from our investments in OpenAI, other income and expense was negative $234 million, slightly lower than expected.
Capital expenditures were $5.2 billion as some third-party capacity deliveries we expected in Q1 were delayed. Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, 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 in CapEx at the time of lease commencement, and cash paid for PP&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 and 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, up 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 3P 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 3P GPU lease deliveries, our own capacity buildouts, 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-period 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 M365 E3 and standalone SKUs. We continue to evolve our sales motions to balance those more traditional SKU per-seat rhythm with the newer premium E7, M365 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 was driven by install 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 lapped the benefit from product launches in the prior year, partially offset by a greater mix of contracts that carry higher in-period revenue recognition.
Industry Solutions Cloud revenue increased 10% with growth in Dynamics 365 and LinkedIn Talent Solutions, though booking trends continued to moderate. 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. For this 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 mix shift 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 third-party content and Xbox Game Pass, partially offset by growth in first-party content. 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 drawdowns by OEM and channel partners, and weaker PC market demand. Inventory levels remain elevated. Segment gross margin dollars were relatively unchanged year 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 a U.S. 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, or growth of 24% to 25%. In commercial bookings, we expect healthy growth in our commercial sales motions, though results will be impacted by the significant Azure commitments 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 3P GPU-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-year comparable that included accelerating growth in the second half. In M365 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 standalone 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. M365 consumer cloud revenue should grow in the low teens, down sequentially as 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-period 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. 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 in 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. Search and advertising revenue ex-TAC growth should be in the low double digits, driven by consistent trends in rate and volume, with overall search and advertising revenue expected to grow at a similar rate. In Xbox content and services, we expect revenue growth to be in the mid- to high-single digits, up sequentially, driven by the timing of content launches across both third and first 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. Windows 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 rate of potential outcomes remains wider than normal.
We expect these trends to continue through the rest of the fiscal year. Therefore, at a total company level, revenue should be between $96 and $97.1 billion, or growth of 18% to 19%. We expect COGS of $32.7 to $32.9 billion, or growth of 26% to 27%, and operating expense of $18.5 to $18.6 billion, 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 volunteer offer.
Operating margins should be down slightly year over year, including any impact from our investments in OpenAI. Other income and expense is 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 approximately $170 billion. Due to the 3P 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 3P 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 remain free cash flow positive in FY27. 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 are off to a strong start to FY27 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 (Vice President of Investor Relations)
Thanks, Amy. We’ll now move over to Q&A. Out of respect for others on the call, we request that 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 star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, as we poll for questions. And our first question comes from the line of Adam Wood with Morgan Stanley.
Please proceed.
Adam Wood (Analyst at Morgan Stanley)
Hi. Thanks so much. Alongside lower-than-expected capex and the better cloud gross margins sequentially, can I ask, as incremental AI capacity comes online, what do you see as likely to be the more important driver of returns over the next few years: improving utilization and unit costs within Azure, or your ability to monetize more layers of each workload across Fabric, Foundry, and Copilot?
Satya Nadella (Chairman and Chief Executive Officer)
Thanks for the question, Adam. I’d say all of the above, but I think the way we’re coming at this is we have one pool and we want to get the pool to be as efficient and fungible. That’s sort of the place where, if I think about all of the physics of how we’re building out the data centers, all of the operational rigor with which we can bring up the capacity, and then of course how 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 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 spans both unstructured and structured. Of course it uses a Postgres database in Azure. And then, by the way, all the agentic work is registered in the Agent 365 and Perception manages the security of it. 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 is the leverage going to come from—it’s not going to come from any one, it’s going to come from every one of them, and it compounds when we work them across. I think that’s.
Amy Hood (Chief Financial Officer)
And Adam, I’m sorry if we missed the front half of your question. I think we at least caught the back half.
Jonathan Nielsen (Vice President of Investor Relations)
Great, thanks, Adam.
Adam Wood (Analyst at Morgan Stanley)
Yeah, absolutely. It’s very helpful.
Jonathan Nielsen (Vice President of Investor Relations)
Thank you, operator. Next question please.
OPERATOR
The next question comes from the line of Carl Kirsted with UBS. Please proceed.
Carl Kirsted (Analyst at UBS)
Okay, thank you. Amy and Satya, 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 that capacity.
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