00:00Let's just start with your top line reaction to these results. Yeah, look, thanks so much for having me. Look,
00:06I think these were fantastic results. You know, obviously we're going to wait and see on the guide. We're going
00:10to wait and see on CapEx and commentary there. But they crossed Azure. You know, I think people were expecting
00:17a 40 percent number and they did 43 percent constant currency. You know, you actually had CapEx be a little
00:22lighter than maybe feared in the quarter. And, you know, we'll see how they guide CapEx for FY27. And, you
00:29know, one thing that
00:29maybe got hidden in a lot of this is their office copilot numbers. You know, they had record office copilot
00:36ads. They added 10 million office copilot users this quarter, which is double the amount they added last quarter. So,
00:42so far all around, I think seems like a very strong quarter to me. A little surprised by the immediate
00:47reaction, but we'll see how the call goes. Yeah. What do you make of just Microsoft's approach to CapEx? I
00:53know we're going to hear more in the call. But last quarter, they said they expected to spend roughly, you
00:57know, $190 billion in
00:59CapEx in the year, but we didn't see a ton of that spending already. What do you make of that
01:05strategy as it compares to the other hyperscalers? Yeah, look, I think they're going after the strategy. They recognize they
01:11made a mistake in the past by kind of pumping the brakes on CapEx and, you know, they lost some
01:15incremental business or had to work with third party vendors as a result. And so I think they're going to
01:21err on the side of overbuilding versus underbuilding, especially because they have the ability to bring all that third party
01:26capacity back in house. You know, it might be kind of a seasonality piece.
01:29of why maybe CapEx was a little bit lighter than we would have expected. But we're watching very closely what
01:35CapEx for FY27 will look like. I think the streets at 190. I'm at 230 billion fully burdened, including capital
01:43leases. So we'll see where they kind of end up. But I think we're going to see very high growth
01:48in CapEx for next year. Well, yeah. And it's kind of interesting, too. And I'd be curious to see when
01:53we get to the conference call how much they're willing to put their cards on the table.
01:57But when we talk about the annualized pace that we've seen, even with the slight miss today or dismissed expectations
02:03on the downside, you're still tracking in that 190 to 200 billion dollar range, if that actually sticks here.
02:10Is there a case to be made, though, about when we talk about the computing capacity and all the things
02:15of how this all folds into Azure and beyond, that even if there isn't this sort of a holy grail
02:21of AI, ROI that everybody's looking for,
02:23that for Microsoft specifically as a company, this works out in their favor one way or the other?
02:29I think that's exactly right. They have enough like stock gaps and the like that they're in a good situation
02:35that if we ever hit a point of which we collectively have overbuilt capacity.
02:39And I think everyone's expecting that to happen at some point. That's what happens when, you know, the largest hyperscalers
02:44are spending combined the GDP of Sweden.
02:46And then maybe that number is going to go even higher on physical CapEx. At some point, we will overbuild.
02:51And I think with Microsoft, because remember, they have so many third party cloud deals with OCI, with CoreWeave, with
02:58Nebius, with a lot of others.
02:59They have expressed publicly their desire to bring that back all in-house over time.
03:04And so if we ever hit that point, I would expect to see more of that third party capacity going
03:09back in-house.
03:10Not to mention, you know, a lot of the capacity they're building out is not just to support Azure, as
03:14you kind of hinted at,
03:15but it's to support these first party AI applications, whether it's GitHub Copilot, Office Copilot, Security Copilot, and there's a
03:22lot more to come.
03:23So I think Microsoft is in a unique position from that, David's point.
03:26They got an interesting boost in the quarter, obviously, from their investment in OpenAI.
03:32And I'm curious, you know, is, I don't want this to be too loaded of a question, but does their
03:37investment and relationship with OpenAI at any point in your view
03:41become a little bit more of a liability and less additive to their bottom line?
03:49Yeah, look, I think the point at which it was viewed as a liability was maybe three, four months ago.
03:53But you've seen them work very closely with Anthropic as well.
03:56And, in fact, that was one of the reasons you saw kind of a one-time beat on EPS, even
04:00stripping that out.
04:01They still would have beaten in the quarter.
04:03But, you know, the Anthropic market valuation has been marked up.
04:06But, like, I think importantly, Microsoft has embraced multimodality.
04:09They've built all their AI applications in such a manner that it can work with OpenAI and Anthropic and OpenSource
04:15and whatever have you.
04:16And they're definitely leaning into that.
04:18I mean, you've seen Satya really embrace the concept of distillation, embrace the concept of multimodality,
04:23especially as we're going through this era where enterprises are trying to figure out how do they, you know, maximize
04:29their token budgets,
04:30you know, after we were kind of going through that era of token maxing where things were kind of off
04:34the charts.
04:35At the same time, they do still have the perpetual right, or not perpetual, but until 2032, the IP rights
04:41to OpenAI,
04:43which means that they can build their own fine-tuned or domain-specific models, leveraging that and not have to
04:48eat the margin,
04:49not have to spend additional capex for specifically that model development.
04:52I think that puts them in a really good position from a model standpoint, that they don't have to have
04:56their own frontier model,
04:58because to a certain extent, OpenAI is their frontier model.
05:01You know, speaking of enterprise budgets, their Microsoft 365 co-pilot reached over 30 million paid seats.
05:09How sticky is that business?
05:13Look, I think it's only going to get stickier, right?
05:16A lot of that maybe a year ago was a lot more experimental and a lot of pilots out there.
05:22I think ever since Cynthia stepped back into, like, the product side back in November,
05:27we've seen meaningfully improved customer feedback to Office co-pilot, and I think it's only going to improve from here.
05:34And so as you get greater adoption, you get greater usage, you get greater customer feedback,
05:39I think the stickiness of that product is going to improve, and it's going to keep customers, not locked in,
05:44but, like, you know, keep customers using the entire Office suite, whereas that was a worry
05:49when Anthropic first announced co-work.
05:53Is this going to start to chip away at that?
05:55And so far, the answer to that seems no.
05:57If anything, you're seeing Microsoft actually integrate co-work as part of the Office suite now.
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