Earnings Season Recap #23

This issue covers the latest trends and results from several of the world’s largest companies such as Amazon, Visa, Meta, Alphabet, and Microsoft. Generative AI is a recurring theme and seems to be a primary focus area for all the large tech companies. Read our gathered quotes to stay up-to-date with the latest trends.

Consumer spending trends, the long-term vision for AWS, storage and fulfillment progressions, the advertising opportunity, and Amazon’s investments in generative AI.

Revenue +9%
*Online stores 0%
*Physical stores +7%
*Third party sellers +18%
*Subscription services +15%
*Advertising +21%
*AWS +16%
EBIT +30%
*margin 3.7% (3.2)

-> Consumers are getting more price sensitive: For the first quarter, our worldwide net sales were $127.4 billion, up 9% year-over-year, or 11% excluding approximately 210 basis points of unfavorable impact from changes in foreign exchange rates. This was above the top end of our guidance range. Overall, we are pleased with the growth that we're seeing in worldwide stores businesses, including quarter-over-quarter revenue acceleration in the International segment, which is helped by easing macroeconomic pressures in Europe. Across the geographies we serve, customers appreciate our focus on staying sharp on pricing, having strong selection and easier convenience, including delivery speeds, which continued to improve throughout the first quarter. The uncertain economic environment and ongoing inflationary pressures continue to be a factor, and we believe it's continuing to drive cautious spending across consumers. This means our customers are looking to stretch their budgets further and are focused on value. We saw moderate spending on discretionary categories as well as shifts to lower-priced items and healthy demand in everyday essentials, such as consumables and beauty. – Brian Olsavsky, CFO (02:21)

-> Third party-sellers are becoming a larger slice of the pie: Third-party sellers, including businesses who elect to utilize Fulfillment by Amazon for their storage and shipping services are a key contributor to the selection offered to customers. We also continued to invest meaningfully in brand protection efforts, including industry-leading technology so that sellers can trust we will provide a great selling experience free from bad actors. Sellers comprise 59% of overall unit sales in Q1, up from 55% 1 year ago. We also saw strong engagement in our advertising services with revenue up 23% year-over-year, excluding the impact from changes in foreign exchange rates. In particular, our sponsored product and brand offerings remain a key driver of growth as we work with advertisers to help customers make more informed purchase decisions. Our teams remain focused on delivering performance through our comprehensive and flexible measurement capabilities along with insights that allow advertisers the ability to measure the return on their advertising spend and help them grow their business. – Brian Olsavsky, CFO (03:40)

-> AWS; customers are looking for cost savings: In AWS, net sales were $21.4 billion in the first quarter, up 16% year-over-year and representing an annualized sales run rate of more than $85 billion. Given the ongoing economic uncertainty, customers of all sizes in all industries continue to look for cost savings across their businesses, similar to what you've seen us doing at Amazon. As expected, customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter. And we are seeing these optimizations continue into the second quarter with April revenue growth rates about 500 basis points lower than what we saw in Q1. As a reminder, we're not trying to optimize for any one quarter or year. We're working to build customer relationships and a business that will outlast all of us. Therefore, our AWS sales and support teams continue to spend much of their time helping customers optimize their AWS spend so that they can better weather this uncertain economy. This customer orientation is built into our DNA and how we think about our customer relationships and business over the long term. – Brian Olsavsky, CFO (04:50)

-> Operating cash flow and CapEx guidance: Turning to cash flows. We remain focused on building long-term sustainable growth in free cash flow, including our efforts towards a strong cash flow accretive working capital cycle. Our operating cash flow for the trailing 12 months ended March 31 increased to $54.3 billion, up 38% versus the comparable period year-over-year. Besides the cash benefit of improved profitability year-over-year, we've also seen supply chains easing up and making progress to improve our inventory purchasing and payment cycles, which in turn has a positive impact on working capital. Now let's turn to our capital investments. We define our capital investments as the combination of CapEx plus equipment finance leases. For the full year 2023, we expect capital investments to be lower than our $59 billion investment level in 2022, primarily driven by an expected year-over-year decrease in fulfillment network investments. We're continuing to invest in infrastructure to support AWS customer needs, including investments to support large language models and generative AI. – Brian Olsavsky, CFO (08:05)

-> Storage and fulfillment progressions: In our storage business, we've been very focused on reducing our cost to serve in our fulfillment network. As we shared in the past, given the unexpected surge in demand during the pandemic, we doubled the size of our fulfillment center footprint and largely built a transportation network the size of UPS in a couple of years. This ended up substantially changing the number of nodes and connections in our fulfillment network. And as a result, we spent the last several months not only redesigning dozens of processes to drive better productivity but also re-architecting our placement approach and larger fulfillment center footprint to move from a national fulfillment network in the U.S. to a regional one. We've created 8 interconnected regions in geographic areas with each of these regions having broad relevant selection to operate in a largely self-sufficient way while still being able to ship nationally when necessary. We just recently completed this rollout and are quite bullish on the early results. Not surprisingly, shorter travel distances means lower cost to serve and customers getting their orders faster. And while on the topic of delivery speed, we're really excited about our progress in providing customers more 1-day and same-day deliveries and are on track to have our fastest Prime delivery speeds ever in 2023. – Andrew Jassy, CEO (09:38)

-> The enormous advertising opportunity: On the advertising side, we're continuing to buck wider advertising trends and deliver robust growth. I think there are a few reasons for it. First, even in difficult economies, most people still shop. And with the largest e-commerce shopping venue, we have a lot of customers that companies seek to reach. That, coupled with our very substantial investment in machine learning to make sure customers see relevant ads when they're looking for various items, have meant that these advertisements have performed unusually well for brands, which makes them want to advertise in Amazon. It's also worth noting that we're still very early in our efforts to find a way to thoughtfully place ads in our broader video, live sports, audio and grocery properties. We have a lot of upside still in advertising. In AWS, what we're seeing is enterprises continuing to be cautious in their spending in this uncertain time. Customers are looking for ways to save money however they can right now. – Andrew Jassy, CEO (10:47)

-> Investing in generative AI and LLMs: I think when you think about machine learning, it's useful to remember that we have had a pretty substantial investment in machine learning for 25-plus years in Amazon. It's deeply ingrained in virtually everything we do. It fuels our personalized e-commerce recommendations. It drives the pick pass in our fulfillment centers. We have it in our Go stores. We have it in our Prime Air, our drones. It's obviously in Alexa. And then AWS, we have 25-plus machine learning services where we have the broadest machine learning functionality and customer base by a fair bit. It’s deeply ingrained in our heritage. I think if you look at what's happened over the last 9 months or so is that these large language models and generative AI capabilities, they've been around for a while, but frankly, the models were not that compelling before about 6, 9 months ago. And they have gotten so much bigger and so much better much more quickly that it really presents a remarkable opportunity to transform virtually every customer experience that exists and many that don't exist that weren't really that easily made possible before. And so it's very early days in that space, but probably not surprisingly. We've been investing in building our own large language models for several years, and we have a very large investment across the company. [...] And if you look at the really significant leading large language models, they take many years to build and many billions of dollars to build. And there will be a small number of companies that want to invest that time and money, and we'll be one of them in Amazon. – Andrew Jassy, CEO (24:35)

-> ChatGPT and CodeWhisperer: And then that third layer are really the applications that are going to be built on top of those large language models. So Chat GPT is a good example of an application that's being built. We'll build some of those applications ourselves. We think one of the most compelling applications that are going to be built in generative AI have to do with making developers much more effective with coding assistance. And so we built something called CodeWhisperer, which we just announced the general availability for, where developers can plug in a natural language, something like - I want to build a video hosting website. And CodeWhisperer will bring up the code you need and the developer needs to employ and put that in production, which is really compelling. If you think about how much more productive developers are going to be and what they're going to spend their time on instead of rewriting code that is nitty and it takes time, I think it's a big deal. – Andrew Jassy, CEO (28:45)

The consumer payments flywheel, opportunities in Latin America, generative AI, and about how Visa still believes it’s early days for blockchain and crypto.

Revenue +11%
*Payments Volume +10%
*Cross-Border Volume Total +24%
*Processed Transactions +12%
Net income +17%
*margin 54% (50)
EPS +20%

-> Financial development: Our financial performance in the second quarter of 2023 was very strong with net revenues up 11% year-over-year. Non-GAAP EPS was $2.09, up 17%. Overall, our global quarterly payments volume was up 13% year-over-year, excluding Russia and China. In the U.S., quarterly payments volume was up 10%. Outside the U.S., excluding China and Russia, payments volume was up 17.5%. Excluding intra-Europe, total cross-border volume remained strong, up 32%, with cross-border travel volume at 130% of 2019. Process transactions grew 12% year-over-year. We remain confident that our strategy is focused on the right opportunities. In the second quarter, this strategy continued to deliver, driving strong growth through consumer payments, new flows and value-added services. – Ryan McInerney, CEO (01:35)

-> Consumer payments: the long runway and flywheel: Consumer payments remain a massive opportunity for Visa. Even with all the digitization over the last several decades, there is still a tremendous amount of cash and check spent globally. There is a very long runway for growth in this business. In consumer payments, the flywheel has three parts: grow credentials, more buyers on the network; grow acceptance, more sellers on the network; and drive engagement, more transactions. We continue to grow credentials, up 7% year-over-year through December and 11% excluding Russia. And we now have more than 6 billion tokenized credentials, up nearly 90% from last year, excluding Russia. We continue to grow acceptance with over 100 million merchant locations worldwide. – Ryan McInerney, CEO (02:32)

-> The big opportunity in Latin America: From December 2019 to 2022, we have grown our credentials by 1.5x and our merchant locations by almost 2.5x. Over that time period, the percentage of our total volume that is point-of-sale payments versus getting cash out of an ATM has grown from 46% to 59%, demonstrating the cash digitization happening in the region. In Colombia, we're pleased to partner on a co-brand with LATAM Airlines, the largest airline in Latin America. We continued to strengthen our position in Brazil, renewing our partnership with Itau, the largest private bank in the country. We also announced a new strategic deal with Banco de Brasilia, that expands upon our existing agreement including a popular credit program issued in partnership with one of Brazil's leading football teams with over 40 million fans. Also in Brazil, WhatsApp had already launched peer-to-peer service to facilitate money transfer using Visa Direct, and recently they announced they will be offering payments from consumers to small businesses as well. – Ryan McInerney, CEO (07:55)

-> Payment volume and capital allocation: U.S. payments volume was up 10% year-over-year, again helped by lapping the Omicron impact last year. Relative to 2019, U.S. payments volume was up 58%, compounding at 12% over the pandemic year. The cross-border travel recovery continues at the pace we expected, indexing at 130 versus four years ago, a 5 point improvement from Q1. As expected, the rebound in Asia is now the primary driver. Travel in and out of Asia reached 2019 levels in the quarter and travel into the U.S. was very close. We believe there is more recovery to come. Travel from Mainland China has mostly benefited other parts of Asia so far, but early bookings suggest strong interest in Europe as the summer approaches. Our new flows and value-added services businesses continued to power ahead. Excluding Russia and in constant dollars, both businesses grew revenues at or about 20%. In the second quarter of fiscal year '23, we bought back approximately $2.2 billion in stock at an average cost of $222.09 and distributed $941 million in dividends. – Vasant Prabhu, CFO (22:02)

-> Fuel prices and consumer spending trends: Most notably, starting in March and through the summer, we will be lapping the peaks in fuel prices last year. In March 2023, fuel prices were nearly 20% lower than last year. In 2022, fuel prices continued to rise through spring and peaked in June. Also contributing discounting in particular retail goods channels, you've heard various U.S. retailers comment publicly about price cuts they are implementing to clear out inventory or pass on reductions in costs. Across other categories of spend in the U.S., payments volume growth remains strong in services, in particular travel and entertainment. Non-discretionary spend growth in categories like food and drug is also holding up well. Another factor that is the potential drag on U.S. payments volume growth starting in March and through April is the impact of lapping higher tax refunds. Refunds are largely spent in the few weeks post receipt. Based on IRS-reported data through April 14, tax refunds are 11% lower this year. We expect this headwind to a bit as we get into May. – Vasant Prabhu, CFO (24:40)

-> Expected trends for the next quarter: Moving now to our outlook for the third quarter. Growth in domestic payments volumes remained stable around the globe. As we said last quarter, the recovery from COVID is behind us now for domestic volume. Post the Omicron impact from last year in January and February, U.S. domestic volume growth rates have ticked down in March, driven by the factors we discussed earlier. We believe that some of these factors will persist through the third quarter. We are assuming March and April trends will continue in the U.S. for the rest of the quarter. In aggregate, we expect the international growth trajectory remains largely unchanged from the second quarter. On the cross-border front, the travel recovery trend has been steady and generally in line with our expectations so far in fiscal year '23. The cross-border travel index to 2019, excluding intra-Europe, has been improving at a rate of 5 points to 6 points each quarter. We are assuming this trend is sustained through the third quarter. The big driver is recovery in Asia continuing, especially driven by Mainland China. We expect Chinese travel to extend beyond Asia to Europe as we enter the summer. On the cross-border e-commerce front, we're also assuming recent trends continue, adjusted for crypto-related volatility. It is important to note that even as the cross-border business continues to recover, relative to 2019, the year-over-year growth rate will continue to slow down as it has over the past few quarters. – Vasant Prabhu, CFO (33:05)

Main areas for the AI-related work, restructuring and layoffs, capital allocation, and 2023 outlook.

DAP +5%
MAP +5%
Ad Impressions +26%
Avg. Price Per Ad -17%
Revenue +3%
EBIT -15%
*marg. 25% (31)
EPS -19%
Headcount -1%
Buybacks $9B

-> Restructuring and layoffs: So far, we've gone through 2 of the 3 waves of restructuring and layoffs that we have planned for this year in our recruiting and our technical groups. In May, we're going to carry out our third wave across our business groups. And this has been a difficult process, but after this is done, I think we're going to have a much more stable environment for our employees. And then for the rest of the year, I expect us to focus on improving our distributed work model, delivering AI tools to improve productivity and removing unnecessary processes across the company. – Mark Zuckerberg, Founder, Chairman & CEO (02:58)

-> Resharing of Reels has doubled in the last 6 months: Now moving on to our products and business. We're seeing strong engagement growth across our apps and good progress on monetization efficiency, which combined to drive good business results. Reels continues to grow quickly on both Facebook and Instagram. Reels also continue to become more social with people resharing Reels more than 2 billion times every day, doubling over the last 6 months. Reels are also increasing overall app engagement, and we believe that we're gaining share in short-form video, too. – Mark Zuckerberg, Founder, Chairman & CEO (03:35)

-> Two main areas for Meta’s AI work and monetization: Now a key theme that I want to discuss today is AI. I've emphasized for a number of these calls now that there are 2 major technological waves driving our road map: a huge AI wave today and a building metaverse wave for the future. Our AI work comes in 2 main areas: first, the massive recommendations and ranking infrastructure that powers all of our products from Feed to Reels, to our ad system, to our integrity systems and that we've been working on for many, many years; and second, the new generative foundation models that are enabling entirely new classes of products and experiences. Our investment in recommendations and ranking systems has driven a lot of the results that we're seeing today across our discovery engine, reels and ads. Along with surfacing content from friends and family, now more than 20% of content in your Facebook and Instagram Feeds are recommended by AI from people groups or accounts that you don't follow. Across all of Instagram, that's about 40% of the content that you see. Since we launched Reels, AI recommendations have driven a more than 24% increase in time spent on Instagram. Our AI work is also improving monetization. Reels monetization efficiency is up over 30% on Instagram and over 40% on Facebook quarter-over-quarter. Daily revenue from Advantage+ shopping campaigns is up 7x in the last 6 months. – Mark Zuckerberg, Founder, Chairman & CEO (04:05)

-> Click-to-message keeps growing fast: Our work to build out business messaging as the next pillar of our business is making progress, too. I shared last quarter that click-to-message ads reached a $10 billion revenue run rate. And since then, the number of businesses using our other business messaging service, paid messaging on WhatsApp, has grown by 40% quarter-over-quarter. Our success here depends on delivering results for other businesses, and at our scale, that can have macroeconomic effects. We recently did a study with economists at UC Berkeley to understand the impact that our services make, and they concluded that every dollar spent on our ads drives, on average, $3.31 in revenues for our advertisers in the U.S. That means over $400 billion in economic activity annually is linked to supply chains relying on our platforms, supporting more than 3 million jobs. – Mark Zuckerberg, Founder, Chairman & CEO (05:20)

-> The next generation of computing: Now beyond AI, the other major technology wave that we're focused on is the metaverse. A narrative has developed that was somehow moving away from focusing on the metaverse vision, so I just want to say upfront that that's not accurate. We've been focusing on both AI and the metaverse for years now, and we will continue to focus on both. The 2 areas are also related. Breakthrough in computer vision was what enabled us to ship the first stand-alone VR device. Mixed reality is built on a stack of AI technologies for understanding the physical world and blending it with digital objects. Being able to procedurally generate worlds will be important for delivering compelling experiences at scale. And our vision for AR glasses involves an AI-centric operating system that we think will be the basis for the next generation of computing. Metaverse technologies will also help deliver AI as well. For example, embodying AI agents will take advantage of the deep investment that we've made in avatars over the last several years. Building the metaverse is a long-term project, but the rationale for it remains the same, and we remain committed to it. – Mark Zuckerberg, Founder, Chairman & CEO (10:09)

-> Financial development and capital allocation: All comparisons are on a year-over-year basis unless otherwise noted. Q1 total revenue was $28.6 billion, up 3% or 6% on a constant currency basis. Had foreign exchange rates remained constant with Q1 of last year, total revenue would have been about $816 million higher. Q1 total expenses were $21.4 billion, up 10% compared to last year. In terms of the specific line items, cost of revenue increased 2%, driven by infrastructure-related costs that were partially offset by lower Reality Labs cost of goods sold. R&D increased 22%, driven primarily by restructuring charges related to facilities consolidation and severance expenses and head count-related costs from our Reality Labs and Family of Apps segments. Marketing and sales decreased 8% due mainly to lower marketing spend and head count-related expenses. And G&A increased 22% due primarily to restructuring charges related to severance and facilities consolidation expenses and legal-related expenses. [...] First quarter operating income was $7.2 billion, representing a 25% operating margin. [...] Net income was $5.7 billion or $2.20 per share. Capital expenditures, including principal payments on finance leases, were $7.1 billion driven by investments in data centers, servers and network infrastructure. Free cash flow was $6.9 billion, and we repurchased $9.2 billion of our Class A common stock in the first quarter. We ended the quarter with $37.4 billion in cash and marketable securities. – Susan Li, CFO (12:37)

-> 3 billion people now use at least one of Meta’s apps every day: Moving now to our segment results. I'll begin with our Family of Apps segment. Our community across the Family of Apps continues to grow. For the first time, we surpassed 3 billion people using at least 1 of our Family of Apps on a daily basis in March, and approximately 3.8 billion people use at least 1 on a monthly basis. Facebook continues to grow globally as well, and engagement remains strong with DAU and MAU growing sequentially across all regions in the first quarter. Facebook daily active users were 2.04 billion, up 4% or 77 million compared to last year. DAUs represented approximately 68% of the 2.99 billion monthly active users in March. MAUs grew by 53 million or 2% compared to last year. Q1 total Family of Apps revenue was $28.3 billion, up 4% year-over-year, and Q1 Family of Apps ad revenue was $28.1 billion, up 4% or 7% on a constant currency basis. – Susan Li, CFO (15:15)

-> 2023 outlook: We expect second quarter 2023 total revenue to be in the range of $29.5 billion to $32 billion. Our guidance assumes foreign currency headwinds will be less than 1% to year-over-year total revenue growth in the second quarter based on current exchange rates. Turning now to the expense outlook. We anticipate our full year 2023 total expenses will be in the range of $86 million to $90 billion, updated from our prior outlook provided in March. This outlook includes $3 billion to $5 billion of restructuring costs related to facilities consolidation charges and severance and other personnel costs. We continue to expect Reality Labs operating losses to increase year-over-year in 2023. Turning now to the CapEx outlook. We expect capital expenditures to be in the range of $30 billion to $33 billion, unchanged from our prior estimate. This outlook reflects our ongoing build-out of AI capacity to support ads, Feed and Reels, along with an increased investment in capacity for our generative AI initiatives. On to tax. Absent any changes to U.S. tax law, we expect our full year 2023 tax rate percentage to be around 20%. In closing, Q1 was a solid quarter for our business. Our global community continued to grow. We made important progress on our company priorities and improved the efficiency of our operations while strengthening the financial position of the company, which sets us up well to execute on the opportunities ahead. – Susan Li, CFO (23:55)

Key focus areas, Bard and generative AI, the progress of Google Cloud and YouTube, and more.

Revenue +3%
*Google Search & other +2%
*YouTube ads -3%
*Google Network -8%
*Google Cloud +28%
*Other Bets -35%
EBIT -13%
*marg 25% (30)
EPS -5%

-> Three areas of opportunity: Today, I'll give an update on the 2 themes I spoke about last quarter: one, our advancements in AI and how they are driving opportunities in Search and beyond; and two, our efforts to sharpen our focus as a company. Then I'll talk about our momentum in Cloud and close with our progress at YouTube. First, the incredible AI opportunity for consumers, our partners and for our business. I've compared it to the successful transition we made from desktop to mobile computing over a decade ago. Our investments and breakthroughs in AI over the last decade have positioned us well. In our last call, I outlined 3 areas of opportunity: continuing to develop state-of-the-art large language models and make significant improvements across our products to be more helpful to our users; empowering developers, creators and partners with our tools; and enabling organizations of all sizes to utilize and benefit from our AI advances. – Sundar Pichai, CEO & Director (01:58)

-> Bard and generative AI: In March, we introduced our experimental conversational AI service called Bard. We have since added our PaLM model to make it even more powerful. And Bard can now help people with programming and software development tasks, including code generation. Lots more to come. For developers, we have released our PaLM API alongside our new MakerSuite tool. It provides a simple way to access our large language models and begin building new generative AI applications quickly. A number of organizations are using our generative AI large language models across Google Cloud Platform, Google Workspace and our cybersecurity offerings. For years, we've been focused on making Search even more helpful. From Google Lens to multi-search, to visual exploration in Search, immersive view in Maps, Google Translate, to all the language models powering Search today, we have used AI to open up access to knowledge in powerful ways. We'll continue to incorporate generative AI advances to make Search better in a thoughtful and deliberate way. We'll be guided by data and years of experience about what people want and our high standards for quality. And we'll test and iterate as we go because we know that billions of people trust Google to provide the right information. – Sundar Pichai, CEO & Director (03:16)

-> Google Cloud: I'm pleased with the ongoing momentum in Cloud. Our disciplined expansion of our product road map and go-to-market organization has helped to build one of the largest enterprise software companies in the world. We have consistently grown top line revenues and improved annual operating margins, and we continue to do so this quarter. Our growth has come from our deep relationships with large enterprises, a strong partner ecosystem and our product leadership. Over the past 3 years, GCP's annual deal volume has grown nearly 500%, with large deals over $250 million growing more than 300%. Nearly 60% of the world's 1,000 largest companies are Google Cloud customers, and many leading start-ups and millions of small and medium enterprises use Google Cloud. We have also built a strong partner ecosystem. Over the last 4 years, the number of Google Cloud Partner certified practitioners around the world has increased more than 15x. The largest global system integrators have built 13 dedicated practices with Google Cloud compared to 0 when we started. And today, more than 100,000 companies are part of our Google Cloud Partner Advantage program. Our growth is also driven by our product leadership. We are bringing our generative AI advances to our cloud customers across our cloud portfolio. Our PaLM generative AI models and Vertex AI platform are helping Behavox to identify insider threats, Oxbotica to test its autonomous vehicles and Lightricks to quickly develop text-to-image features. – Sundar Pichai, CEO & Director (07:20)

-> Youtube: Turning next to YouTube. Let me start by thanking Susan Wojcicki for her terrific leadership of YouTube for 9 years. She recently transitioned into an advisory role with Alphabet this quarter, with Neal Mohan, a long-time leader at Google and YouTube, becoming the new head of YouTube. Here are a few highlights from the quarter. YouTube Shorts continues to see strong momentum with Creators. Last year, the number of channels that uploaded to Shorts daily grew over 80%. Those posting weekly on Shorts saw the majority of new channel subscribers coming from their Shorts post. The living room remained our fastest-growing screen in 2022 in terms of watch time, and we are seeing growth and momentum internationally. On our subscription business, we rolled out several new updates to YouTube Premium. Premium subscribers can now queue videos on phones and tablets, stream continuously while switching between devices and auto-download recommended videos for off-line viewing. And we have great momentum around YouTube TV and YouTube Primetime channels. We have announced pricing for the NFL Sunday Ticket offering, which will help to drive subscriptions, bring new viewers to YouTube's paid and ad-supported experiences and create new opportunities for Creators. – Sundar Pichai, CEO & Director (10:42)

-> Four focus points for YouTube and ROI benchmark: Creators fuel YouTube's success. Across long form and shorts, music and podcasts, vertical and horizontal, YouTube is where Creators are incentivized to make their best work, which means the best content, more viewers and more opportunities for advertisers. As I said last quarter, our creator ecosystem and multi-format strategy will be key drivers of YouTube's long-term growth. To support this growth, we're focused on, number one, Shorts; number two, engagement on CTV; number three, investing in our subscription offerings; and number four, a longer-term effort to make YouTube more shoppable. First, Shorts. We're seeing strong watch time growth. Monetization is also progressing nicely. People are engaging and converting on ads across Shorts at increasing rates. Number two, connected TV. As Sundar said, we're seeing momentum globally. Viewers love watching YouTube creators and their favorite content on the large screen. Advertisers are leaning in. Zooming out more broadly for a second. Across YouTube, we're helping brands benefit from our expansive reach and drive the profitability they're looking for. In one of our largest marketing mix modeling studies to date, YouTube ROI is 40% higher than linear TV and 34% higher than all other online video, according to a customer analysis from January 2020 to March 2022 of Nielsen Compass ROI benchmarks across 16 countries and $19 billion of total media spend measured. – Philipp Schindler, Chief Business Officer (18:01)

-> Headcount and CapEx outlook: The reported number of employees at the end of the first quarter includes almost all of the employees impacted by the workforce reduction we announced in January. We expect most of the impacted individuals will no longer be reflected in our headcount by the end of the second quarter. In terms of the outlook for head count for the year, as we shared last quarter, we are meaningfully slowing the pace of hiring in 2023 while still investing in priority areas, particularly for top engineering and technical talent. In terms of our investments in AI, we are excited about the creation of Google DeepMind, combining the Brain Team from Google Research with DeepMind, with the goal to accelerate innovation and impact. Beginning in the second quarter of 2023, the costs associated with teams and activities transferred from Google Research will move from Google Services to Google DeepMind within Alphabet's unallocated corporate costs. Finally, as it relates to CapEx, for 2023, we now expect total CapEx to be modestly higher than in 2022. As discussed last quarter, CapEx this year will include a meaningful increase in technical infrastructure versus a decline in office facilities. We expect the pace of investment in both data center construction and servers to step up in the second quarter and continue to increase throughout the year. – Ruth Porat, CFO (29:05)

-> Bard and LLMs will contribute across the board: We have launched Bard as a complementary product to Search. But we'll be bringing LLM experiences more natively into Search as well. I do think, first of all, we'll be rolling it out in an incremental way so that we can test, iterate and innovate. So I think we'll approach it that way. I think overall, I think it can apply to a broad range of queries. I'm excited that it can allow us to better help users in a category of queries, maybe in which there was no right answer and they are more creative, et cetera. So I think those are opportunities. But even in our existing query categories where we get a chance to do some heavy lifting for the users and use AI to better guide them, I think you will see us exploring in those directions as well. It's early days, but I think there's a lot of innovation to come. On the cost side, the cost of compute has always been a consideration for us. And if anything, I think it's something we have developed extensive experience over many, many years. And so for us, it's a nature of habit to constantly drive efficiencies in hardware, software and models across our fleet. And so this is not new. If anything, the sharper the technology curve is, we get excited by it, because I think we have built world-class capabilities in taking that and then driving down cost sequentially and then deploying it at scale across the world. So I think we'll take all that into account in terms of how we drive innovation here. – Sundar Pichai, CEO & Director (35:25)

Key priorities, the collaboration with OpenAI, FY 2024 outlook, and the record-breaking numbers for LinkedIn and gaming.

Revenue +7%
*Prod. & Business +11%
*Intelligent Cloud +16%
*Pers. Computing -9%
*Azure +27%
*LinkedIn +8%
*Xbox C&S +3%
EBIT +10%
*marg 42% (41)
EPS +10%

-> Three key priorities: The Microsoft Cloud delivered over $28 billion in quarterly revenue, up 22% and 25% in constant currency, demonstrating our continued leadership across the tech stack. We continue to focus on 3 priorities: first, helping customers use the breadth and depth of the Microsoft Cloud to get the most value out of their digital spend; second, investing to lead in the new AI wave across our solution areas and expanding our TAM; and third, driving operating leverage, aligning our cost structure with our revenue growth. Now I'll highlight examples of our progress, starting with infrastructure. – Satya Nadella, Chairman & CEO (03:15)

-> Azure and OpenAI: Azure took share as customers continue to choose our ubiquitous computing fabric from cloud to edge, especially as every application becomes AI-powered. We have the most powerful AI infrastructure and is being used by our partner, OpenAI, as well as NVIDIA and leading AI start-ups like Adept and Inflection to train large models. Our Azure OpenAI service brings together advanced models, including ChatGPT and GPT-4 with the enterprise capabilities of Azure. From Coursera and Grammarly to Mercedes-Benz and Shell, we now have more than 2,500 Azure OpenAI service customers, up 10x quarter-over-quarter. Just last week, Epic Systems shared that it was using Azure OpenAI Service to integrate this next generation of AI with its industry-leading EHR software. Azure also powers OpenAI API, and we are pleased to see brands like Shopify and Snap use the API to integrate OpenAI's models. More broadly, we continue to see the world's largest enterprises migrate key workloads to our cloud. Unilever, for example, went all in on Azure this quarter in one of the largest-ever cloud migrations in the consumer goods industry. IKEA Retail, ING Bank, Rabobank, Telstra and Wolverine Worldwide, all use Azure Arc to run Azure services across on-premise, edge and multi-cloud environments. We now have more than 15,000 Azure Arc customers, up over 150% year-over-year. And we are extending our infrastructure to 5G network edge with Azure for Operators. We are the cloud of choice for telcos. And at MWC last month, AT&T, Deutsche Telekom, Singtel and Telefónica all shared how they are using our infrastructure to modernize and monetize their networks. – Satya Nadella, Chairman & CEO (04:05)

-> Microsoft Teams surpassed 300 million users: Teams usage is at an all-time high and surpassed 300 million monthly active users this quarter, and we once again took share across every category from collaboration to chat to meetings to calling as we add value for existing customers, and win new ones like ABN Amro, Jaguar Land Rover, Mattress Firm, Unisys and Vodafone. We announced a new version of Teams that delivers up to 2x faster performance while using 50% less memory so customers can collaborate more efficiently and prepare for experiences like Copilot. Teams is also expanding our TAM. Nearly 60% of our enterprise Teams customers buy Teams Phone, Rooms or Premium. Teams Phone is the undisputed market leader in cloud calling, helping our customers reduce cost with a 3-year ROI of over 140%. Teams Rooms revenue more than doubled year-over-year, and Teams Premium meets enterprise demand for AI-powered features like intelligent recaps now generally available. It's one of our fastest-growing modern-world products ever with thousands of paid customers just 2 months in. With Microsoft Viva, we have created a completely new suite for employee experience. Viva brings together goals, communication, learning, workplace analytics and employee feedback across industries, companies like Dell, Mastercard and SES are using Viva to help their employees thrive. Just last week, we announced Copilot for Viva, offering leaders a new way to build high-performance teams by prioritizing both productivity and employee engagement. And with Viva Sales, we've extended the platform to specific job functions, helping sellers apply large language models to their CRM and Microsoft 365 data so that they can automatically generate content like customer mail. – Satya Nadella, Chairman & CEO (10:08)

-> Record engagement on LinkedIn: We once again saw record engagement as more than 930 million members turned to the professional social network to connect, learn, sell and get hired. Member growth accelerated for the seventh consecutive quarter as we expanded to new audiences. We now have 100 million members in India, up 19%. And as Gen Z entered the workforce, we saw 73% year-over-year increase in the number of student sign-ups. In this persistently tight labor market, LinkedIn Talent Solutions continues to help hirers connect to job seekers and professionals to build the skills they need to access opportunity. Our hiring business took share for the third consecutive quarter. The excitement around AI is creating new opportunities across every function for marketing, sales and finance to software development and security. LinkedIn is increasingly where people are going to learn, discuss and up-level their skills with more than 100 AI courses. And we have introduced new AI-powered features, including writing suggestions for member profiles and job descriptions and collaborative articles. – Satya Nadella, Chairman & CEO (14:30)

-> Market share gains for Bing and Edge: Two months since the launch of new Bing and Edge, we are very encouraged by user feedback and usage patterns. All up, Bing has more than 100 million daily active users. We are winning new customers on Windows and mobile. Daily installs on the Bing mobile app have grown 4x since launch. We are making progress in share gains. Edge took share for the eighth consecutive quarter, and Bing once again grew share in the United States. We continue to innovate with first-of-their-kind AI-powered features, including the ability to set the tone of chat and create images from text prompts powered by DALL-E. Over 200 million images have been created to date, and we see that when people use these new AI features, their engagement with Bing and Edge goes up. As we look towards a future where chat becomes a new way for people to seek information, consumers have real choice in business model and modalities with Azure-powered chat entry points across Bing, Edge, Windows and OpenAI's ChatGPT. We look forward to continuing this journey in what is a generational shift in the largest software category, search. – Satya Nadella, Chairman & CEO (16:08)

-> Gaming; subscriptions revenue and the new AI-platform for developers: We are rapidly executing on our ambition to be the first choice of people to play great games whenever, however and wherever they want. We set third quarter records for monthly active users and monthly active devices. Across our content and services business, we are delivering on our commitment to offer gamers more ways to experience the games they love. Our revenue from subscriptions reached nearly $1 billion this quarter. This quarter, we also brought PC Game Pass to 40 new countries, nearly doubling the number of markets we are available. Great content remains the flywheel behind our growth. We have now surpassed 500 million lifetime unique users across our first-party titles and have never been more excited about our pipeline of games, including the fourth quarter launches of Minecraft Legends and Redfall. In closing, we are focused on continuing to raise the bar on our operational excellence and performance as we innovate to help our customers maximize the value of their existing technology investments and thrive in the new era of AI. In a few weeks' time, we'll hold our Build conference, where we will share how we are building the most powerful AI platform for developers and I encourage you to tune in. I could not be more energized about the opportunities ahead. – Satya Nadella, Chairman & CEO (17:18)

-> Financial development: Our third quarter revenue was $52.9 billion, up 7% and 10% in constant currency. Earnings per share was $2.45 and increased 10% and 14% in constant currency. Our results exceeded expectations, driven by focused execution from our sales teams and partners. In our commercial business, revenue was up 19% in constant currency. We saw better-than-expected renewal strength, including across Microsoft 365, which also benefited Windows commercial given the higher in-period revenue recognition. In Office 365 stand-alone products, we saw improvement in new business growth, while growth trends in EMS and Windows commercial stand-alone products remain consistent with Q2. [...] We have seen share gains in Azure, Dynamics, Teams, Security, Edge and Bing as we continue to focus on delivering high value as well as new innovative solutions to our customers, including next-generation AI capabilities. Commercial bookings increased 11% and 12% in constant currency on a strong prior year comparable with a declining expiry base and 3 points of unfavorable impact from the inclusion of Nuance in the prior year. – Amy Hood, CFO (18:41)

-> FY 2024 outlook: Now moving to our Q4 outlook, which unless specifically noted otherwise, is on a U.S. dollar basis. My commentary for the next quarter and FY '24 does not include any impact from Activision as we continue to work towards closing in fiscal year 2023, subject to obtaining required regulatory approvals. Now to FX. Based on current rates, we expect FX to decrease total revenue growth by approximately 2 points with no impact to COGS or operating expense growth. Within segments, we anticipate roughly 2 points of negative FX impact on revenue growth in Productivity and Business Processes and Intelligent Cloud and roughly 1 point in More Personal Computing. Overall, our outlook has many of the trends we saw in Q3 continue through Q4. In our largest quarter of the year, we expect customer demand for our differentiated solutions, including our AI platform and consistent execution across the Microsoft Cloud to drive another quarter of healthy revenue growth. Last year, we had our largest commercial bookings quarter ever with a material volume of large multiyear commitments. On that comparable, we expect growth to be relatively flat. We expect consistent execution across our core annuity sales motions with strong renewals and continued commitment to our platform as we focus on meeting customers' changing contract needs, which include shorter term, quick time-to-value contracts in this dynamic environment. Our key focus remains on delivering customer value. – Amy Hood, Executive, CFO (29:35)

-> Azure outlook: Revenue will continue to be driven by Azure, which, as a reminder, can have quarterly variability primarily from our per user business and from in-period revenue recognition, depending on the mix of contracts. In Azure, we expect revenue growth to be 26% to 27% in constant currency, including roughly 1 point from AI services. Growth continues to be driven by our Azure consumption business, and we expect the trends from Q3 to continue into Q4, as noted earlier. Our per-user business should continue to benefit from Microsoft 365 suite momentum, though we expect continued moderation in growth rates given the size of the installed base. In our on-premises total business, we expect revenue to decline low single digits as demand for our hybrid solutions, including Windows Server and SQL Server running in multi-cloud environments will be more than offset by unfavorable FX impact. And in Enterprise Services, revenue should be relatively unchanged year-over-year as growth in Enterprise Support Services will be offset by a decline in Microsoft Consulting Services. In More Personal Computing, we expect revenue of USD 13.35 billion to USD 13.75 billion. PC demand should be similar to Q3, and given channel inventory still remains elevated, our revenue will lag overall market growth as it continues to normalize. Therefore, Windows OEM and Devices revenue should both decline in the low to mid-20s. – Amy Hood, CFO (32:53)