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Microsoft delivering better than expected results for the first quarter. The company also reporting cloud revenue slightly above the street's expectations. Microsoft also saying AI contributed 12 points to Azure revenue growth in the quarter. RBC capital markets software equity analyst, Rishi Jaluria, joins us now for a closer look. Rishi, it is great to see you. So, Microsoft reports the stock here in the after hours, Rishi. It's up about 1%. Of course we don't have guidance yet. We'll look for that in the call, but give me the Rishi Jaluria instant analysis here.

Yeah, and thanks Josh, always a pleasure to be on your show. So, thanks so much for having me. Uh, look, I think the couple of things strike out to me. Number one is it feels like sentiment has gotten a little bit more muted on Microsoft. So, expectations weren't too crazy heading into the print. We saw Azure actually beat at a time where people were worried about Azure missing. Um, we actually saw AI kind of accelerate a little bit as well, but more importantly Azure XAI, the core Azure, is actually accelerating on its own. So, that's all I think, all very encouraging to see. And you know, look when we talk about AI as a long-term growth driver, tell me any other enterprise software company that's getting $6.1 billion in ARR from AI today. By the way, that too with a conservative definition of what's in that AI bucket. I think it does not include any training of OpenAI models at all, mostly inferencing and fine tuning. I think they're in a really enviable position. Yes, there's a lot of CapEx. Yes, I think the jury's still out on uh Office Copilot. And we're waiting to see you know what Satya and Amy have to say in terms of is there that back half acceleration in Azure still coming. But I think all things considered, you know, pretty pleased with what we're seeing here.

I'm also curious if you're um happy with the amount of sort of transparency, clarity that we're getting on the contribution from AI. I mean, I'm just seeing this headline here that AI contributed 12 points to Azure revenue growth in the first quarter, which seems pretty specific and maybe more than we're getting from some of its competitors. What do you think?

I think that's exactly right. Look, um, the fact is they're actually willing to quantify it, and you know, as I kind of alluded to, they use a conservative definition. It is primarily uh OpenAI as a customer in terms of people like us being ChatGPT customers. Uh in terms of other companies using the OpenAI APIs to develop, and then GitHub Copilot. Those are the biggest things. So, the fact that they're actually willing to call it out. And I think, you know, again, I need to emphasize they're not including all the training of GPT5, GPTO1, all of that, whereas I do believe others may be doing that. I also cover Oracle. I would not be surprised if OCI does include training of Cohere models. And so I think there's a conservative number and they're providing a greater level of transparency than others. And I think that's something that I hope others can follow suit, because that really makes the markets work better as when we just have more information.

Rishi, you know I know you don't cover Amazon or Alphabet, but I am curious to get your take on, you know, just how you think as a financial analyst about Microsoft in the great cloud wars right now. And looking ahead, what you think their real competitive advantages are going to be.

Yeah, I think there's a lot of advantages that Microsoft has even before the OpenAI deal and GenAI taking the world by storm over the past two years. I still think they were in the best position because they had the most enterprise grade technology, and maybe most importantly, they have the full stack uh from IAS to PAS to SAS. Uh you'll notice Amazon, for example, which my colleague covers, um doesn't really have as much at the application layer relative to Microsoft. So I think that Microsoft is in probably the strongest position of any of the hyperscale cloud vendors out there. And now you layer in the OpenAI partnership, the fact that Microsoft is infusing AI throughout the entire stack. The fact that companies there's this Azure halo effect that's going on where companies are actually giving more share to Microsoft because they're so impressed with the AI roadmap and all the innovation that's happening at Microsoft. I think it honestly puts them in the strongest position out of any of the hyperscalers.

Um, you know, a lot of the street agree with you, Rishi, in terms of your analyst peers. And yet the stock this year kind of meh, right? It's up 15% or so, um going into tomorrow's session which we'll see the reaction to these numbers. Uh what do you think is going on there? Why is there that sort of gap?

Yeah, it's classic market philosophy of people get ahead of themselves, get overly excited, and then any small blip is enough to get people disappointed. Uh you know, one of the biggest pieces of feedback I hear from people is, uh you know, look, the other hyperscalers are also doing AI, and I would maybe contest not in not nearly in the same way. Um, but then I would also say, you know, there's a lot of disappointment over Office Copilot. And look in my mind, this is the standard Microsoft playbook. They come to market with a product that may not be fully there, but they'll make it there, right? They did this with Microsoft Power BI, and were, you know, able to eat the lunch of all their competitors. They did this with Microsoft Teams, and look what they were able to do to Slack. Even you know, for for the viewers who are maybe old enough to remember, the first version of Microsoft Office was pretty terrible, right? And paled in comparison to other offerings like Lotus 1-2-3 out there. And now Office is the kind of de facto standard quasi-monopoly in the productivity space. So, I think they'll they'll figure it out. It might take a year before Office Copilot really becomes incremental to revenue. Uh but I think that's maybe why the stock hasn't been performing as well as uh you know, mega cap company that's innovating at this level that is actually playing from a leadership position when it comes to AI should be.

On the call, Rishi, we're going to get that forecast, the guidance. Uh curious, what else are you listening for? What do you want to hear from Satya Nadella and Amy Hood?

Yeah, I think beyond the numbers, right? And the guidance and the reiteration of acceleration for Azure in the back half of the fiscal year, it is really going to be any kind of color we can get around Office Copilot, because I still think even though I'm saying you have to exercise patients, any proof points in terms of enterprise adoption, in terms of new product development, in terms of you know, more um, you know, things to come in in terms of innovation. I think those are things that I'm paying attention to. And then other ways that maybe there is potential for Microsoft to be share gainers in parts of the market that they haven't been super strong in. I would say for example, uh front office CRM. They have Dynamics, Dynamics 365. It's been kind of a I would say a relatively disappointing business even though it's technically been a share gainer, but with the you know advent of bringing GenAI into this and having Copilot for Sales, Copilot for Service, Copilot for Marketing, can they actually turn back into a real share gainer in that CRM space. So, looking for all these things of where can AI turn into a growth driver for parts of the business that maybe investors aren't fully paying attention to today.

Rishi, thank you so much. It's great to see you as always, appreciate it.

Thank you so much.