Karl Keirstead

Karl Keirstead of UBS Group asked about the specific catalysts behind the recent acceleration in on-premise to Azure migrations and questioned the potential durability of this trend.

Answer

CEO Satya Nadella identified three primary drivers for Azure's growth: 1) ongoing classic migrations of workloads like SAP and VMware, which he described as being in the 'middle innings'; 2) the scaling of traditional cloud-native applications; and 3) the addition of new AI workloads. He noted these factors are building on each other.

Karl Keirstead from UBS Group asked for the specific catalysts behind the accelerated on-prem to Azure migration activity and questioned the durability of this trend.

Answer

CEO Satya Nadella outlined three primary drivers: 1) ongoing classic migrations of workloads like SAP and VMware, which he described as being in the 'middle innings'; 2) the scaling of traditional cloud-native applications; and 3) the addition of new AI workloads. He stated these factors are building on each other, driving growth.

Karl Keirstead of UBS Group asked about the specific catalysts driving the sustained acceleration in on-premise to Azure migrations and questioned the durability of this trend.

Answer

CEO Satya Nadella identified three primary drivers for Azure's growth: 1) Classic on-premise migrations (e.g., SAP, VMware), which he described as being in the 'middle innings'; 2) The scaling of traditional cloud-native applications; and 3) The addition of new AI workloads. He noted these factors are compounding and driving durable growth.

Karl Keirstead of UBS asked for details on the 16-point growth lift to Azure from AI, questioning which specific workloads drove the demand and if that contribution could increase in the next quarter.

Answer

CFO Amy Hood clarified that the primary outperformance in Azure this quarter actually came from its non-AI business. She explained that the upside in AI services was due to bringing supply online earlier than expected for some customers, but the majority of the beat against expectations was from the non-AI portion of the business.

Karl Keirstead of UBS asked about the recent 'Stargate' news and changes in the OpenAI relationship, questioning the strategic decision and its implications for Microsoft's long-term capital expenditure needs.

Answer

CEO Satya Nadella affirmed the strength of the OpenAI partnership and emphasized that Microsoft is building a fungible, geo-distributed fleet that balances training and inference while continuously being upgraded. CFO Amy Hood added that CapEx is driven by the need to deliver on nearly $300 billion in total commercial RPO for all customers, not just OpenAI, and that the spending mix will shift from infrastructure to more revenue-correlated CPUs and GPUs.

Karl Keirstead from UBS asked for Microsoft's perspective on its partnership with OpenAI amid media speculation and inquired how the company manages the associated CapEx demands and the impact on other income.

Answer

CEO Satya Nadella described the OpenAI partnership as "super beneficial" for both parties, leading to significant innovation and success. CFO Amy Hood added that OpenAI's need for Azure infrastructure is a positive demand signal that justifies capital investment. She clarified the "other income" impact is a mechanical accounting entry under the equity method, reflecting a percentage of OpenAI's losses capped by Microsoft's total investment.

Karl Keirstead from UBS Group AG referenced comments from Microsoft's CEO and asked if the acceleration of Snowflake on Azure was due to specific joint initiatives or if the outperformance was evenly distributed across all cloud providers.

Answer

CFO Mike Scarpelli stated that Azure was indeed Snowflake's fastest-growing cloud, with customer revenue on Azure up 40% year-over-year, attributing it to better field alignment with Microsoft. CEO Sridhar Ramaswamy added that the collaboration is deep, spanning infrastructure, OneLake, and end-user products like Power BI, which acts as a significant accelerant.

Karl Keirstead from UBS asked for a contrast between the current stable environment and the macro pressures of 2022-2023, and also questioned if Snowflake had any significant revenue exposure to large AI-native companies.

Answer

CFO Michael Scarpelli explained that the customer base has matured to larger, more cost-focused enterprises, unlike the less cost-conscious startups of the post-COVID era, and he is not seeing major optimization cycles. CEO Sridhar Ramaswamy added that the sales team now proactively ensures efficient customer spend. Scarpelli confirmed that while AI companies are customers, none represent more than 1% of revenue.

Karl Keirstead asked about current usage trends, the macroeconomic assumptions embedded in the second-half guidance, and whether the expected pace of storage revenue runoff from Iceberg is tracking as previously anticipated.

Answer

CFO Mike Scarpelli described the customer buying environment as 'very stable' and confirmed that current consumption trends support the raised full-year guidance. He reiterated that while they haven't seen storage leave Snowflake yet, some runoff is expected in the second half and is already factored into the forecast.

Karl Keirstead asked for clarification on the impact of elevated early renewals on CRPO growth and the expected revenue contribution from the Paradox acquisition.

Answer

CFO Zane Rowe confirmed that early renewals contributed to the CRPO outperformance and indicated the $15 million increase to the full-year subscription revenue guide is a "good rough proxy" for Paradox's Q4 contribution. CEO Carl Eschenbach added that early renewals are driven by customer demand to add new products, particularly AI, to their existing contracts.

Karl Keirstead of UBS inquired about the expected timeframe for AI products to become 'needle-moving' in terms of monetization and asked about the long-term margin outlook given the strong Q1 performance.

Answer

CEO Carl Eschenbach argued that AI is already moving the needle, citing 100% YoY ACV growth for AI products and strong uptake of solutions like Evisort. CFO Zane Rowe addressed margins, stating that while Q1 was strong, the full-year guide of 28.5% accounts for planned investments. He reiterated confidence in reaching the 30% margin target for the upcoming fiscal year and expanding beyond that in the future.

Karl Keirstead of UBS Group AG asked about the timeframe for AI product monetization to become 'needle-moving' and questioned the long-term margin outlook, given that Q1's 30% margin already met the fiscal 2027 target.

Answer

CEO Carl Eschenbach asserted that AI is already moving the needle, citing 100% year-over-year growth in AI product ACV and strong uptake of solutions like Evisort. CFO Zane Rowe stated that while Q1 margin was strong, the full-year guide of 28.5% accounts for planned investments. He affirmed the company is on track for its 30% target next fiscal year and expects to grow margins beyond that in the future.

Karl Keirstead from UBS requested more detail on the reinvestment of savings from the recent headcount reduction, asking which areas were being trimmed and which were receiving increased funding.

Answer

CEO Carl Eschenbach stated that he expects headcount to be higher in a year, signaling a full reinvestment of savings. Key investment areas include AI and product technology, international expansion, go-to-market sales capacity, and the partner ecosystem. CFO Zane Rowe characterized it as a 'mix shift' toward growth initiatives while also driving efficiencies across the company.

Karl Keirstead of UBS asked for details on the Q1 FY26 growth outlook, which implies a sequential deceleration, and requested a ranking of the drivers for the expected H2 FY26 acceleration between deal ramps and AI revenue.

Answer

CFO Zane Rowe explained the Q1 outlook includes a one-point headwind from a leap year comparison and that previously signed strategic deals will contribute about 0.5 points to H2 growth. CEO Carl Eschenbach added that AI momentum is a key factor, citing the large untapped customer base for Recruiter Agent and the planned rollout of new monetizable AI agents next year.

Karl Keirstead inquired about the relationship between the newly raised non-GAAP operating margin target of 30% and the free cash flow margin, questioning if it should also be expected to rise significantly.

Answer

CEO Carl Eschenbach acknowledged the general correlation but deferred a specific target update to the upcoming Analyst Day. He noted that factors like different payment timing in ramping industries (e.g., federal) and Workday's status as a U.S. taxpayer could influence the direct relationship between the two metrics.

Karl Keirstead from UBS Group asked for an explanation for the significant sequential step-down in the growth guidance for the Data Center segment for Q1 2026.

Answer

CFO Joe Binz attributed the lower Q1 guidance to seasonality and tough comparisons. He explained that Q4 is a seasonally strong quarter with a large base of expiring contracts, which benefited from several large renewals. In contrast, Q1 has a smaller expiration base, offering less opportunity for expansion. Additionally, Q1 faces headwinds from lapping prior-year programmatic changes and the tail end of the server end-of-support benefits.

Karl Keirstead of UBS Group asked for an explanation of the significant step-down in the Q1 growth guidance for the Data Center segment.

Answer

CFO Joe Binz attributed the lower Q1 Data Center guidance to several factors. Q4 benefited from a seasonally large base of contract expirations leading to renewals, whereas Q1 is a seasonally weaker quarter with a smaller expiration base. Additionally, Q1 faces headwinds from lapping prior-year programmatic changes and the final benefits of the server end-of-support migration push.

Karl Keirstead of UBS Group AG questioned if the AI-native cohort generates revenue at similar margins and asked for drivers of the positive gross margin outlook for the second half.

Answer

CFO David Obstler explained that pricing is based on volume and term, not customer type, so margins are a function of customer size rather than their AI-native status. Both he and CEO Olivier Pomel attributed the positive gross margin outlook to successful internal cloud cost optimization efforts using Datadog's own products, with benefits expected to continue.

Karl Keirstead asked why revenue from large AI-native customers might become more volatile and whether the Q4 guidance incorporated assumptions of this potential volatility.

Answer

CEO Olivier Pomel explained that this small cohort of AI companies has grown extremely fast, and as they become very large customers, they are expected to optimize usage and negotiate better terms upon renewal. CFO David Obstler and Pomel clarified that while they flagged this potential for transparency, the Q4 guidance was based on their standard conservative philosophy and did not include a specific adjustment for this factor.

Karl Keirstead of UBS Group asked whether ServiceNow observed any incremental improvement in the customer selling environment during Q2, suggesting a potential easing of hesitation seen earlier in the year.

Answer

Chairman & CEO Bill McDermott responded that the demand environment for AI innovation has remained consistently strong, rather than changing dramatically. He noted that companies now view agentic AI as a necessity to operate in a world of constant change, with C-suite teams making cross-functional decisions to adopt the platform.

Karl Keirstead of UBS Group AG asked if the recent macro uncertainty changes the previously communicated seasonal shape of cRPO growth, which was expected to trough in Q3 before accelerating in Q4.

Answer

President and CFO Gina Mastantuono gave a direct response, stating that the seasonal shape of cRPO growth will remain the same as previously discussed. She confirmed that the macro environment does not change the expected flow of the renewals backlog.

Karl Keirstead asked for a direct update on the federal business, addressing recent market debate stemming from prior leadership changes and issues with a partner, Carasoft, and sought reassurance on the outlook for federal bookings.

Answer

CEO Bill McDermott stated unequivocally that ServiceNow saw no impact from and is not involved in any issues regarding Carasoft. He described the federal business as exceptionally strong, with fantastic net new ACV growth, multiple large deals, and ServiceNow becoming the standard platform for agency-wide digital transformation. He added that GenAI is a top priority for federal agencies, and the company's new Government Community Cloud SKUs are seeing great traction.

Karl Keirstead addressed the recent debate surrounding ServiceNow's federal business, citing past leadership changes and issues with partner Carasoft. He asked for a direct update on these issues and the company's confidence in federal bookings for the upcoming quarters.

Answer

CEO Bill McDermott stated unequivocally that ServiceNow saw no impact in Q3 and is not currently involved in any issues regarding Carasoft, telling analysts to remove it from their concern list. He described the federal business as exceptionally strong, with fantastic net new ACV growth and ServiceNow becoming the standard platform for agency-wide digital transformation. He also highlighted great traction for the new GenAI SKUs in the government cloud.

Karl Keirstead asked how the go-to-market pivot towards upmarket opportunities is reflected in guidance and if it requires significant investment affecting margins. He also requested a high-level update on the progress of this strategic shift.

Answer

CEO Dev Ittycheria reported strong progress, evidenced by the 24% growth in customers spending over $1 million annually. He clarified that sales investments were reallocated from the mid-market, so margin pressure comes from increased R&D and marketing, not sales. CFO Serge Tanjga confirmed that improved sales productivity from this shift is factored into the guidance.

Karl Keirstead sought clarification on why the slow start to the year was described as 'purely operational' when it was previously framed as a macro issue. He also asked what was driving the strong sequential growth implied by the Q3 guide.

Answer

CEO Dev Ittycheria and CFO Michael Gordon clarified that the macro issue related to a slowdown in consumption of existing workloads, whereas the 'operational' issue was a slow start to new business, which has since recovered. Gordon attributed the strong Q3 guide to a higher starting Atlas ARR from the Q2 beat and increased strength in the EA pipeline.

Karl Keirstead from UBS asked for qualitative details on GitLab Duo's contribution to the FY26 forecast and how GitLab differentiates its AI offerings in an increasingly competitive market.

Answer

CFO Brian Robbins stated that while Duo exceeded expectations and constituted about one-third of the ARR in deals where it was included, it will take time to materially impact overall revenue. CEO William Staples emphasized that GitLab's key differentiator is its comprehensive DevSecOps platform, which provides rich context to AI models across the entire software development lifecycle, from planning to security. He also highlighted the upcoming Duo Workflow agentic AI and noted that the proliferation of AI-generated code will increase the need for a robust management platform like GitLab.

Karl Keirstead asked for an update on the company's philosophy regarding operating margins, given the strong outperformance and historical focus on growth.

Answer

CFO Brian Robbins confirmed that while growth remains the top priority, it will be pursued responsibly. He highlighted significant operating leverage gains, including record sales and marketing efficiency and best-in-class gross margins, demonstrating a commitment to balancing investment with profitability.

Karl Keirstead of UBS inquired if early GitLab Duo wins involved customers moving off GitHub Copilot and whether the switch to Anthropic's LLM significantly improved Duo's code generation functionality.

Answer

CEO Sid Sijbrandij confirmed that customers commonly conduct head-to-head comparisons and that GitLab is winning against Copilot. He clarified that while GitLab still uses some Google models, it switched to Anthropic's model for code generation because it is the best on the market. He emphasized that being vendor-agnostic allows GitLab to use the best model for the task, providing a key advantage in delivering superior results to customers.