Earnings Call: Q4 2014

Jul 22, 2014

Greetings and welcome to Microsoft's 4th Quarter Fiscal Year twenty fourteen Earnings. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chris Sutt, Thank you, Chris. You may begin. Thank you, Roya. Good afternoon and thank you for joining us today. On the call with me are Satya Nadella, Chief Executive Officer Amy Hood, Chief Financial Officer Frank Broad, Chief Accounting Officer and John Cetoff, Deputy General Counsel. On our website, microsoft.com/investor, We have posted a slide deck, which provides a summary of our financial results, a reconciliation of differences between GAAP and non GAAP financial measures and a table of noted items to aid in understanding our results for this quarter. Additionally, the slide deck contains detailed information regarding the impact of the Nokia Devices and Services acquisition on our financial results. Our press release is also on the website and includes an addendum with additional information about our 4th quarter performance. Microsoft is reporting the Financial performance of the acquired Nokia Devices and Services business in a new segment called Phone Hardware. Additionally, the Devices and Consumer Hardware segment was renamed Computing and Gaming Hardware. The products included in this renamed segment remain the same. Current year information reflects the financial performance of the acquired Beginning on April 25, 2014. Any reference to operating expense includes research and development, Sales and marketing and general and administrative, but excludes integration and restructuring charges. Please keep in mind that all growth comparisons we make on the call today relate to the corresponding period of last year. Unless otherwise Today's call is being webcast live and recorded. If you ask a question, it will be until July 22, 2015. During this call, we will be making forward looking statements, which are predictions, projections or other statements 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 in the Risk Factors section of our Form 10 ks, Form 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 will turn the call over to Amy. Thanks, Chris, And good afternoon, everyone. This month is an important time for Microsoft. As a leadership team, we're taking bold and decisive To evolve our organization and culture, this includes difficult steps, but they are necessary to position Microsoft for future growth and industry leadership. Today, we'll spend more time talking about the significant changes we're driving. However, Let me first start with this quarter's results. After that, Satya will talk more about our path forward and then I'll share our financial outlook before we take your questions. As I think about our strong execution this quarter, there are three things that stand out to me: Significant momentum with our cloud services, progress in a number of our consumer businesses and continued cost discipline. Our total Q4 revenue was $23,000,000,000 including $2,000,000,000 from the Phone Hardware segment. As you know, Our Q4 guidance did not include the impact of the acquisition of Nokia's Devices and Services business. Excluding that, we grew revenue 10%, exceeding the high end of our guidance range. Moving on to earnings per share. Before the impact of the acquisition and the noted items Chris highlighted earlier, EPS grew 12% to $0.66 These details can be found in the earnings slide deck on our Investor Relations website. Geographically, performance was strong across most markets, particularly in North America and in Europe. We did, however, see challenging conditions in China, where like many other multinationals, we're experiencing a weak business environment, which we do not expect to change in the near term. Our commercial cloud revenue grew 147% this quarter, driven by both Office 365 And Azure. Our commercial cloud annual revenue run rate more than doubled this year and now exceeds $4,400,000,000 And with this rapidly growing scale, we continue to expand our cloud gross margins. We saw strong commercial seat growth Across Office 365, particularly with SMB customers. Additionally, we added over 1,000,000 new subscribers to Office 3 65 home and personal and we ended the quarter with 5,600,000 users. Azure has also grown dramatically The storage doubling and compute tripling this year. Along with increased usage of our core services, over 50% of our Azure are now also using higher value services like the Enterprise Mobility Suite, which has seen strong adoption since the May launch. We're pleased that our customers are enthusiastically embracing Office 365, Azure, CRM Online and our other cloud services, especially considering it's still early in the cloud transition. Each customer has unique deployment needs and as a result, CIOs value the flexibility that our hybrid cloud offerings provide. You can see this in our commercial bookings, which grew 23% this quarter And our contracted not billed balance now exceeds $24,000,000,000 As we previously discussed in fiscal year 2014, Both the quarter and the year presented a large renewal opportunity. Our differentiated value proposition, combined with strong execution, In addition to transitioning to the cloud, our customers continue to invest in premium versions of our on prem server products like Windows Server, System Center and SQL Server. As a result, our server licensing revenue Grew 14% this quarter. We feel good about the progress we're making with Windows. Developed markets continue to show stability and we're encouraged by the initial response from OEMs to our new consumer offerings like Windows with Bing. This quarter, OEM revenue grew 3% as We saw the commercial hardware refresh cycle continue with businesses updating their devices and renewing their commitment to the Windows platform. XP end of support contributed to the double digit growth in both Windows Pro and volume licensing, though the benefits moderated throughout the quarter. In Bing, we continue to see growth in both usage and monetization. This quarter, U. S. Search query share exceeded 19% and RPS grew double digits again. As we saw in prior quarters, display revenue remains soft. In late June, we launched Surface Pro 3. While it's still early, Sales are outpacing earlier versions of Surface Pro and we are excited to bring the device to many more markets this summer. During the quarter, we reassessed our product road map and decided not to ship a new form factor that was under development. Combined with the transition of production toward our latest Surface offering, we made inventory adjustments, which impacted our gross margins. Also in June, we released our new Xbox One offering and we're pleased with the response. At E3, we reasserted our focus on games With blockbuster titles and key exclusives coming this holiday. With the progress we are making in channel inventories, the new markets for Xbox 1 and our exciting game lineup, We feel well positioned heading into the holiday season. With the closing of the Nokia Devices and Services acquisition during the quarter, We established a new segment, phone hardware, to provide transparency into the progress we'll make as we improve and grow the phone business. This quarter, Lumia device sales were primarily driven by good performance in the lower price point 50600 Series. Sales of non Lumia devices were in line with the overall feature phone market dynamics. Our gross margins were impacted by decisions we made to rationalize the device portfolio as well as acquisition related amortization expense. Across the company, we grew gross margin by $1,000,000,000 or 7%. While the faster growing cloud and hardware businesses impacted our overall company gross margin percentage, it's important to note we continue to drive margin growth in key areas with improved discipline and business process. In D&C Other, revenue from search advertising and subscriptions are driving gross margin growth. In Commercial Other, margins expanded again this quarter, benefiting from both improved business scale and data Center efficiency in our cloud services. And we've made key changes to our hardware business, which have been discussed by both Satya and Steven Elop We've also kept our focus on rigorous operating expense discipline. Excluding the addition of about $750,000,000 from NDF, our Q4 operating expense came in at the low end of our guidance. And for the full year, with disciplined decision making, we grew revenue 9% before NDS, more than twice as fast operating expense, to prior year taxes related to intercompany transfer pricing. Beyond that, the increase was driven by the inclusion of NDS results and are changing geographic mix. In Q4, we returned $3,400,000,000 in Cash to shareholders through buybacks and dividends to finish the fiscal year at 15,700,000,000 an increase of 28% over the prior year. With that overview, let me turn it over to Satya to share some thoughts. Thank you, Amy. Hello, everyone. I'm proud of the results we delivered this quarter and across the fiscal year. In Q4, on an operating basis, we grew revenue 10% and operating income 12%. We accelerated our commercial cloud business to a $4,400,000,000 annual run rate. And perhaps more importantly, we made bold and disciplined decisions define our core as a productivity and a platform company for the mobile first, cloud first world. Before I get into the investment principles and decisions, I want to explain how our focus on productivity and platforms leads us to participate in cloud and mobile markets. Mobility for us goes beyond just devices. While we are certainly focused on building great phones and tablets, We think of mobility more expansively. We think the opportunity that comes from running our productivity experiences on Windows, iOS and Android device. Office 365 and Dynamics SaaS offerings are targeted here. We also see great Tunity in simplifying and managing the user experiences spanning multiple devices, ecosystems with our identity management, device management and Data security. This is the focus of our Enterprise Mobility suite. Similarly, when it comes to the cloud opportunity, We run an app scale public cloud service and provide service for private and hybrid clouds. Azure, StorSimple, Image and our data center additions of server products across Windows Server, System Center and SQL Server all help us participate Our mobile and cloud opportunity views informs our decisions on what to build and where to invest. Most Specifically, we use the following three principles to guide our investments. 1st, focus investments on the core. Productivity experiences and platform investments were prioritized across engineering, sales, marketing as well as M and A. 2nd, consolidate overlapping efforts. This means one operating system that covers all screen sizes and consolidated dual use productivity services that cross life and work. 3rd, Run all businesses in an economically sound way. We will get crystal clear on the core businesses that drive long term differentiation And the businesses that support them. For those supporting efforts such as MSN, retail stores and hardware, We will also ensure disciplined financial execution. Now let's talk about the specific investments. We will be relentless in our focus on our core digital work and life experiences and the 2 platforms that support Everything we do starts with digital work and life experiences to delight dual users. These are users who use technology both at work and in their Personal life. This is how we reinvent productivity. Last year, we started to take steps in this direction. Now OneDrive and OneDrive for Business are 1 team. Outlook and Exchange are 1 team. Skype and Link are 1 team, all focused on those Dual user scenarios. We are clear that our experiences are going to be available on all devices. We have a specific goal for multiple Microsoft applications to be available on every home screen. This is why we brought Office to the iPad and now there are more than 35,000,000 downloads of Word, Excel, PowerPoint and OneNote. We believe productivity experiences will go beyond individual applications to deliver ambient intelligence that spans applications. To that end, we introduce Cortana, our personal assistant in Windows Phone 8.1. We also believe Power BI Suite enables you to ask natural language questions, do rich visualizations and collaborate around data. Customers are loving it in the fact the average monthly users have grown over 130%. We are pleased to See all up Dynamics growth at 13% for the quarter with CRM Online nearly doubling. And it's great now to have Dynamics CRM in the Gartner Leaders Quadrant in both sales and service, the 2 most relevant areas in the CRM space. Looking forward in fiscal year 2015, we are increasing our investment in R and D and sales for our Digital Work and Life businesses, even as we cut total operating expenses. We have a rich road map going forward. Two examples of our innovation What we are doing with Delve and Skype Translator. Delve is an Office 365 cloud based service that is The first in a new breed of intelligent and social work experiences. Dell will turn Enterprise search on its head as information that is relevant to you finds you. Think of this as the Facebook news feed Skype Translator will break down the language barriers in our communications and impact everything from everyday conversations with friends to education to global business. Additionally, I'm pleased to see the progress with Bing now more than 19% U. S. Query share and strong RPS growth. Going forward, we will drive our Bing related investments to contribute to the core digital work and life experiences such as Cortana, SmartSearch, Dell, Power Q and A and many others. We expect Bing to be profitable on a standalone basis in FY Now let's transition to the cloud OS. Our cloud OS represents the fastest This growing opportunity for Microsoft. Quarter after quarter, we drive growth and customer adoption. Our server products benefit from our public cloud. The fact that we use our servers to run our cloud make our server software The most capable enabling others to build and operate their cloud. This has led to growth in Hyper V Share, Which is now at 30.6% and has helped grow data center additions of Windows Server and System Center, both up more than 40% for the year. We also had another breakout year for SQL Server. With SQL Server 14, we released industry leading in memory technology across all database workloads of online transaction processing, Data Warehousing and Business Intelligence, and we grew our SQL business by more than 19%. Our Azure business is growing rapidly and we further accelerated growth last year. We grew our data center footprint in Australia, Brazil, Japan and China, while doubling our capacity in existing regions. In FY 2014, we also started to see the adoption of our High value services on top of our base cloud infrastructure. We announced the Enterprise Mobility Suite, A comprehensive cloud solution to address the consumerization of IT challenges such as bring your own device and SaaS application adoption, EMS brings together identity management, device management and data security into 1 IT control plane and architecture. The early data from customer adoption for EMS is very encouraging. We announced the Azure Intelligent System Our IoT service in the cloud that enables organizations to securely connect, manage and capture machine generated data from a variety of sensors and devices. To support these high value services In Azure, I have prioritized acquisitions such as Green Button for big compute, Kaptan for mobile back end services And just in the past few weeks, in midge for disaster recovery for hybrid clouds. In FY 2015, we'll make investments to drive this strategy forward. We will expand our Azure data center footprint and increase capacity in existing regions. We will launch new high level Including Azure Machine Learning that currently is in preview. We will expand our hybrid solutions with new services such as StorSimple, Image as well as our server products all offering cloud tiering. We will continue to build out the EMS value proposition And we will expand our sales efforts to drive growth. Let's transition to our device OS and hardware, the 3rd component of our core. In everything we do with our Windows OS and first party devices, we will light up our digital work and life experiences. We are approaching the Windows OS business with a bold challenger mindset and pushing both the product and business model forward. We start with a focus on business customers in FY 2014. We saw these customers recommit to Windows. In April, we released an update to Windows H1. To start, we improved the core desktop experience with mouse and keyboard advancement. For enterprises, we released Internet Explorer Enterprise mode and extended our mobile device management capability. With Windows 8.1 Update, we also lowered the hardware spec required so that OEMs can build tablets and clamshells at lower price points. In addition, we made the decision to evolve the Windows business model. Now Windows licenses are $0 for any OEM building a device less than 9 inches We also added a low cost Windows offering with Bing integration for OEMs. This new offering combined Lower hardware specs means OEMs will bring a fantastic lineup of value based notebooks and tablets to the market this holiday. In June, We launched Surface Pro 3, the most productive tablet on the market today. The reason it's the most productive tablet on the market is because we Talk through the experience end to end. For example, one of the things you will notice with Surface Pro 3 is how it excels at note taking. You can jot down your thoughts rapidly just like with a pen and paper. To make this work in an integrated natural way, our developers Pull together, one vision to write code that resides in the firmware in the Surface Pro 3's pen, the Windows shell and its inking support to reduce the parallax And as Amy said, we are optimistic given the early signs From the Surface Pro 3's performance in the market. On phones, we saw a good early start to LUMIA 6 30 and 6 35 as well as LUMIA 930, especially in Europe. In the year ahead, we are investing in ways that will ensure Our device OS and first party hardware align to our core. We will streamline the next version of Windows from 3 operating systems into 1 Single converged operating system for screens of all sizes. We will unify our stores, commerce and developer platforms To drive a more coherent user experience and a broader developer opportunity. We look forward to sharing more about our Our approach to first party hardware going forward is clear. At times, we will develop new categories like we did with Surface and we will responsibly make the market for Windows Phone. However, we are not in the hardware for hardware's sake, and the 1st party device portfolio will be aligned to our strategic direction as The productivity and platform company. As I said before, going forward, all the devices will be created with an explicit purpose to light up our digital work and life experiences. Good examples of this Good examples of this today are what we are doing with Surface Pro 3 for note taking and PPI for meetings. You can expect to see this type of innovation in our hardware, including phones. Amy will talk more on our plans for disciplined execution around our hardware business going forward. I want to make a few comments on Xbox. It's important for us to have a core that's thriving. It's equally important to play smart bold bets In other areas where we have the ability to add value and have impact. That's what we're doing with Xbox. We made the decision to manage Xbox to maximize enterprise value with a focus on gaming. Gaming is the largest digital life category in a mobile first cloud first world. It's also the place where our past success, A revered brand and passionate fan base present us a special opportunity. With our decision to specifically focus on gaming, We expect to close Xbox Entertainment Studios and streamline our investments in music and video. We will invest in our core console gaming and I hope you can see That we have bold ambitions and we have made a lot of progress. Also know that we are well underway in evolving our organization and culture to deliver on these bold ambitions. This includes simplifying how we work and modernizing our engineering processes. In all that we do, we will be accountable to our customers, partners and shareholders, Powering every individual and organization to do more and achieve more in a mobile first, cloud first world is a huge undertaking, And it is one that Microsoft is uniquely qualified to take on and change the world. Thank you. And with that, let me turn it over to Amy to Give you more guidance on FY 2015. Thanks, Satya. Before going into detail about our outlook, Let me first say that all forward looking information assumes the macroeconomic environment remains stable throughout this coming fiscal year. As Satya detailed, we're taking bold steps to move Microsoft forward with a renewed sense of clarity and alignment. Our investment plan reflects those changes as we reallocate resources to aggressively drive toward our goals and pursue the highest growth and Financial Return Businesses. Even as we invest for growth, we expect our total operating expense in fiscal year 2015 to be down from this past year before considering the addition of the Nokia cost structure and integration and restructuring cost. Now Let me address phone separately. In fiscal year 2014, we recorded about $750,000,000 of operating expense for the phone business for the period post the acquisition. Annualized, this would have been about $4,500,000,000 but we are aggressively working to drive synergies across key functions such as development, supply chain and operations as we integrate and right size the business. We expect to realize more than $1,000,000,000 in synergies and as a result, we will be on a path to reach operating breakeven for the phone business in fiscal year 2016. Including phone, we expect operating expense to be between 34.2 And $34,600,000,000 in fiscal year 2015. In addition to the expense guidance I just provided and as we announced on July 17. We expect to incur between $1,100,000,000 $1,600,000,000 in restructuring expense. These will be substantially complete in the first half of the fiscal year. Separately, We will also incur about $150,000,000 per quarter in integration costs such as systems work. Similar to this quarter, we will continue to report These items in a separate line item in the income statement. Now let me give our view on the Q1, starting with Devices and Consumer. In licensing, we expect revenue to be $4,100,000,000 to $4,200,000,000 This range reflects an ongoing business PC refresh cycle, headwinds for consumer PCs and a continued moderation of the benefits from the XP End of support. In Computing and Gaming Hardware, we expect revenue to be $1,700,000,000 to $2,000,000,000 This range reflects the continuing ramp of Surface Pro 3 and Xbox 1 as both products are introduced into new markets in Q1. In phone hardware, we expect revenue to be $1,900,000,000 to $2,300,000,000 as we And in devices and consumer other, we expect revenue to be $1,800,000,000 to $1,900,000,000 Moving on to commercial. We expect revenue across our two segments to be 12 $0,000,000 to $12,200,000,000 Within this, we expect commercial other revenue of $2,200,000,000 to $2,300,000,000 And in corporate, we expect about $300,000,000 of negative impact next quarter. We expect COGS to be 7.5 $7,900,000,000 with variability being driven by both hardware segments. We expect 1st quarter operating expense, Excluding integration and restructuring to be between $8,500,000,000 $8,700,000,000 As a reminder, other income and expense includes dividend interest income offset by interest expense and the net cost of hedging. We expect these items to generally offset one another. We expect our full year tax rate to be between 21% 23%. This is in line with the Q4 excluding the prior period tax adjustment as the changing mix of our business as well as the impact of the NDS acquisition will Investments in cloud infrastructure are necessary to support and enable the significant growth and momentum in These investments are decided based on the thorough review of demand and capacity plans to ensure that the investments provide an appropriate return on capital. We also remain focused on software driven innovation to increase the utilization and capacity of the capital we deploy. We expect our revenue to grow in line with normal seasonality. In closing, Q1 is the start of an incredibly important year for Microsoft. We're making important changes to our organization and culture to enable and empower our people to do their very best work. Mobility and cloud present an enormous opportunity and we are focusing resources on our core, so we can capitalize and deliver on the next wave of innovation, growth and long term shareholder value. With that, I'll turn it back over to Chris and we can move to Q and A. Thanks, Amy. And with that, we'll move to Q and A. Operator, please go ahead and repeat your instructions. Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Mark Moerdler with Sanford Bernstein. Thank you very much. I've got 2 parts to it. The first is, Satya, you've been changing The engineering processes within the company adding more analytics to the process, how do you see this change impacting both the product and The speed of go to market. Yes. 2 things, Mark. 1 is the diversity of Products that Microsoft has from silicon tape outs to services that we are Continuously updating in Azure or Office 365 is a lot more than let's say when we first created the Microsoft Engineering system that was for retail package product. So since then a lot has changed and a lot has evolved. And so what we are doing is we are introducing new functions and new skills. Design is even more important than it ever was. Data analytics, as you said, is And they're not outside functions. They are functions that are integral to how we do product development, how we do AB testing, how we do Log analysis on a continuous basis. So that's the engineering process and culture change that we have ongoing. And in fact, a lot of learning from a variety of different teams that's now spreading across a lot of Microsoft. Thank you. And Amy, One quick question. We saw a significant acceleration this quarter in cloud revenue. I guess, Amy or Satya, we saw acceleration in cloud revenue year over What's is this office for the iPad? Is this Azure? What's driving The acceleration and how long do you think we can keep this going? Mark, why don't I take it? And if Satya wants to add, obviously, He should do that. In general, I wouldn't point to one product area. It was across Office 365, Azure and even CRM Online. I think some of the important dynamics that you could point to, particularly in Office 365, I really think over the course of the year, We saw an acceleration in moving the product down the market into increasing what we would call the mid market and even small business at a pace. And that's a particular place that I would tie back to some of the things Satya mentioned in the answer to your first question, improvements to analytics, Improvements to understanding the use scenarios, improving the product in real time, understanding trial, ease of use, ease of sign up, all of these things Actually can afford us the ability to go to different categories, go to different geos and to different segments. In addition, I think what you'll see, Mark, as we initially moved many of our customers to Office 365, it came on one workload. I think what we've increasingly seen is our ability to add more workloads and sell the entirety of the suite through that process. I also mentioned in Azure, our increased ability to sell some of these higher value services. So While I could speak broadly about all of them, I think I would generally think about the strength as being Both completion of our product suite, ability to enter new segments and ability to sell new workloads. The only thing I would add is, It's the combination of our SaaS offerings like Dynamics and Office 365, our public cloud offering in Azure, but also So our private and hybrid cloud infrastructure, which also benefits because they run on our service, our cloud runs on our service. So it's such combination which makes us both unique and reinforcing. And a best example is what we are doing with Azure Active Directory. The fact that somebody gets onboarded to Office 365 means their tenant information is in Azure AD. That fact that the tenant information is in Azure AD is what makes EMS our Enterprise Mobility suite more attractive to a customer managing iOS, Android or Windows devices. That network effect It's really now helping us a lot across all of our cloud efforts. Thanks, Mark. Thanks, Mark. Thank you. I appreciate it. Congrats on the quarter. Thank you. Thank you. Next question please. Our next question comes from the line of Brent Thill with UBS. Please proceed with your question. Thank you. Amy, you're taking a very disciplined approach on expenses. I'm just curious if you could help everyone understand how you're approaching that And your confidence in doing more with less. Thanks, Brent. Let me actually I'll start and I think Satya actually will have some things to add. This is first of all, I would start by saying, I wouldn't describe the behavior to me. I would describe the behavior to a senior leadership team and to a group that's focused on investing in the core, focused on making trade offs, focused on really accelerating our growth in key areas. Our ability to make changes really throughout the second half This year in particular and as we've led into fiscal year 2015 is really about a group focused on building and investing in something that can really be even greater than it is today. And so, while I would use the word disciplined, I don't think it's about a person and it shouldn't be. It should be about an environment in which every person here thinks about how they Can increase their ROI and accrue to the collective. And I think we've actually seen the benefits of that in the past few quarters and I think you'll see it As we head into 15. I think you captured well. Okay, great. Thanks, Brent. Operator, next question please. Thank you. Our next question comes from the line of Keith Weiss with Morgan Stanley. Please proceed with your question. Excellent. Thank you for the question and very nice I was hoping to talk a little bit about the sort of the growth strategy at Nokia. You guys Look to cut expenses pretty aggressively there. But this is particularly smartphone is a very competitive marketplace. Can you tell us a little bit about The strategies for how you actually start to gain share with Lumi on a going forward basis. And maybe give us an idea of what levels of Share or what levels of kind of unit volumes are you going to need to hit to get to that breakeven in FY 2016? Let me stop and Amy you can even add. So overall, we are very focused On I would say thinking about mobility share across the entire Windows family. I already talked about in my remarks about how mobility for us even goes beyond devices. But for this specific question, I would even say that We want to think about mobility, not just one form factor of a mobile device, because I think that's where the ultimate prize is. But that said, we are even year over year basis seeing increased volume for LUMIA. It's coming at the low end In the entry smartphone market, and we are pleased with it. It's come in many markets, we now have over 10%. That's the first marker I would sort of say that we need to track country by country. And the key place where we are going to differentiate is Looking at productivity scenarios or the digital work and life scenarios that we can light up on our phone in unique ways. When I can take my Office Lens app, use the camera on the phone, take a picture of Anything and have it automatically OCR recognized and into OneNote in searchable fashion, that's a unique scenario. What we have done with Surface and PPI shows us the way that there is a lot more we can do with phones by broadly thinking about productivity. This is not about just a word or excel on your phone. It is about thinking about Cortana and Office Lens and those Kinds of scenarios in compelling ways. And that's what at the end of the day is going to drive our differentiation and higher end Lumia phones. And Keith, to answer your specific question regarding FY 2016, I think we've made the difficult choices To get the cost base to a place where we can deliver on the exact scenarios Satya has outlined, and we do assume that we continue to grow our Units through the year and into 2016 in order to get to breakeven. Okay. Thank you, Keith. Operator, next question please. Thank you. Our next question comes from the line of Phil Winslow with Credit Suisse. Please proceed with your question. Hi, guys. Congrats on a great quarter. I just wanted to dig into Office 360 You put up another quarter of pretty impressive metrics, gone up to 5,600,000 home premium users. I think the commercial side grew. I think it was 98% year over year. And Satya, you talked about some pretty meaningful download numbers as far as on the iPad. I wonder if you could just give us an update on Office 365 sort of how it's doing versus your expectations and sort of what your expectations are over the course of the next Thanks, Phil. In terms of versus our expectations, In this quarter, it did do better than we expected. And frankly, we had quite lofty goals. So I think That is encouraging. And I think I talked about some of those key drivers in the prior question. When I think really about And personal, because we haven't had a chance to talk specifically about the consumer usage. And you sort of referenced off this on the iPad in your question. I think it's really about continuing to make the subscription value, whether it's through the home SKU or the personal SKU, Have the most value to a user. It's about a user having the opportunity to access Office, the world's leading productivity app on the device of their choice, having it light up the very best on Windows devices and having that accrue back to our subscriptions. And so, I think our ability to execute on that over the past, I guess, 18 months that we've had these SKUs in market, is quite encouraging. I don't really look to office On the iPad as one item, it's a part of the value proposition that I think we make both in the consumer segment as well as in the commercial segment. Got it. Thanks, guys. Thanks, Phil. Thanks, Phil. Next question, please. Our next question comes from the line of Rick Schierling with Nomura. Please proceed with your question. Thanks. I'm wondering if you could talk about Office for a moment. I'm curious whether you think we've seen the worst for Office here with the consumer fall off. In Office 365 growth and margins expanding there, just sort of if you can look through the dynamics and give us a sense, Do you think you're actually have turned the corner there and we've maybe seen the worst in terms of office growth and margins? Rick, let me just start qualitatively in terms of how I view Office the category and How it relates to productivity broadly and then I'll have Amy even specifically talk about margins and what we are seeing in terms of that Probably the question. First of all, I believe the category that Office is in, which is Productivity broadly for people, their group as well as organization is something that we are investing Significantly and seeing significant growth in. On one end, you have new things that we are doing like Cortana. This is for individuals on new form factors like the phones where It's not about any single application, but an intelligent agent that knows everything about my calendar, everything about my life and tries to help me with my everyday tasks. On the other end is something like Dell, which is a completely new tool that's taking some what is enterprise search and making it more like this Facebook News Feed where it has a graph of all my artifacts, all my people, all my groups and uses that graph to give me relevant information Same thing with Power Q and A and Power BI. It's a part of Office 365. So we have a pretty expansive view of how we look at Office And what it can do. So that's the growth strategy. And now specifically on office renewals And I would say in general, let me make 2 comments. In terms of office on the consumer side between what we sold on prem as well as the home and personal, we feel quite good With Attach continuing to grow and increasing the value prop. So I think that's to address the consumer We actually saw Office grow, as you said, this quarter. I think the broader definition that Satya spoke to of the office value prop. And we continued to see office renewed in our enterprise agreements. So in general, I think I feel like we're In a growth phase for that franchise. Thanks, Rick. We'll move to the next question, please. Thank you. Our next question comes from the line of Walter Pritchard with Citigroup. Please proceed with your question. Hi, thanks. Satya, Tati, I wanted to ask you about 2 statements that you've made. 1 around responsibly making the market for Windows Phone. Just kind of following on Keith's question here. It's a really competitive market. It feels like ultimately you need to be a very, very meaningful share player in that market to have value for A developer to leverage the universal apps that you're talking about in terms of presentations you've given it, build and so forth. And I'm trying to understand How you can do both of those things at once? And in terms of responsibly making the market for Windows Phone, it feels difficult given Your nearest competitors there are doing things that you might argue are irresponsible in terms of making them their market given that they monetize it in different ways? Yes. So one of the beauties of Universal Windows apps is it aggregates for the first time for us All of our Windows volume, the fact that even what is an app that runs with a mouse and keyboard on the desktop can Be in the store and you can have the same app run-in a touch first on a mobile first way gives developers the Higher volume of Windows, which is 300 +1000000 units as opposed to just our 4% share of mobile in the U. S. Or ten So that's really the reason why we are actively making sure that Universal Windows Apps is available and developers are taking advantage of it. We have great tooling because that's the way we are going to be able to create the broadest opportunity to your very point about developers getting an ROI for building to Windows. So that's how I think we will do it in a responsible way. Great. Thank you. Moving to the next question please. Our next question comes from the line of Heather Bellini with Goldman Please proceed with your questions. Great. Thank you so much for your time. I wanted to ask a question about, Satya, your comments about combining the next Windows into 1 for all devices. And just wondering if you look out, I mean, you've got kind of different SKU segmentations right now. You've got enterprise, you've got consumer less than 9 inches for free, the offering that you mentioned earlier that you recently announced. How do we think about when you come out with this one version for all devices? How do you see this changing kind of the go to market And also kind of the traditional SKU segmentation and pricing that we've seen in the past. Yes. My statement Heather was more to do with Just even the engineering approach, the reality is that we actually did not have 1 Windows. We had multiple Windows operating systems Inside of Microsoft, we had one for phone, one for tablets and PCs, one for Xbox, one for even embedded. So we had many, many of these efforts. So now We have one team with a layered architecture that enables us to in fact for developers bring that collective with one store, one commerce system, one discoverability mechanism. It also allows us to scale the UI across all screen sizes. It allows us to create this notion of Universal Windows apps and BIN coherence there. So that's what more I was referencing. Our SKU strategy will remain by segment. We will have multiple SKUs for enterprises, we will have for OEM, we will have for end users. And so we will be disclosing and talking about our SKUs as we get further along. But this my statement was more to do with how we are Bringing teams together to approach Windows as one ecosystem very differently than we ourselves have done in the past. Excellent. Thank you. Thanks, Heather. Next question please, operator. Certainly. Our next question comes from the line of Ed McGuire with CLSA, please proceed with your question. Hi, good afternoon. Satya, you made some comments about harmonizing some of the different products Across Consumer and Enterprise. And I was curious what your approach is to viewing your different hardware offerings both in And with Surface, how your go to market may change around that? And also, since you've decided to make the operating For sub 9 inches devices free, how you see the value proposition and your ability to monetize that user base evolving over time? Yes. The statement I made about bringing together our productivity applications Across Work and Life is to really reflect this notion of dual use, because when I think about productivity, it doesn't separate out What I use as a tool for communication with my family and what I use to collaborate at work. So that's why having this one team that thinks about outlook.com as well as Exchange helps us think about those dual use. Same thing with files and OneDrive and OneDrive for Business, because we want to have the software, have the smarts about separating out the state, Caring about IT control and data protection, while me as an end user get to have the experiences that I want. That's how we are thinking about harmonizing those digital life and work experiences. On the hardware side, we will continue To build hardware that fits with these experiences, if I understand your question right, which is how will we differentiate Our first party hardware, we will build 1st party hardware that's creating categories. A good example is what we've done with Surface Pro 3 And in other places where we have really changed the Windows business model to encourage a plethora of OEMs to build great Hardware and we are seeing that. In fact, in this holiday season, I think you'll see a lot of value notebooks, you'll see clamshells. So we will have the full price range of our hardware Offerings enabled by this new Windows business model. And I think the last part was how will we monetize? Of course, we will again have a combination. We will have our OEM monetization and some of these new business models are about monetizing on the back And with Bing integration as well as our services attached and that's the reason fundamentally why we have these 0 priced Windows SKUs today. Great. Thank you. Thanks, Ed. Thanks, Ed. Next question please. Our next question comes from the line of Karl Keirstead with Deutsche Please proceed with your question. Thanks. I wouldn't mind focusing for a moment on the enterprise server side. That's where at least For me, much of the upside came. We haven't seen server product revenue growth in the mid teens in a while. Total Microsoft bookings 20 percent ex Nokia. Haven't seen that in ages. Perhaps the answer These questions are related, but what's happening with those two numbers to drive the upside? I'm sure a little bit came with Azure being Strong, but that's relatively small. So clearly, there was an inflection up on the on prem server tools business, maybe part of it was Renewal rates and if that's the answer, how much room do we have to go on that? Thank you. I mean, I'll start and then Amy you can add. Overall, we've And a major revamp of our server lineup, SQL 14 being a recent one, which We launched in the last quarter. And it's the strength of our server products. I mean this is that phenomena where our servers have becoming We've become much more competitive. Windows Server for virtualization and private cloud, System Center for data center management, SQL for all the in memory workload capabilities it has and BI. All of that Has really benefited from us running our own cloud, pushing our own servers to run these at scale services. And with that being in place and these refreshes, we are seeing increased investment and interest On our infrastructure when it comes to data centers, one of the things is as the public cloud is growing, We in fact don't see it at least for now as a zero sum. In fact, we see growth Especially with the virtualization rates, because people are not overall the number of applications on mobile side are growing. All of those mobile applications Drive back end compute and storage and that back end compute storage some of it goes into the public cloud, but a lot of it even goes into the data center. That's where we have a very good price performance equation and a TCO equation. And so we are being pretty competitive in grabbing share and our Hyper V share is a good example of that. And I think, Carl, you're right. When you triangulate the data around our strong trend line on unearned, even commercial Office 365, cloud growth as well as we talked about the benefits of our hybrid offerings, A lot of on prem server growth as well this quarter. Okay. Thank you. Thanks, Carl. Operator, we'll take the next question. Our next question comes from the line of Daniel Ives with FBR Capital. Please proceed with your question. Great. Thanks, guys. This is Jim Moore in for Dan Ives. Just can you talk a little bit about the geographies? You mentioned some North America and Europe strength. And maybe just talk a little more about the dynamics there in terms Where you're seeing this trend, cloud or PC, etcetera? Thanks. Thanks, Jim. Actually, I would say the strength across the products isn't geographically specific. So, it's relatively consistent. We've seen cloud growth globally. We've seen on prem server growth globally. In general, the products get launched 1st and often in the U. S. And so it tends to be the most mature Some of those transitional markets. But I think in general, my geographic comments are far more holistic than they are product specific. Thanks very much. Thanks. Operator, we'll have time for one more question, please. Thank you. And our last question will come from the line of Brad Reback with Stifel. Please proceed with your question. Hey, how are you? Thanks very much. Satya, you guys did a very good job this year of returning capital to shareholders over $15,000,000,000 Can you give us some sense philosophically if you see a lot of Opportunity for additional repurchase dividend activity or is this a level you're fairly comfortable with? Thanks. Thanks for the question. Overall, my comments remain the same. I answered this even in the last call, which is the approach we Taken is a balanced approach and a thoughtful approach. We're going to look at our own need to invest in order to drive growth in the opportunities we see. I think today's conversation and results show how some of the best we have made with our cloud are paying off. And It's great to see that momentum and it's in fact a pretty broad based momentum across Azure, Office 365 and Amy mentioned it pretty briefly even CRM Online Growth. So to me that remains the core, which is being able Place our capital to drive organic growth and for the long term health of this company. That said, we will have a balanced approach in terms of both share buyback as well as dividends. That's the approach we have taken over the last multiple years That will be the same thoughtful process that I expect us to continue with going into the next fiscal and beyond. Great. Thanks very much. Thanks, Brad. Thanks, Brad. Okay. That wraps up the Q and A portion of today's earnings call. We look forward to seeing many of you in the coming months at various investor conferences. For those of you unable to attend in person, these events will generally be webcast and you can follow our comments at our Investor Relations website. Please contact us if you need any additional details. And thanks again for joining us today. Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.