M&A Announcement

Sep 3, 2013

Welcome to the Microsoft Conference Call. All lines have been placed in a listen only mode until the question and answer session. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I'd now like to turn today's call over to Mr. Chris Xu, General Manager, Investor Relations. Chris, you may begin. Thank you, operator. Good morning and thank you for joining. With me today are Steve Balmer, Chief Executive Officer Stephen Bob, Executive Vice President, Devices and Services of Nokia Brad Smith, Executive Vice President and General Counsel Terry Meyerson, Executive Vice President, Operating and Amy Hood, Executive Vice President and Chief Financial Officer. On our website, microsoft.com/investor The slide deck, which is intended to follow today's presentation. As a reminder, today's call is being webcast live and recorded. If If you ask a question, it will be included in our live transmission, in the transcript and any future use of the recording. You can replay the call and view the transcript at the Microsoft Investor Relations website. During this call, we will be making forward looking statements, which are any predictions, projections or other statements future events based on current expectations and assumptions that are subject to risks and uncertainties. The potential risks and uncertainties include, among others, But the expected financial and other benefits from the Nokia transaction may not be realized, including because of factors discussed in today's press release. Actual results could materially differ because of these factors, comments made during this conference call and 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 statements. And with that, I'll now turn the call over to Steve. Thanks, Chris, and thanks everybody for joining us on this Call today, I say hello from Salo, Finland, which is the one of the heart and soul development facilities for the Nokia Lumia Windows Phone. And I'm excited to have a chance to talk to you about the very bold and exciting deal transaction that we announced today. On slide 4, I just want to make sure everybody has the key elements of the deal in mind. I know it's all in the press materials, but let's make sure everybody's Clear. Number 1, Microsoft is acquiring Nokia's phone business, both its so called mobile phone business as well as its smart device business. Number 2, along with the acquisition of Nokia's phone business, we are also being assigned rights to Nokia's license IP license With Qualcomm and other key IP licenses. Number 3, we are licensing not buying, we are licensing Nokia's patents To be able to use them not only with our Windows Phone and other phone product line, but across the Microsoft product set. Number 4, we're licensing the ability to use Nokia's HERE mapping geospatial location. We'll use those words interchangeably today Service to use that and modify it broadly in our products. Nokia It is a company that will continue under the Nokia name. It retains the NSN business, which is a network infrastructure business, its location and mapping Business here, its CTO office and the patent licensing business that goes along with the advanced With this announcement, we also cement The original partnership that we put in place 2.5 years ago to focus together on Nokia phones that are Windows phones, There was a date in 2014. We call it the recommitment date, in which we would Each has some options on how to move forward, quite complicated, but we've been talking for a while about where we wanted to go. We think we've made Excellent progress with the partnership and yet we also know we have a long way to go and felt in balance that Together this is the best approach for both companies' shareholders. On slide 5, I show you a sampling of some of the Beautiful. Nokia phones, Nokia ships well over 200,000,000 phones a year. The vast majority of those are mobile or feature phones that get sold for prices as low as say $25 And are often the first connection with technology that people in many places in the world have With any kind of communications or information technology device, we look at that as an excellent feeder system Into the smartphone world and a way to touch people with our services even on much lower end devices In many parts of the world. And so we're pleased to be acquiring the full capability of Nokia in phones From mobile phones to smart devices, from engineering to marketing, manufacturing, supply chain management and the like. Nokia is a phenomenal company that we have really had a chance to work with and get to know over the last two and a half years. We knew the company earlier, but the working partnership is phenomenal. On slide 6, I just want to highlight the sort of four Key rationales for the deal, we're going to walk through each one of these, number 1. And most importantly, we are trying to accelerate Our phone market share, as good as the work is that we've done together and Terry Meyerson will have a chance to We know we need to accelerate. We're not confused about that. We see opportunities to do so and Terry will discuss that. Number 2, we want to strengthen the overall opportunity for Microsoft from a devices and services perspective and that Opportunity for our partners as well. I'll speak about that later. We're going to talk about why this is a smart acquisition From a financial and assets perspective, Amy Hood and Brad Smith will do that. And last So with that, I'll turn things over to Terry Meyerson. Terry has run our Windows Phone business. He now runs all of our operating systems work. He's been on the front edge of the partnership with Nokia and then Championing inside this path forward and I'm going to let Terry talk about our plans to accelerate co chair. Thanks, Steve. Hello, everyone. This is the single most exciting deal in my 17 years at Microsoft, Unlocking our potential to win in mobile devices. We can go to Slide 8. This all started in fall 2010, when the Nokia and Microsoft teams began talking about partnership. We asked ourselves, With 2 great brands, Microsoft Software and Nokia Hardware, what could we create? At Nokia, we found great leadership, innovative concepts and incredible engineering capability, Not to mention a flare for original and world inspiring hardware design. In February 2011, We signed our strategic partnership. Nokia would invest exclusively in Windows Phone and Microsoft would bet Nokia's Hear mapping technology. We shipped our first phone together 9 months later, the Lumia 800. Last fall, We shipped Windows Phone 8, which enabled Nokia to create a full portfolio of Windows Phones that spanned a broad array of price points in over 100 Today, we have the best selling Lumia 520 at an entry level price point, The 620, the 720, the 820, the 920, which was voted Smartphone of the Year by Engadget's readers the Same year, the iPhone 5 and Galaxy S3 launched and now the best camera phone in the world, the Lumia 10 20. In just over 2 years, Nokia has gone from shipping no Windows Phones The shipping $7,400,000 last quarter. As a result of our Windows Phone innovations combined with Nokia's amazing device portfolio, their capability in distribution and retail promotion, Windows Phone has reached over 10% share in 9 markets. And in 34 markets, Windows Phones are outselling BlackBerry From Australia to China to Brazil, Italy, Mexico, Russia and the United States. The Nokia Windows Phone momentum has made Windows Phone the fastest growing mobile platform With 78% year over year growth, every quarter for the past 8 quarters, more customers have Activated Windows Phones than in the prior quarter. We are building momentum, But we still have low share today. Last decade with Xbox and Exchange, we were in the same position starting small. Here we aspire to the same trajectory. We need to make the market for Windows Phone. We have to go to the customer with a clear message that highlights Windows Phone's differentiation. The marketing approaches we have used in the past are insufficient. This allows us to invest in a single marketing campaign, which allows us to efficiently communicate the Windows Phone value proposition to consumers with 1 brand and the united voice, Making the market for the entire Windows Phone Ecosystem. The thing I'm most excited about with this deal is how our innovation will accelerate. Our teams have a proven ability to work together And this deal removes the seams in our collaboration. Nokia's mobile phones division reaches a whole new customer segment for Microsoft, Shipping over 53,000,000 phones last quarter, we are excited to partner with this team to bring the next 1,000,000,000 people onto the Internet. In the area of imaging, the Lumia 10 20 has no equal. We are excited to bring this technology together With our breakthrough connect camera technology to delight our customers. Our phones have evolved into our personal Assistance helping us navigate our day. This deal brings us a new Hear data license, which when combined with our Bing information platform Will enable us to create a more immersive experience for our customers. From the Skype and Link experience to next generation sensors How our devices connect to cloud services, to interactive entertainment, to device categories not yet on the charts, The Nokia and Microsoft teams share a common vision for innovation at the hardware software boundary. Together, we will now explore this boundary together, ultimately creating opportunities for all Windows OEMs. Together, Nokia and Microsoft have the scale to combat Galaxy, the design to combat iPhone and the innovation capability to lead it all. Great. Thanks, Terry. I want to talk a little bit about the totality of Microsoft And how this deal strengthens us as a company in so many ways. So on slide 13, if you will, I want to harken back to themes we've been striking over the past months, actually past couple of years of the transformation of Microsoft. The company I joined 33 years ago was a company focused in on software for personal computers. And software is a great skill and will always be a core strength of Microsoft. The PC is an important device, the most productive device on the planet and will continue to be so. And yet for us To not only to grow, but for us to really fulfill the vision of what we can do for our customers, we've evolved our thinking. We need to be a company that provides a family of devices. In some cases, we'll build the devices. In many cases, 3rd parties, our OEMs can build the devices, but a family of devices with integrated services that best empower People and businesses for the activities that they value the most. The core deliverable For us, it's been software. And yet the core way in which people will consume that is through hardware experiences As well as cloud services, which is a fundamental transformation for our company, which is very, very important. We started the Cloud transformation 5 or 6 years ago, we've made great progress. We certainly have been working hard on devices and yet the Nokia Acquisition, the deal that we're talking about today is transformational in terms of giving us the capability to do physical devices In addition to the work we do with our OEM partners on virtual devices for us that is on Windows PCs. I do think and we want to touch on why we believe that greater smartphone success is good for Microsoft and our shareholders well as our partners. And I do want to talk about geospatial services and the work we're doing with the Nokia Here division, Because when you think about the high value services of the future, these mapping and location services are essential. And we think we've made a smart Win win deal in that area. If you go to slide 14, The first thing I want to talk a little bit about is essentially why phones. There are many theories of Microsoft and Where we should go that I get a chance to read and hear from investors and from journalists. And in a simple way, I would say much as apps help operating systems and operating systems help apps, devices help services and Services help devices. Being successful with end users, I'd use the word consumer, but it implies that people don't have a work life and a Personal life, a professional or productive life and a fun life, but being successful with Users, is absolutely just vital to succeed both at work and at home. When people talk about the consumerization of IT, that's a phenomenon that we grew up with. The PC represented the first consumerization of IT. If you want to as we do then to capture a large user base, real people who use our products in many aspects of their life, You must focus either on consumer services, devices or some combination. And I would say that in many ways we're coming at both of these, but devices are particularly important As a place to capture and really involve the end user and frankly the device while we continue to pursue service opportunities And we see great opportunities particularly for revenue upside in our Bing service. The device opportunity is perhaps the best opportunity for pursuing users in very, very, very large numbers. The phone is a device of course, obvious. It is the most popular device intelligent device now on the planet. And it's important for us To really make sure we have that innovative high quality experience that lights up on great devices. We do think that there will be innovation in hardware and in software and that will give opportunities for us to build Market share in the phone is a device and that brings with it corporate opportunities. I continue to believe that there's enough innovation In devices unlike some of our investors that it will be a growth opportunity in terms of the financial rewards To the bold, to the innovative who pursue it. We will as we do today, we will support both I Phone and Android Galaxy phones with our services. We're not holding back services from other phone vendors platforms in any way. On the other hand, we cannot do a full and first class experience on those platforms. The level of integration, the level of device The level of economic tax taken by the platform vendor, all of those things, we run the risk that Google or Apple will foreclose our ability to innovate, to integrate our applications the way we have an office, to do distribution or to impose Economic terms. And for all of those reasons, not only in an offensive aspect, but the defensive aspect, we think it's very important to have an absolutely first rate Microsoft phone experience with integrated software and services. We're not new to devices. There will be over 300,000,000 Windows devices sold this year. Certainly, as I've talked to our hardware partners In PCs and tablets, they agree with me passionately that success in phone is important to success in tablets. And I've already had a chance to talk to a number of our big OEMs who are excited about the transaction that we're announcing today with Nokia. We also know that there's a relationship between tablets and PCs. So in some senses and in successful investment in Windows Phone And the Windows ecosystem should help raise the tide of everything that we do. And we know that that rising tide attracts Application developers and we recognize the gaps we have in application ecosystem today, particularly on Windows Phone. On slide 15, I want to talk a little bit about why we think we need to do our own phone hardware And what the ongoing opportunity is for our OEM partners. As we discussed, Windows Phone has achieved a number 3 Position in smartphones globally. Some of you say 3 is not 2 and not 1. I will tell you, you cannot get to be 2 until you are 3. And we will work very hard on the opportunities that are in front of us. But what it means is we have the smallest share of the real Contenders and today a very high concentration over 80% of the Windows Phone business is already with Nokia. And so in terms of evaluating paths that would ensure that we continue to see great Windows Phone devices from the Nakia team and in an attempt to really ask what's the most sensible economic model, It made sense for us to go first party have our own phones to ensure a Windows phone presence. We looked at various OEM alternatives, continuing an OEM only model, those actually look prohibitively expensive From a marketing standpoint and this actually looks to us to be the best risk return and upside opportunity for our shareholders. Terry talked about why an acquisition is better than continuing From an innovation and marketing standpoint and an arm's length relationship with Nokia. And so we think the combination gives us the maximum opportunities and Amy will talk some about that from a financial perspective. We absolutely believe this acquisition grows our OEM opportunity. More success with phones helps our OEMs in tablets and PCs. I talked to a number of OEMs who are more enthusiastic today than they were yesterday About pursuing Windows Phone because they know we have a flagship product with which to blaze trails in this market And there is plenty of opportunity for OEMs to address the diversity of markets that are out there. And I'm pretty excited. It's a different model than the PC model, but I'm pretty excited about the way in which we can balance our own first party hardware and get support and help that's important from our OEMs. On slide 16, in some senses the question is why Nokia? We're going to do phone hardware. There's absolutely no question in my mind that Nokia is a first rate company when it comes to device design and engineering. We know that from working with their teams and seeing their products, device distribution and sales, supply chain, operational Hardware distribution and they can do that today all with Windows Phone. I think there's no question that We're going to need to be and want to be a scale player in hardware, having a culture, a set of processes, a set of talent and people Really know how to run a 1st rate hardware business is essential. We certainly think we have many talented hardware engineers, but we have A very, very capable team, a team that ships as many smart as many electronic devices as almost any company on the planet Now becomes part of Microsoft. And I'm very excited to welcome the Nokia team. I'm traveling in Finland for the next few days meeting people beyond the leadership team and I think it's really exciting to see the team that's here. Finally, I want to talk a little bit about high value services. Nobody buys hardware for hardware and it's sometimes hard to get Real end users buy services without buying hardware. So we think about as I said devices with services And with Office, with Skype, with Xbox Entertainment Services, SkyDrive, Bing, we have a powerful lineup of 1st rate services to deliver on high value experiences. But in the mobile world, mapping is essential. And we need a very effective alternative for mapping to Google. It is important to many players including Microsoft There being more than one digital map of the world. What we're doing in the partnership today What we'll do I'm sorry, with this transaction, Microsoft will get flexibility to integrate Nokia's HERE geospatial assets Into all of our experience, we have great freedom to innovate around the HEAR location platform and yet Nokia can maximize the use of the hear assets by other industry player. Like every other aspect of the deal being announced today, we examined many possibilities And collectively decided that the new partnership is simpler, more effective and more likely to Lead to economic success for both entities and a real second digital map of the world. We will become with the conclusion of this transaction, we will become a top 3 customer for Nokia. Those economics are outside of the acquisition economics That we summarized in the sheet, but they're in the analysis that Amy Hood will now share with you. Amy, you want to talk some about the smartness so to speak of this acquisition? Absolutely, and hello, everyone. As Steve and Terry have both mentioned, today is a very exciting day for Microsoft and we feel great about the opportunity that this deal represents to drive long term shareholder value with both top and bottom line growth. As we turn to Slide 19, let me get into a few specifics of the deal. There are really 2 primary components. First, we are paying €3,790,000,000 Nokia's devices and services business, which includes thousands of design patents, key brands and the benefit that we receive from Nokia Signing its patent licenses with 3rd parties to Microsoft. Additionally, €1,650,000,000 is being paid to license Nokia's broad And we will be able to leverage it across Microsoft's entire portfolio of products. Brad will cover the details on these key assets in a few The combined purchase price will be paid using offshore cash. We do not believe that this transaction will impact our ability to In addition to the Lumia brand of products, an important component of Nokia's devices and services business It's the scale and breadth of their ASHA branded phones and other phones developed by the mobile phone business unit. Nokia sold over 53,000,000 mobile phone units in their Q2 and their strength in growth markets creates a unique opportunity for Microsoft to reach these users as they transition to smartphones. And many of Nokia's strongest smartphone markets are places where the mobile phone business was a key part Now to Slide 20. Earlier, Terry walked through some of the benefits that we'll gain from the steel, particularly from an engineering and go to market perspective. Additionally, this deal affords us greater economic opportunity. Under the commercial deal that was in place, we were capturing less than $10 per device and software royalty gross profit, then making platform payments to Nokia and investing in sales and marketing support to grow the business. By owning the devices and services business, Microsoft will now be able to capture Using assumptions that are in line with industry forecasts and current performance and trajectory, after it is integrated into Microsoft, We estimate that we will achieve operating income breakeven for this business when we sell approximately 50,000,000 smart devices a year. For reference, Nokia sold over 7,000,000 Lumia units last quarter, up 32% sequentially. As we continue to drive Scale, the per unit profitability is significantly better for us with this acquisition. Now to slide 21. We expect this deal to have a negative $0.08 impact On adjusted basis and a $0.12 impact to GAAP earnings per share in fiscal 2014 based on a Close date in early calendar 2014. Adjusting for acquisition related amortization and integration expenses, We expect the deal will be accretive on a non GAAP basis in fiscal year 2015, driven by both increased smart device unit volumes Business efficiently. As Steve mentioned, Nokia brings significant expertise in areas such as supply chain and demand planning And have mature operational systems in place that will be a key asset for the combined entity. On Slide 22, With the deal, we have a real opportunity to materially drive long term shareholder value. The smartphone market is expected to reach over 1,700,000,000 units a year. And as Steve and Terry discussed, this acquisition In addition, we believe there are opportunities to create additional value with a positive impact on our family of devices, particularly tablets, but also PCs along with our portfolio of business and consumer services. Those impacts are not included in these numbers. Before I hand it off to Brad, let me leave you with this. With this acquisition, we have an opportunity To fundamentally change the economic structure of our mobile business. It is a change that as the business grows Presents an opportunity to deliver enhanced economics with significant additional benefits to other businesses across the company. With the commercial deal showing positive early momentum and both companies assessing their strategic positions, this Was the right time to make this deal. And with strong execution, it is an acquisition that can deliver significant economic return. Now, let me hand it off to Brad, who's going to talk through some of the details regarding the patents and the intellectual property. Thanks, Amy, and hello, everyone. Let me turn to Slide 23 and talk a little bit about the IP aspects If you step back and think about it, it's pretty self evident that an important part of managing a smart devices business well Involves the management of intellectual property rights. Anybody who reads the news will see that if you don't do a good job, you run the risk that you infringe other people's patents, Your shipments can be enjoined. Even if you are able to secure licenses, if you're not Creative in the way you put all of this together, you can drive up your costs. And indeed for some companies, The patent costs amount to 10% or more of their bill of materials. For other companies, that's substantially lower. We put a lot of thought as we've structured this transaction and considered the company's strategic opportunities at addressing the patent issues. If you look at what we're getting in this agreement, it really breaks down into a few pieces. Number 1, there are some IP assets that are being transferred From Nokia to Microsoft, this includes about 8,500 design patents. These are the patents that distinguish the physical Features of a product from another product. It includes the transfer of 2 important brands, the ASHA brand and the Lumiya brand. And we secured a 10 year license to use the Nokia brand on feature phones. So that's what is being moved over in terms of ownership. 2nd, there's a patent license for which Microsoft is paying €1,650,000,000 This involves the Right to in effect make use of Nokia's inventions. It doesn't involve the transfer or ownership of the patents itself. But what it does It gives Microsoft a license for all of Nokia's patents, except for the NSN patents. It gives us the option which we'll exercise to convert this license from a 10 year license to a perpetual license, meaning we'll have patent coverage for the life of all those patents. And it also has a broad 5 year, 2 way standstill between both companies, including the NSN patents. One of the reasons we focus so much on securing this license, one of the reasons it has a high price tag It's because of the very substantial value of Nokia's patent portfolio. When we look at the industry and in particular when we Patents that are relevant to wireless connectivity using the CDMA standard or the GSM standard or 3 gs or 4 gs technologies, We really believe that Nokia has one of the 2 most valuable portfolios in the industry. The other is Qualcomm's. So we secure the right to use those patents as we produce and innovate in this device space going forward. There's also some significant value for our existing business. We've been making Annual patent royalty payments already to Nokia for our existing businesses and we assign roughly a quarter of the value of €1,650,000,000 patent license to these existing businesses. If you go to Slide 24, you see the other Part of what is a very significant aspect of this transaction. In our view, Nokia has been 1 of the smartest I'd go as far as to say the most sophisticated and smartest device company in securing the patent rights it has needed To produce smart devices, smartphones. And under this agreement, the benefits of over 60 licenses that Nokia has negotiated with 3rd parties are assigned to Microsoft. The most important of these is with Qualcomm. Nokia reported publicly that it negotiated a 15 year license that went into effect in 2,008 with Qualcomm. It paid Qualcomm €1,700,000,000 It also transferred to Qualcomm a number of Nokia patents. And as a result, Takeda has what we regard as an important and attractive patent arrangement in place with Qualcomm. We now benefit from that arrangement. But it's not Qualcomm alone. There are a number of other important third parties as well from which we'll now Get the benefit of the existing licenses. We get to combine that with the license agreements we've been putting in place over the last few years. And typically over the last few years as we've negotiated patent agreements with other companies, we've bargained for the right to produce devices if we wanted to go that So our existing agreement with Samsung gives us coverage under Samsung's patents without paying additional money. The same is true for a number of other patent agreements that we have in place. When you put all of this together, the IP assets that are transferred, the Nokia patent license, the patent license that are transferred from Nokia to Microsoft, We believe it puts us in the position to have the most cost effective patent arrangements for any company in the smart devices space. Great. Thanks very much, Brad. I'm going to turn to slide 26 Talk some about the execution plan. One of the things which I think we're most sort of acutely focused in on Is how do companies really make big acquisitions work? In this case, we We have 2.5 years now of experience in making many aspects of this acquisition work. Our partnership Provides us with great confidence. We know the people. We can produce products together. We know how to go to market Together, we can do it all more efficiently. We understand that. More effectively, we understand that. But and I have to say, I don't know whether we would be here if we hadn't Already operated under our current collaborative agreement to do so much great work. So building on the existing partnership In the structure of the deal, I've spent time with Nokia's senior team On the devices and services side, this is Terry Meyerson and others. As part of the not as part of the transaction, but associated with the transaction, Stephen Elop and frankly most of the leadership team from Nokia on the devices and services side is Signed up, excited. Moving over to Microsoft, so that we have the opportunity to execute on this without missing a beat. The leader of the smart devices side, the mobile phone side, the talent and expertise that Juha brings in operations, Chris Webber, who runs the field, all in cash. Stefan Pannenbecker has done some of the most important design on Lumia joins as part of this deal. We'll hear from Steven Elop in just a moment. We have a structure for the integration that makes sense to us. Stephen will run our integrated devices organization and his team on the engineering and supply chain will come with him and will be kind of the center under which we integrate devices and supply chain will be with Stephen. Our phone device R and D will be centered here in Finland. We will consolidate marketing as well as the development software services. The Nokia sales team importantly will stay intact. We need that team out There every day, not only just to close, but post close really generating the sales through the relationships with the operators. And we think we've got a good plan there. We have integration executives mobilized on both sides. Tom Gibbons Who's been with Microsoft over 20 years in a variety of hardware and software aspects of our business will lead as will Juha Put Keronta on the Nokia side. And as I said, we have working rhythms between the two companies that are intact. I'd like to turn things over to Stephen Elop, who will lead the Microsoft Devices effort post closing and Currently well, as of yesterday, we're CEO of Nokia and now is EVP of the Devices Division of Nokia. Stephen? Thank you, Steve, and I'm glad to be able to join you on the call today. At Nokia, we've been building momentum around our Eluvia products steadily over the past 4 quarters. We continue to connect the next 1,000,000,000 people with new advances in our mobile phones business. We've been going faster than Nokia has ever gone before. And as other manufacturers have fallen by the wayside or gone sideways, achieving our goal of becoming the 3rd ecosystem is becoming very real. And that is one of the reasons Nokia and Microsoft have entered into this transaction. We believe this transaction will accelerate the momentum of the devices and services business. By bringing our teams together, we can increase our share in smart devices through faster innovation, through better products and through unified branding and marketing. In short, we can reduce the natural frictions in the system between our two companies. We can invest more resources into the effort and we to bring a rich array of Microsoft services to first time smartphone users and as we create an on ramp to Windows Phone for people that are 1st smart experiences. Our likelihood of success with devices and services goes up as a result of this transaction. When Steve and I first discussed the original partnership between Nokia and Microsoft in early 2011, we spent a lot of time focused on designing How our companies would actually work together? We put in place the organizational structures and management rhythm For our teams to jointly design and engineer the award winning products that we have since delivered. Our collective teams have now had 2.5 years of experience with working together side by side every single day. This represents a huge advantage as we enter this transaction, Because we already know each other, we have learned how to solve problems together and we continue to share the same broader goals. That experience with Microsoft Combined with our passion to win with our strategy has allowed us to confirm that we will be bringing a very talented and motivated team across the Microsoft. For example, Joe Harlow will join Microsoft and will continue to lead smart devices. Timo Toikkanen will join Microsoft and will continue to lead mobile devices. Yohokuranta will join Microsoft and will lead the integration effort between our companies On behalf of Nokia, while continuing to lead operations for us. Stefan Pannenbecker will join Microsoft and will lead Design. Chris Webber will join Microsoft and will lead the devices sales team with the Nokia sales team being the nexus for Microsoft's And as we speak, dozens of other leaders at Microsoft have already confirmed their commitment to the success of this next After and are as we speak helping everyone else at Nokia through what is an emotional period of time. I'll be focused on leading passionate teams of Nokia through this transition. I'll concentrate my efforts in the months immediately ahead on the devices and Business within Nokia and when the transaction with Microsoft closes, I2 will transfer to Microsoft and become the VP of Devices. We have exciting innovation across Nokia smart devices and mobile phones. And with a strong plan for We can accelerate the current momentum to be a more successful leader in the mobile market. Thank you, Steve. Thanks, Stephen. I just want to underscore one point before I pass things to Brad to talk about regulatory, which is kind of the next step. I am incredibly Proud of the products that we have produced with Nokia. The Lumia Windows Phones in Market are some of the best products Microsoft has ever built in terms of capability, design, quality. We're very, very Affirm in our commitment and belief. We have work to do to establish even greater Differentiation, we have work to do on the so called application gap. We have work to do for market success, but we have created absolutely first rate products of which We are all at Nokia and Microsoft incredibly proud and we will continue that as we move into this new space. Brad, why don't you Talk a little bit about regulatory approval. Sure. Thanks, Steve. As an acquisition involving 2 global Not surprisingly, this involves merger review by a number of governments and regulatory authorities around the world. So we'll be moving quickly to submit This for the requisite approval in the European Union, the United States and China, in countries such as India, Brazil, Russia, Canada, many others, we're confident that we'll secure regulatory approval in the 1st calendar quarter of 2014. And I think the basis for our confidence is pretty clear. Number 1, this is an instance where you really see complementary That's coming together. Microsoft and Nokia are not competing in this space today. In fact, we're already partners that are collaborating. And the essence of the The rationale for regulators is clear as well. We will be more effective as a competitor in the market By bringing all of these strengths together and by operating separately or through this partnership in 2 different companies, We get to bring together the new capabilities to Microsoft that Nokia has really excelled at over the years. That includes everything from design and manufacturing and inventory and supply chain management, to the other As Amy pointed out, The economics will enable us to be more effective. In short, we will be a stronger number 3 And regulators like it when the number 3 competitor in a market has a better opportunity to challenge the 2 Market leaders. And at the same time, as Steve has highlighted, we're committed to continuing to work with our partners in the Windows and Windows Phone systems. Indeed, we believe our success in phones will help our partners when it comes to other areas, especially tablets Ultimately, as we all know, regulators quite rightly look 1st and foremost at what a deal will mean for consumers. In this instance, we believe emphatically that this is good news for consumers. By bringing together hardware, software and IP licenses, we're in a position to drive down our costs. We're in a position to accelerate innovation. We're in a position to offer consumers more choice, Better innovation and stronger products. That in short is what regulators look to approve. That's why we're confident We'll secure approval for this. And back to you. Chris, I think that pretty much wraps up and we would love the chance to take some questions. Great. That's our first question. Walter Great. Thanks for taking the question. Just Steve Bummer on the tablet side, Obviously, we could say as many of the same things as you put into the slide deck as rationale for doing an acquisition on the phone side as we could say about the tablet side including Picking up more gross margin. And I'm wondering how this transaction impacts the strategy going forward in tablets and whether or not you need to in a sense Double down further on first party hardware in the tablet market. And then just had one follow-up. Okay. Terry, do you want to talk a little bit about that? That would be great. Well, phones and tablets are definitely a continuum. We see the phone products growing up, Screen sizes and the user experience we have on the phones, we've now made that available on our Windows tablets. Our application platform spans from phone to tablet. And I think it's fair to say that our customers are expecting Us to offer great tablets that look and feel and act in every way like our phones. And we'll be pursuing a strategy along those lines. Tablets is an area where we Absolutely have our own first party hardware as you know and see opportunities to continue to build and strengthen. And it's an area where we have very strong programs in place with our OEMs, particularly On the Intel Atom Processor based product lines that I think people will really get a lot of value on and You'll see a range of new products coming for the holiday season. And then, Terry, can you talk about just the ability to scale Windows down? Obviously, Nokia has a large base of very low priced feature phones. That base maybe sort of dwindling over time. But You've been cost reducing Windows, the specs and so forth to be able to get Windows down to low priced devices. Can you talk about any efforts To accelerate that process given potentially access to a much bigger pool of low cost phones that are out there already? It's definitely a priority for us to bring Windows to as many customers as we can around the world. Lower priced phones is a strategic initiative for the next Windows phone release and We have nothing more really to say now. Operator? Okay. Thank you. We'll move to the next question please. Thanks Walter. Our next question is Mark Murdler, Dan from Bernstein. Your line is open. Thank you. Steve Ballmer, two questions. The first one is, how does this affect the reorg? Given hardware was in one group and operating And another software and other. Does the Nokia device does this the merger affect that? Does it merge into the hardware business and hardware Content device group or does this now change that? And then I have a follow-up. No. The reorg is absolutely intact. Obviously, the devices business has a broader scale and new capability. Julie Larsen Green, who is running devices in Studios is flat out. We've got a lot of work we're doing here over the next several months. And Julie and her team will work on a planning and integration Bayes, Julie will continue. She's excited about working on devices. But absolutely the critical mass of the group With that acquisition is in the phone space and Stephen Elop will run the group and We'll take the appropriate steps with Julie working with Stephen to figure out appropriate integrations. And then as follow-up on it, what's your expectation going forward in terms of I just want to clarify this, the percentage of Windows phones that will be from OEMs? Today Nokia, as I said, well over 80% well over 80% of all of our I don't foresee that changing dramatically in the short run. But as the market grows, I expect to The additional percentages if you will go to our OEMs, but it's premature to predict today. We definitely have interest from OEMs In the Windows Phone opportunity, given that people understand we're going to place the trails here with our own first party hardware. Yes, you can. So I do ask that you please just stick to one question and avoid long or multi part questions, please. And operator, next question please. Brent Thill, UBS. Your line is Thanks. Just on the cost rationalization, Nokia's 32,000 employees versus Microsoft at 99,000 considerable Bulk of employees. Can you just talk about the rationalization over time and how that plays out? Amy will take it. I do want to highlight that in many hardware companies, Manufacturing labor is primarily outsourced and Amy can remind us the numbers. But in Nokia, there's more in sourced manufacturing. Naki has got a strategy about that that is obviously they've executed very well. But you kind of have apples and oranges a little bit between the 32,000 And are almost 100,000. But Amy, why don't you provide some context in detail? Sure. Thanks, Brent. About 1000 of those 32,000 employees are really directly a part of the manufacturing business. And so I think a better way As you think about the scale and opportunity is to really focus on the percentage of Nokia outside of that. And I actually think both Steve and Steven did a thoughtful job in the execution slide about talking Really about the philosophy we're using as we go through the integration process around the benefits of the incremental sales Force that we're getting with Chris and his team as well as really going through and being thoughtful about the rationalization so that we get to One voice, one brand, one team that can best execute and be efficient. Thanks, Amy. Next question please operator. Keith Weiss, Morgan Stanley. Your line is open. Hi, Sean. Thank you guys for taking the question. You guys have talked about the success in the partnership to date and putting out some really good products. I was wondering Steve, perhaps you could give us some Concrete example of what does the acquisition enable you to do that you guys couldn't do through the partnership? Maybe give us some more concrete examples there. Or is that maybe not the point? Maybe Point is more so that this really solidifies Microsoft's presence in the smartphone market. This is more about ensuring that you guys are going to be a presence here for an ongoing For a longer term basis? Well, the latter is certainly true. We see at least 3 distinct to do better as one company than as 2. Number 1, we talk about 1 brand and the unified voice to the market. I will say that I think we can probably do better for consumer name than the Nokia Lumia Windows Phone 10 20. And yet because of where both companies are and the independent nature of the businesses, we haven't been able to shorten that. Just take that as a proxy for a range of improvements that we feel we can make. We can Simplify the way in which we work with operators and the overall consumer branding and messaging gets much simpler. That is an efficiency of being 1 company. On the innovation front, we've done a lot of great work together. And yet as 2 companies, there's always some lines along which it's hard to innovate. The Lumia 10 20 is awesome in terms of what it has for camera and imaging. And yet, I think as one company, we would have doubled down on that bet, Made an even greater range of software and services investments around the core hardware platform. 3rd, I think we get business agility. As 2 companies, we're making 2 independent sets of decisions about where and when and how to invest By country, by operator, by price point and there is, let me say, an inefficiency financially as well as Lack of agility that comes with that. So in all three of those areas, despite the fact that I think we've done a really good job, we can improve and accelerate quite noticeably. Excellent. Thank you. Thanks, Keith. Operator, I think we have time for 2 more questions. Next question, please. Ralph Wall Street Journal. Your line is open. Hi. You guys have 15% a fairly aggressive market share Assumption for where you guys are going to go in a few years. I guess I'm wondering to get there one thing you're going to need is a lot of developer support. Developers already have iOS, Android. You could make an argument that HTML5 over the next few years will grow. That will give them a third Development platform, how will you guys convince them to develop for Windows Phone? Terry, why don't you talk a little bit about developers, If you don't mind? Well, for developers today Windows offers an incredible opportunity with the installed base of PCs, phones and tablets and soon in new Xbox 1, we want to offer them this opportunity to build either HTML5 applications or native applications that span all of those devices, enabling them to Reach segments of users on those devices, users in an enterprise, users on a gaming console and This provides them very unique opportunities to monetize their application investments. So we're pretty excited about the platforms we're bringing to market, Dissolve for reception on in some areas, it's certainly better than others. But overall, we're making progress We know we got a lot more work to do. One of the keys of course is driving volume. We think we have differentiated products. We can tell story a little bit better. We get volume up and we have over 160,000 applications in the store. We know we have a long way to go. And the key is really offering with our own first party applications and first party hardware enough reasons to buy to drive volumes And then attract the broader developer ecosystem. Obviously, HTML5 would be kind of a neutral thing. I would expect all Major platforms to embrace it to some extent. And in some senses, it takes away a little bit about of the apps barrier to Entry, which we know we need to work hard on right now. Great. Thanks. Operator, let's move to last question, please. Our last question comes from Rick Sherlund from Yara Securities. Thanks. I'm wondering if you could just share with us whether Value was made aware of this before they entered their cooperation and standstill agreement? Brad, do you want to take that? The answer is no. You would not expect the company to Material non public information to an entity that doesn't have an appropriate non disclosure agreement. So the answer is no. Okay. Thank you. Okay. So that will wrap up our call today. Thank you again for joining us. We look forward to seeing many of you at our Financial This will be held on September 19. Thanks again. Thank you. That concludes the conference for today. All participants may