Earnings Call: Q4 2013

Jul 18, 2013

Welcome to Microsoft's Fiscal Year 2013 4th Quarter Earnings 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, please disconnect at this time. And I would now like to turn the meeting over to Chris Sutt, General Manager of Investor Relations. Chris, you may begin. Thank you, operator. On our website, microsoft.com/investor is our financial summary slide deck, which is intended to follow our prepared remarks and provides a reconciliation of differences between GAAP and non GAAP financial measures. As a reminder, we will post today's prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be live transition 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 until July 18, 2014. During this call, we will be making forward looking statements that are predictions, projections or other statements about future events. 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 reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward looking statement. Before I hand the call over to Amy, I'd like to remind you that all growth comparisons we make on the call today will relate to the corresponding period of last year. Also, unless specified otherwise, all impacted numbers for the current quarter have been adjusted for the cumulative effect of the revenue deferrals and recognitions related to the Office and Windows upgrade offers the $900,000,000 charge for inventory adjustments, primarily related to the new Surface RT pricing we announced earlier this week and the goodwill impairment charge from last year. You can find the details of the adjustments and reconciliation of differences between GAAP and non GAAP financial measures in our financial summary slide deck. And with that, I'll turn the call over to Amy. Thanks, Chris, Good afternoon, everyone. Thanks for joining us today. In many ways, our 4th quarter results reflect the trends we saw developing throughout the fiscal year. The consumer x86 PC market declined as users continued to prioritize devices with touch and mobility. At the same time, we We saw continued strength in our enterprise products and cloud solutions and increased adoption of our consumer services. This quarter, Our Windows business declined as the device market continued to evolve beyond the traditional PC. We are working We released the public preview of Windows 8.1. It blends the desktop and modern experience. It has new features and improvements in areas such as personalization, Search, built in apps and cloud connectivity. Windows 8.1 will be a free update to existing Windows 8 users and will be made available to OEMs in August less than 1 year since launch. To increase and improve retail distribution, we entered into a strategic partnership with Best Buy to create a Windows store in over 600 Best Buy locations. These store within a store locations provide a large scale hands on consumer experience that showcases Microsoft devices and services. The percentage and breadth of touch devices available at retail continues to improve. The first 8 inches Windows tablet became available at retail a few weeks ago. It has legacy application compatibility, includes Microsoft Office and retails for less than $400 We expect additional compelling small screen devices to be available in the coming months. Less than a year ago, we launched Surface RT and Surface Pro, each with a unique value proposition. Surface is one part of our journey to bring innovative, compelling Windows devices to market in the modern era of computing. With each step, we analyze our progress and fine tune our action plans as needed. Here's what we did this quarter. We reduced the price of Surface RT by $150 is $3.49 per device. As a result of this price change, as well as inventory adjustments for related parts and accessories, we recorded a $900,000,000 charge to our income statement. While this resulted in a negative $0.07 impact on earnings, We believe this pricing adjustment will accelerate Surface RT adoption and position us better for long term success. We also increased retail distribution this quarter. Surface is now available in 29 markets and 10,000 retail locations. We expanded the availability of Surface to our business and institutional customers. Through our new Channel expansion program, commercial customers are able to purchase Surface devices from authorized resellers in the U. S. Over the next few months, we will authorize commercial distributors and resellers in more countries. So in summary on Windows, we are working hard with our partners to gain share in the evolving and growing device market. I want to be very clear. We know we have to do better and that's one reason we made the strategic and organizational changes we made last week. With over 1,500,000,000 Windows users around the world, a transition of this magnitude takes time. We are confident we are moving in the right direction. Now on to our Enterprise business, which continues to be strong. We closed out the year with record unearned revenue of $22,400,000,000 as businesses continue to make long term commitments to the Microsoft platform. Within our server and tools business, we continue to make significant improvements in performance, reliability and scalability with SQL Server. As a result, customers are increasingly moving mission critical and DI workloads to the platform. While SQL Server has been the unit share leader in the market for some time, it has consistently outgrown the market over the past 12 months and is now the 2nd largest database in revenue share. We recently announced the next versions of Windows Server and System Center, which will continue to deliver on our cloud OS vision. With new features and enhancements in virtualization, storage and networking, we We are empowering our customers to more efficiently manage their application services and their private, hosted and public cloud infrastructures. In Windows Azure, we continue to innovate and broaden our cloud platform offerings. We recently announced an important enterprise partnership with Oracle that will enable customers to run Oracle software on Hyper V and in Windows Azure. In June, we announced the public preview of Windows Azure in China operated by 21Vianet, making Microsoft the 1st multinational organization to offer public cloud services in China. As a result of the greater choice and flexibility, we are seeing increased customer traction, both in terms of an increase in enterprise customers, but also the average deal size. Our productivity solutions continue to be a top priority for CIOs. As enterprise customers look to modernize their productivity infrastructures, they are increasingly turning to Office 365. We recently announced the expansion of commercial availability into several new markets, making Office 365 available in over 125 markets worldwide. I'm pleased to share that momentum is accelerating and Office 365 is now on a $1,500,000,000 annual revenue run rate. During the quarter, we saw ongoing momentum for our consumer services such as Office 365 Home Premium, SkyDrive, Xbox Live, Skype and outlook.com. By giving consumers rich, high value experiences across productivity, Communications and entertainment, these services can help give our products and our overall ecosystem a strategic advantage in today's marketplace where the line between home and work is blurring for many customers. Our unified communication offering of Skype and Link are great example of where customer and enterprise products can be mutually reinforcing and create more opportunity for Microsoft. In summary, The Q4 continued many of the trends we saw developing throughout the fiscal year. We continued to make important strides toward our strategy to create a family of devices and services for individuals and businesses to empower them for the activities they value the most. Some of our investments are already paying off, while others reinforce the foundation that positions us for future growth and profitability. With that, I'll hand it over to Chris to give more details about this quarter before I come back to share thoughts on the Q1 of fiscal 2014. Thanks, Amy. First, I'm going to review our overall results and then I'll move on to the details by business segment. Revenue was up 3 percent to $19,200,000,000 and operating income declined 11% to 6,200,000,000 Earnings per share declined 19 percent to $0.59 Foreign exchange had a $257,000,000 or 1 percentage point negative impact to revenue this quarter and a $177,000,000 or 3 percentage point negative impact to net income. From a geographic perspective, revenue in the U. S. Was strong relative to other regions. Annuity revenue continued to be strong Growing 13%. We had record unearned revenue of $22,400,000,000 and our contracted not billed balance was approximately $21,000,000,000 Now to the results for the Windows division, where revenue declined 5% this quarter. The x86 PC market continued to decline. While business PCs showed modest growth, we estimate consumer PCs declined more than 20%. As a result, OEM revenue declined percent. OEM revenue lagged the PC market, primarily due to market dynamics in China and lower ASPs reflecting the introduction of our small screen touch offerings and current period incentive programs. Non OEM revenue grew 22%, driven by sales of Surface and continued double digit growth continued progress in the transition from Windows XP and today almost 3 quarters of enterprise desktops are running Windows 7. Volume licensing of Windows delivered more than $4,000,000,000 in revenue this year. Next, I'll walk through our server and tools business, which posted another solid quarter with 9% revenue growth and double digit bookings growth. Product revenue grew 9%, driven primarily by growth in premium versions of Windows Server and SQL Server. Our cloud momentum continues with strong customer adoption, upsell to higher level services and increased innovation. We released a number of Azure services including mobility, Media and website services and a growing number of customers are already using multiple services for their cloud platform needs. We added 25% more enterprise customers this quarter and now over 50% of the Fortune 500 are using Windows Azure. In the data center, system center revenue grew 14% and the premium version of Windows Server continued to see significant revenue growth. Hyper V, our virtualization product continued to gain market share over the past year. Companies such as Aston Martin and Grant Thornton continue to look to Hyper V and System Center to deliver their critical Business, SQL Server revenue grew 16% and again outpaced the broader market. Last month, we announced SQL Server 2014, the next version of our data platform, which has in memory capabilities built right into the core database. We also announced Power BI for Office 365, a cloud based BI solution that combines the power of SQL Server with the familiarity of Office. Now, I'll move on to the Microsoft Business division, where revenue grew 2%. Within that, business revenue grew 7% driven by 10% growth in annuity revenue. Consumer revenue declined 27%. Results in our consumer business were driven by Declines in the consumer x86 PC market and the shift to subscription offset in part by attached gains. As our customers transition to this new subscription model, there is a short term impact to revenue due to the changes in the timing of revenue recognition. But over time, we expect our revenue to grow and become more recurring and predictable. With the subscription model, we are providing greater value to Through frequent product updates, new cloud services and attractive pricing, we saw strong early adoption of the subscription offering and now have more than 1,000,000 Office 365 Home Premium subscribers. It's been a big year for Office 365 And as Amy said, it's now on a $1,500,000,000 annual revenue run rate. This was our strongest quarter ever with more net seat adds in the quarter than all of fiscal 2012. We're seeing strong upsell with 1 in 3 Office 365 seats now running premium workloads. In terms of our productivity offerings, we continue to see strength with Exchange, SharePoint and Link each growing double digits. Link revenue grew over 30% driving our Enterprise Communication business to deliver more than $1,000,000,000 revenue in this fiscal year. Additionally, we met a key milestone in the Lync and Skype integration and users can now seamlessly communicate in voice and I'm across the two services. Next, I'll move on to the Online Services division where revenue grew 9% and operating performance improved by $107,000,000 or 22 Online advertising revenue was up 11%, driven by both rate and volume improvements in our search business. In the entertainment and devices Vision revenue grew 8%. Xbox Live transaction revenue grew nearly 20% and is providing economic opportunities for publishers in the soft console market. This quarter, we announced our next generation gaming and entertainment console Xbox 1. And at E3, we showcased an impressive line of games that will be coming Progress with Windows Phone continues as our partners including Nokia, Samsung, Huawei and HTC are delivering new phones at a broader range of price points. Telefonica also recently announced an enhanced marketing effort to promote Windows Phone 8 devices. And with the recent Sprint announcement, Windows Phone 8 devices will now be available on all major U. S. Operators. Now I'll cover the remainder of the income statement. Cost of goods sold increased 14%, principally driven by Surface and growth in cloud Operating expenses grew 9%, primarily related to sales and marketing for Surface and Windows 8. This quarter our CapEx increased as we continue to invest in our cloud infrastructure and expand our geographic footprint to support the growth in our online businesses. And finally, we returned $2,900,000,000 to shareholders in buybacks and dividends. Now I'll turn the call back to Amy for our outlook. Thanks, Chris. Before I discuss For expectations for the Q1, I'd like to spend a few minutes discussing last week's announcement on 1 Microsoft. If you haven't already done so, I encourage you to read our strategy memo and Steve Balmer's e mail to employees. Microsoft is rallying behind a single strategy. As a part of this, we implemented a new organizational structure that will allow us to advance our strategy more quickly and more efficiently. We are currently in the process of determining what changes, if any, will be made to our reporting segments. In late September, we will host an analyst event here in Redmond, at which point we will discuss our strategy, our new organizational structure and any changes to our reporting segments. We will also give more thoughts on our full year outlook at that time. Please look for additional details from Chris over the coming weeks. Now moving on to our expectations for the Q1. In Windows, We expect revenue to continue to be negatively impacted by the decline in the consumer x86 PC market. Excluding the impact of the Windows upgrade offer in the prior year, OEM revenue should account for 65% of the division's revenue and should decline mid teens. Non OEM revenue should account for approximately 35% of the division's revenue, primarily reflecting revenue from volume licensing and including Surface RT at its new price point. When updating your models, please keep in mind In the Q1 of fiscal 2013 prior to the launch of Surface, OEM accounted for 75% of the division's total revenue. Within Server and Tools, product revenue, including transactional and multiyear licensing, is about 80% of the division's total, while Enterprise Services is the remaining 20. We expect both product and Enterprise Services revenue to grow high single digits. In the Microsoft Business division, we expect business revenue to account for approximately 85 percent of the division's total, while consumer revenue should account for the remaining 15%. Business revenue should grow mid single digits reflecting low double digit growth in annuity and the shift from transaction licensing to cloud services. With the ongoing shift to subscriptions, consumer revenue will lag the x86 consumer PC market by approximately 5 percentage points, even as Attach continues to grow. This excludes the impact of with upgrade offer in the prior year. As a reminder, business revenue accounted for 80% of total revenue in the prior year. In the Online Services division, we expect revenue to grow low double digits, reflecting growth in search revenue, partially offset by lower display revenue. With the Entertainment and Devices division, we expect revenue to decline low single digits as the industry awaits the next generation consoles. For the Q1, cost of goods sold will reflect surface as well as the impact of the capital expenditures we made in fiscal 2013. As a result, COGS should grow over 20%. Other income and expense includes dividend and interest income offset by interest expense and the net cost of hedging. In the current low interest rate environment, we expect these items to generally offset. For the Q1 regarding CapEx, we expect continued growth in our investments in our global data centers. Excluding the impact of the Windows and Office upgrade offers, unearned revenue should roughly follow historical seasonal patterns. Now turning briefly to the full fiscal year, we are reducing our operating expense guidance. We now expect fiscal year 2014 operating expenses to be $31,300,000,000 to $31,900,000,000 with growth in the low teens for the Q1. We expect our tax rate to be between 18% 21% for the full fiscal year. In summary, as we look back on the year, Fiscal 2013 was a pivotal time for Microsoft. With Windows 8, we increased our addressable market. Our OEM partners have started capitalizing on the new opportunities, delivering a wide range of new Windows hardware from phones to tablets to new PCs. We extended our first party devices through Surface We modernized productivity with Office 365 changing our business model. For the first time, both businesses and consumers can now access Office through subscription. We took share from key competitors and key enterprise markets. We added several new features, including infrastructure as a service capabilities to Windows Azure. With Azure, We are fundamentally changing the way businesses manage their IT infrastructure and we continue the expansion of our data center footprint, which enables us to deliver high value services and experiences globally. As we look to fiscal 2014, we're focused on a single strategy. With our new organizational structure, we believe we'll be able to execute more quickly and more efficiently, driving long term growth, profitability and shareholder value. With that, I'll turn it back to Chris and we'll take some questions. Thanks, Amy. We want to get to questions from as many of you as possible, so please just stick to one question. Operator, please go ahead and repeat your instructions. And we do have a first question from Walter Pritchard with Citigroup. Your line is now open. Thanks, Amy. I'm wondering if you could talk a little bit about you talked about COGS in Q1 and you don't mention COGS for the rest of the year. Obviously, you have Xbox 1 launching in the Could you give us some guidance about how we should think about that product having an impact on margins, maybe comparing it $360,000,000 or anything else you could do to help us directionally with the COGS impact beyond Q1? As we transition to a device Services company, I think you should keep in mind that we expect CapEx to continue to grow as we ramp our business. Specifically, to Xbox 1 And new generation of consoles and launches, I think you should think about that as we think about all console life cycles. So keep that in mind as you model COGS and seasonality throughout the year. Thanks Walter. Next question please. Our next question comes from Mark Merzler with Sanford Bernstein. Your line is now open. Thank you. Can you give us some color On the short term revenue impact of the move to the cloud, is it just MBD? Is it also in server and tools? How does the license revenue convert To cloud revenue? Mark, thanks for that question. It is primarily in MBD where we had a higher of our revenue that was accounted for transactionally, both on the business side and in the consumer side. So I think that's why you've seen us in our outlook for Q1 try to start to explain that transition to consumer by saying that we expect it to lag the PC market by approximately 5 percentage points while attach increases. Is there a similar lag on the transactional side on the enterprise? Yes, you can see it when we gave the guidance for the business segment. We said 10% growth in the annuity. And so that would clearly say that part of that is a transactional move from recognized upfront revenue to multiyear licensing agreements. Thanks, Mark. Next question please. Our next question comes from Phil Winslow with Credit Suisse. Your line is now open. Hi, guys. Just a follow-up on actually both those 2. First, Amy, obviously, when you go to a subscription model, you have less upfront Kind of lower billings that 1st year versus license. I wonder if you could give us sort of a backfill where $1 of cloud or Office $3.65 revenue would have been in that 1st year would have been $3 relative to license just so we can try to backfill and help with that Transition and also actually to Walter's question about Xbox COGS. Maybe you could give us a sense for if this cycle really Could be any different than previous cycles when you thought about pricing relative to the cost of the console itself? Thanks. I'll try to remember both those questions. Let me take the second one because it's the most recent in my mind. I would not think about this console cycle as being any different from prior cycles. So let me go back The first question was just can I give an example, I believe, of how to think about the transition from how we used to recognize revenue when we bought Something upfront transactionally versus buying a subscription from us? I'll give an example. If you used to buy a License from us as a consumer and paid us for example $100 for ease of math, we recognized $100 in the period in which it was purchased. Now, if that same person went and bought Office 365 Home Premium and once it was activated, we will recognize the revenue over the period of the Purchase which is 12 months and recognize it ratably. Thanks. Next question please. Our Question comes from Keith Weiss with Morgan Stanley. Your line is now open. Excellent. Thank you guys for taking my question. I was wondering focusing on the server and tools division, You guys came in with high single digit growth versus the guidance of low double digit growth. I was hoping you could walk us through some of the elements that perhaps transpired during the quarter That caused that gap of why you came in slightly below expectations there and to what extent was the shift towards subscriptions a part of that? Let me start by saying server and tools had a very good quarter. We continue to win share in virtualization with SQL Server and continue to grow faster than both Oracle and IBM. Revenue did grow 9%, which importantly far out based on the underlying hardware market. And over the period of the quarter, we did see the hardware market fundamentally come in a bit lower than we had expected. Great. Thanks, Keith. Next question, please. Our next question comes from Heather Bellini with Goldman Sachs. Your line is now open. Great. Thank you very much. Amy, I was wondering if you could talk a little bit about the incentive Pricing you've been doing not just on your own devices like Chris mentioned in his prepared remarks, but also in the OEM market. And if you haven't done Incentive pricing at the OEM level, is there a chance we could see this strategy going forward as a way to help lower the price points of consumer PCs and then hence trying to spur demand. Thank you. Thanks, Heather. I think it's a great question. I do think that we should think about incentives and all of our programs, including a small screen touch to you that we've launched as a way to increase the breadth of our Windows devices available across all price points. Thank you, Heather. Next question please. Our next question comes from Rick Shirland with Nomura. Your line is now open. Thanks. I wonder if you have any perspective for us on you've got Intel's Haswell shipping now, 8.1 coming in probably October. Are you sensing that OEMs are Trying to manage inventories down for the time being and waiting cautiously. Intel suggested that maybe you're seeing some inventory liquidation. So I wonder if you could Thanks Rick. I think like the rest of the ecosystem, we are Cited by the advances Intel's made with this 4th generation core processor and we're off looking forward to the next Atom chip. But with launch Yes, a little less than a month ago. I think it's a little bit too early for me to say and we'll have to wait and see how the quarter plays Next question please. Our next question comes from Brent Thill with UBS. Your line is now open. Amy, on the expenses you're revising next year down and it looks like your expense growth will materially slow And what it was this year, I'm just curious if you could just help us understand where that's coming from and how you're thinking about that for next year? Well, actually, I think this is I feel good because I think in some ways the reorg we announced last week Along with our increased focus on our new single strategy has allowed us to really look and say, what are the things we're going to put And focus to improve our execution. And so I feel quite good about our ability to do that. And you've heard us say before, many of the reasons we did this reorg are about Doing things better and more efficiently. Thank you. Thanks, Brett. Next question please. Our next question comes from Ed McGuire with CLFA. Your line is now open. Hi, good afternoon. Amy, you had Discussed your increased CapEx this quarter and I was wondering if you could address the margin profile of your cloud Services, in the comments you discussed how you have higher data center costs and what I'd like to Understand is whether this is temporary as you're ramping up this transition towards subscription business or whether this actually changes The gross margin profile of these revenues. Thanks. Thanks, Ed. It's a good question. As we transition to a device Services company, that is a multiyear commitment to evolve our business. And you should expect the CapEx will continue to grow as we ramp that business. With the expansion of Azure service offerings and the continued momentum in Office 365 as well as our consumer services, Investing in this global footprint to meet customer demand is incredibly important and quite strategic. And really the question is our ability to scale smartly and that will create an advantage for us that we can pass along to our customers. And so I look forward to being able to move these data centers globally to reach more people with more services. Okay. Thanks, Ed. Operator, next question please. Our next question comes from John DiFucci with JPMorgan. Your line is now open. Thank you. Amy, your CapEx this quarter was about $700,000,000 or greater than $700,000,000 greater than you guided just 90 Why was there such a sudden change? I know Chris, I think, explained why it was higher and why it's going to be higher going forward. But Why was it such a sudden change so dramatically just in this quarter? And will this planned increase going forward affect your ability to do things like buy back shares? In Q4, really, as we continued to add Azure services, in fact we added over 80 this quarter and with the increased demand of Office 365 $1,500,000,000 annual run rate up from just $1,000,000,000 in Q3. I would think about that as our ability to increase demand and meet demand globally with our services. And so doing that in Q4 was important because you want to be ahead of demand there. So was that something that was unexpected? You just had higher demand in Q4? We're accelerating. Okay. And will this Does that affect your ability to buy back shares going forward, this increase in CapEx? No. I mean our cash, We returned $2,900,000,000 this quarter and over $12,000,000 for the year and we'll continue to take a balanced approach to capital allocation With those investments, acquisitions where they make sense and return of capital to shareholders. Okay. Next question please. Our next question comes from Kash Rangan with Merrill Lynch. Your line is now open. Hi, thank you very much. Amy, congrats on your first conference call as CFO. My question had to do with the Windows side All the business, I know that you had an impairment charge for the inventory clearance, but even if I back if I add that back in, it looks like The operating margins in the Windows business were sequentially lower quite materially. I just wanted to get some insights into what drove that from the March quarter into the June quarter. And as you look further out into the operating margins of the Windows business, given that you're going to be focusing on Surface, how should we think about the margin structure? I guess you have a Volume threshold to clear before you can start to make a margin given that it's more of a product. But really 2 parts to that question, love to get your insights. Thank you so much. Thanks, Kash. Let me address what I think were the 2 components. The first component is like a general question about margins this quarter for Windows. As you said, they were impacted by Surface and the second one is by the marketing investment we continue to make in the ecosystem to move it forward. Overall, I think as you think about the Windows division as we reported, obviously, since there's a mix between hardware and software, You should continue to expect margins to reflect that mix. Thank you, Kash. Next question please. Our next question comes from Ross MacMillan with Jefferies. Your line is now open. Thanks a lot. Amy, I just wanted to drill into the billings growth where we adjust for the unearned. And it's a lot higher for the server and tools business, which is obviously going through a transition towards more Subscription arrangements, that it and what higher there than in the MBD segment. I'm just wondering if you could compare and contrast why that might be. I understand the consumer piece in MBD, but is the other piece of this just that there are more So the traditional licensing arrangements in MBD with enterprise customers and so the impact from the transition is all the greater and that's why you see that more Jude, billings growth rate in MBD. Thanks. Ross, thank you. It's always terrific when someone answers their own question. You Have it exactly correct. Great. Thank you. Thanks. Thanks, Ross. Next question please. The next Question comes from Greg Moskowitz with Cowen. Your line is now open. Thank you very much and good afternoon. Just a follow on a bit on Kash's question. With Windows revenue coming in where it did, we are getting a few questions from investors about how Windows fared this quarter relative to the PC units. If we were to exclude tablet revenues both Surface and otherwise, just wondering Amy if you might be able to say roughly on a year over year basis how Windows PC revenue Compared to the low double digit PC unit decline cited by the IDCs and Gartner's? Chris actually covered that a bit in his comments, but let me reiterate, because I do understand the question, I think, which is related to our OEM revenue of 15% down 15%. It was related, I believe, to China, lower ASPs on the small screen queue that we mentioned as well as some of the incentive programs that we had in place during the quarter. Our next question comes from Raimo Lenschow with Barclays. Your line is now open. Thank you. And Amy, welcome on the first earnings call. I had a question on the Business PC side. That sort of was an area of strength for the Windows division And you saw some growth there. Can you talk a little bit about if that's kind of if you see that as a sustainable number or is that still driven by the end of life for Windows XP. Thank you. Yes. As we mentioned, our Windows business did make incremental progress in the business side. We expect that to continue in Q1. And with the end of life of Windows XP next year, We expect continued migrations. And today in the enterprise about 3 quarters of desktops are already running Windows 7. Kevin, thank you. Good. Thank you. Next question please, operator. All right. Our next question comes from Brendon Barmicle with Pacific Crest Securities. Your line is now open. Thanks so much. Amy, contracted but on build was down sequentially from Q3, the first time we've seen that in the last 2 years. What's attributing to that shift? Thank you. Actually, I think our strong annuity growth as well as our record unearned balance, I do believe supports our belief that the strong performance of our multiyear license agreements is in place. Thanks, operator. I think we have one more. Okay. The next question is going to come from Karl Keirstead with BMO Capital Markets. Your line is open. Thanks. I just wanted to ask a question about the mix shift to multiyear licensing across Microsoft. That's been a big part of the story. It's been up about 5 percentage points year over year each quarter in fiscal 2013. Amy, I'm just wondering as we look forward to fiscal 2014, Can we expect it to increase at that clip? Or is the software assurance attach rate now getting high enough that that mix shift should start to moderate? We've I continue to believe we'll have double digit annuity growth next year. So I think that shift you've Same, especially as we continue to move people to our cloud services, will continue. Okay. Thanks. Okay. So that will wrap up our 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 and at our Financial Analyst Meeting be held in late September, where we'll share more details about our long term strategies, the organizational structure and outlook for the rest of the fiscal year. Thank you again for joining us today. This concludes today's conference. Thank you for your participation. You may disconnect at this time.