Earnings Call: Q1 2013

Oct 18, 2012

Welcome to Microsoft's Fiscal Year 2013 First 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, you may disconnect at this time. And I would now like to turn the call over to Bill Kofet, General Manager, Investor Relations. Bill, you may begin. Thanks, Gabriel, And thank you everyone for joining us this afternoon. As usual with me today are Peter Klein, Chief Financial Officer Frank Brode, Chief Accounting Officer and John Sedopf, Deputy General Counsel. On our website, microsoft.com/investor is our financial summary slide deck, which is intended to follow our prepared remarks and provide the reconciliation of differences between GAAP and non GAAP financial measures. Note that all growth comparisons we make on the call today will relate to the corresponding period of last year. Unless specified otherwise, all impacted numbers for the current and the $189,000,000 revenue deferral primarily related to the office offer. 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. You can replay the call and view the transcript at the Microsoft Investor Relations website until October 18, 2013. 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 Okay. And with that, I'll turn the call over to Peter. Thanks, Bill, and thanks everyone for joining us. Our first quarter revenue was Flat year over year at $17,400,000,000 reflecting solid growth in multiyear licensing, but a slowdown in transactional revenue. Our transactional revenue, which includes our OEM business, was impacted by a challenging PC market, normal purchasing slowdowns in advance of upcoming product launches and tough economic conditions, particularly in Europe. This impact was offset by growth in multiyear licensing revenue, which benefited from healthy renewals of enterprise agreements, as customers continue to make long term commitments to the Microsoft platform. Our productivity and infrastructure offerings remain a top priority for CIOs. In productivity, our collaboration and communication solutions continued to perform well with double digit revenue growth this quarter. In the data center, our virtualization capabilities And hybrid cloud scenarios are enabling enterprises to move to the modern data center on their term. And on the data platform, We are well positioned to take share as customers increasingly turn to SQL Server 2012 for their mission critical workloads and business intelligence needs. As part of our ongoing focus to increase the overall value we bring to our customers, we are enhancing our unique Hybrid IT capabilities with targeted acquisitions like StorSimple and PhoneFactor. Acquisitions of industry leading solutions like these Accelerate our ability to help CIOs better manage their environment. As I mentioned earlier, The PC market was challenged this quarter. In addition to a tough economic environment and competitive pressures, OEMs drew down their Windows 7 inventory as they began the transition to Windows 8. Our partners are building an incredible breadth of hardware. To date, we have certified over 1,000 unique Windows 8 Systems, including beautiful new tablets, convertibles, Laptops and all in ones, and there will be more to come. As I look at where we are, We have kicked off the largest launch wave in our history. And in a 12 month period, we will have refreshed nearly all of our major products. With these launches, you are seeing the investments we've made over a number of years converge. And more importantly, You are seeing us execute on our commitment to deliver devices and services that people love and businesses need. Whether we build our own devices as we have chosen to do with Xbox and Surface or work with our partners to develop stunning new Windows devices, We will continue to offer consumers and businesses wide ranging choices, so that every user can get exactly what they want at the price that is right for them. With Windows 8 and our cloud services, we will delight users with an integrated Experience across their devices. Right out of the box, Windows customers will be connected to unique Communications, productivity and entertainment services from both Microsoft and our partners. Services like SkyDrive, which allows users to store and manage their data online or the recently announced Xbox Music, which brings entertainment to the forefront. Users can access their content seamlessly from any device at any time. With the new office, which will be made available in the coming months, we will enable productivity scenarios that take full advantage The hardware coming to market, including new mobile form factors with touch and pen capabilities. And with Skype, Yammer and other services, we put social directly into productivity and collaboration. Within the enterprise, CIOs are using technology to drive their business strategy forward. Whether it's making employees more productive, unlocking key business insights or managing a growing number of devices, We are uniquely positioned to address their needs. Our products are scalable and flexible and provide the lowest total cost of ownership. As we enter this new era at Microsoft, there's incredible opportunity for our partners, developers and customers. And we are well positioned for sustained profit growth in the future. With those thoughts, I'll hand it back to Bill for more details on our results, and then I'll come back to provide some thoughts on our outlook for the Q2 and full fiscal year 2013. Thanks, Peter. First, I'm going to review our overall results and then I'll move on to the details by business segment. Revenue for the quarter was flat at $17,400,000,000 Operating income was $6,700,000,000 down 7%. Earnings per share was $0.65 a decline of 4%. Cash flow from operations was roughly flat at $8,500,000,000 Foreign exchange had a $257,000,000 or 2 percentage point negative impact to revenue this quarter, but the impact to net income was immaterial. From a geographic perspective, this quarter we saw tough conditions in Europe, where revenue declined mid single digits. In Emerging Markets, PCs were roughly flat, a significant deceleration from the growth rates we had been seeing previously. Our Enterprise Business and Emerging Markets continued its double digit revenue growth. When looking at our revenue mix, consumer and business transactional revenue declined, which is typical ahead of launches. Multi year licensing revenue remains strong with 15% growth, representing roughly 45% of our total revenue for the quarter. When adjusted for the $1,900,000,000 cumulative impact of the Windows and Office revenue deferrals, Unearned revenue was $17,700,000,000 up 13%. Our contracted not billed balance was roughly $20,000,000,000 Now let's move on to the PC market. We saw the overall PC market declined this quarter in advance of the launch of Windows 8 and in part due to competitive pressures and the challenging macroeconomic climate I noted earlier. Business outperformed consumer and emerging markets outpaced developed markets although at a reduced rate. Moving to the results for the Windows division, revenue declined 9% and lagged at the PC market due to OEM inventory drawdown prior to the Windows 8 launch and the ASP dynamics of emerging markets relative to developed markets. We have discontinued the bridge to the PC market as Windows 8 will be a platform across a broad set of form The shape of Windows revenue this quarter was non linear as revenue slowed down dramatically in the 1st 2 months driven by the weak PC market dynamics. Revenue accelerated in September as OEMs started to build up for Windows 8 launch demand. Windows 8 OEM pre sales revenue was roughly $800,000,000 approximately 40% higher and Windows 7 presales revenue in the comparable launch quarter. This quarter volume licensing revenue grew double digits And our Windows 7 Enterprise deployments continue to grow though at a slower rate than last quarter. On Tuesday, we announced pricing, market availability and opened preorders for Surface. Next week on October 26, we will launch Windows 8 and Surface. With a modern user interface, ability to support multiple form factors Now we'll move on to the Microsoft Business division, where revenue grew 1%. Business revenue grew 3% And within that, multiyear licensing revenue grew 8%. Reflecting the PC market dynamics, Consumer revenue declined 8%. Last week, we released to manufacturing the new office and announced that it will be generally available in the Q3 of fiscal year 2013. The new office has a fresh look and touch friendly interface that lights up on Windows 8 devices. Since the customer preview in July, millions of people have downloaded the preview or signed up for the service and we feel great about the feedback and positive response from users. The new office is also in the cloud and features social enterprise capabilities with SharePoint, Yammer and Skype. It is our most comprehensive office release ever. Our productivity server offerings continue to perform well. Exchange, SharePoint and Link collectively grew double digits again this quarter. Link revenue grew at an impressive rate of over 40% as enterprises chose our unified communications platform for their communication and collaboration needs. Dynamics revenue grew mid single digits and within that Dynamics CRM revenue grew over 30%. This quarter, we announced key milestones to our ERP portfolio with updates to Dynamics GP and NAV. Both these releases deliver great value to customers and partners through faster and more efficient implementations and compelling application functionality. Now let's move to server and tools, which posted another solid quarter with over 20% bookings growth and 8% revenue growth. Enterprise services grew 13% and multi year licensing revenue grew 19%, driven by new customers who are investing in our product Wave. Transactional revenue declined this quarter driven in part by a slower server hardware market and customers switching to multiyear licensing. In the data center, we are seeing strong adoption of our platform across cloud, on premise and hybrid scenarios. System Center revenue grew more than 20% and we launched Windows Server 2012 in September with increased management and virtualization capabilities. Customers like Acer, Equifax and Volkswagen Financial Services are already using its robust set of technologies and features including network virtualization, live migration and continuous availability. We continue to gain virtualization share as customers like Pella and the city of Barcelona switch from VMware to Hyper V and System Center to build private clouds with increased efficiencies and higher savings. In the public cloud, we continued the pace of innovation and announced the release preview of Windows Azure Mobile Services, which connects Windows 8 apps to the cloud, back end hosted in Windows Azure. As Peter mentioned, over the past few weeks, we announced the acquisitions of StorSimple and PhoneFactor, which will enhance our position in data storage and device management. In our data platform business, SQL Server revenue continued to grow double digits. SQL Server premium revenue grew more than 20% as customers continue to deploy it for their mission critical workloads and business intelligence needs. By combining the power of SQL Server, SharePoint and Office, CIOs can create scalable Self-service BI platforms. Users can leverage these platforms to analyze and interact with data in bold new ways, Make real time decisions and gain insights from big data. We are seeing how SQL Server 2012 has raised the bar and Positioned us to grow faster than the competition. Next, I will move on to the Online Services division, where revenue grew 9%. Online advertising revenue was up 15%, driven primarily by rate improvement in search, offset in part by a decline in display revenue. Operating performance improved by $150,000,000 or 29%. Increasingly, users are finding better search results at Bing. In blind test, nearly 23 users chose Bing's web search results over Google's results and over 10,000,000 users have visited the Bing It On Challenge where they can compare Bing and Google head on. In In the Entertainment and Devices division, revenue declined 1%. While the console market was Tough, Xbox maintained its strong share and had 49% of the U. S. Market for the quarter. This holiday season, we have a great lineup of games headlined by Forza Horizon and Halo 4 and complemented by a rich catalog of Kinect games. We continue to see strength in Xbox Live, where our membership grew over 15%. This week, we announced Xbox Music, which leverages the cloud to integrate the music experience across the tablet, PC, phone and TV and has a worldwide catalog of over 30,000,000 songs. Xbox Music is the most comprehensive service available. It provides users unlimited streaming music on Windows devices, lets them play music based on similar artists and styles and allows them to purchase songs and albums. There's no other music service out there today that matches the capabilities of Xbox Music. We are excited about the upcoming launch of Windows Phone 8. We have a strong device lineup and breadth of operators across key markets. We will share more about Windows Phone 8 at our event on October 29. Moving on to Skype. This quarter, 120,000,000,000 minutes of calls were made on the Skype network, an increase of 58%. We continue to make progress with the integration of Skype into our portfolio of products and have announced the upcoming federation between LINC and Skype, which will allow users to access their contacts through a common interface. Skype is also central to communications in the new office and Skype calling is included in the upcoming Office 365 subscription service. I will now cover the remainder of the income statement and share some expectations going forward. Cost of goods sold increased 10%, primarily due to Nokia platform payments, inclusion of Skype costs, growth in cloud infrastructure and enterprise services. As we look forward, Excluding Surface, we expect COGS to grow high single digits for the full fiscal year. Operating expenses grew 2% to $6,500,000,000 For the full fiscal year, we are reaffirming our guidance for operating This quarter was $226,000,000 driven by the gain from the MSNBC sale. Other income 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 remainder of the year. This quarter, our tax rate was approximately 19%. For the full fiscal year, we expect our effective tax rate to be 19% to 21%. Adjusting for the impact of the Windows upgrade and Office offers, We expect unearned revenue will roughly follow historical sequential growth patterns for the 2nd quarter. We expect capital expenditures for the full fiscal year to be roughly $3,500,000,000 This quarter, we returned $2,900,000,000 to shareholders in buyback and dividends and raised the dividend 15% to $0.92 per share annually. Now I will turn it back to Peter for our revenue outlook. Thanks, Bill. For the remainder of the call, I'll discuss our revenue expectations for the Q2 and full fiscal year 2013. Starting with server and tool, Product revenue, including transactional and multiyear licensing, is about 80% of the division's total revenue And Enterprise Services is the remaining 20%. As we noted last quarter, our customers are moving from transactional purchasing to premium products and multi year licensing agreements. We expect product revenue to grow high single digits for the 2nd quarter and low double digits for the full fiscal year. And we expect enterprise services revenue to grow low double digits for the 2nd quarter and mid teens for the full fiscal year. In the Microsoft Business division, multiyear licensing revenue, which is approximately 60% of the division's total should grow low double digits for both the Q2 and full fiscal year. Excluding the office deferral, transactional revenue, which is the remaining revenue in the division, should grow low single digits in the 2nd quarter and mid single digits for the full fiscal year. As a reminder, when updating your Q2 models, you should defer between 850 and $950,000,000 of revenue related to presales into the channel and the office offer. Amounts deferred for presales will be recognized upon general availability, while amounts deferred for the office offer will be recognized upon delivery, redemption or the expiration of the program in the Q4 of fiscal year 2013. Moving on to Entertainment and Devices division. While we have been maintaining our shared leadership position, the console market continues to be challenged. As a result, We expect revenue to decline low teens in the 2nd quarter, but to grow low single digits for the full fiscal year. In the Online Services division, we look to build upon improvements in share and search monetization. In the Windows division, as a reminder, 2nd quarter growth will reflect the recognition of $800,000,000 of revenue from Q1 presale, partially offset by roughly $100,000,000 of additional deferred revenue related to the Windows upgrade offer. Remember that the upgrade offer expires at the end of February, at which time we will recognize all remaining deferred revenue. Looking forward, we eagerly anticipate the launch of Windows 8. We are bringing a new range of capabilities and scenarios to Windows. And with support of system on chip architecture, we are moving beyond the traditional PC to the widest range of Windows hardware we have ever seen. New hardware will debut next week and will broaden over the coming months. With Windows 8, we are giving developers A modern platform in which they can build rich immersive apps unlike any the Windows ecosystem has seen. The Windows Store offers developers attractive financial terms and broad reach. With its grand opening next week, The Windows Store will have a strong lineup of apps. Just as with the hardware, the lineup of apps will become more robust over time. In addition to delivering Windows 8 next week, we will also launch Surface. Designed to be the ultimate stage for Windows, Surface allows users to seamlessly transition between consumption and creation and is an example of the substantial innovation that is enabled by Windows 8. We are hard at work manufacturing the devices and will ramp production over time. October 26 only marks the beginning of a journey we will take together with our partners and developers. Our collective success will be evident over time as we change the way people experience the power of technology. With that, I'll turn the call over to Bill and we'll take some questions. Thanks, Peter. And with that, Peter and I will take some questions. We want to get questions from as many of you as possible, so please stick to just one question and avoid long or multipart questions. Gabrielle, can you please go ahead and repeat your instructions? Yes, of course. Our first question does come from Rick Thanks. On the Windows and Windows Live division, there was no real guidance for the year. You just said you'd recognize all remaining Deferred revenue. Can you just help us understand what the variables are that we should be thinking about other than what the PC market grows at and by PC market, I think we need to define that as all Windows 8 compatible devices, including tablets. So Are there mix shift issues, the price you realize on a tablet versus a traditional notebook? What are kind of the variables we Should be thinking about in terms of how to model Windows and Windows Live revenues for the year? Yes. Thanks, Rick. That's exactly right. I mean, one of the Exciting things about Windows 8 is how it really redefines sort of how people think about devices and the experiences they get across those devices. And up until now, that's sort of narrowly been defined as, say, PCs or tablets and customers have been forced to choose And make trade offs, frankly, of what they get. With Windows 8, you can kind of get whatever you want at whatever price point you want. So whether you want a convertible With touch and pen and integration with your line of business apps, whether you want a tablet for great information and communications and entertainment, Whether you want to touch Ultrabook, all of those things come into play and all those things are available with Windows 8. And I think over time, We're going to see how that plays out, and that's the opportunity for us. And it's really a factor of thinking about how all those are going to play against each other. Operator, next question please. Our next question comes from Heather Bellini with Goldman Sachs. Your line is now open. Great. Thanks. Thanks, Bill and Peter. Just to Rick's question a little bit more specifically, and I was on another call before this, maybe you said it. But can you give us a sense of your expectations for Surface in the quarter? Or if you can't do that, can you give us a sense for what preorders were thus FAR, just to give us a sense of how that's ramping out of the gate and what your expectations are for that? Yes. Thanks, Heather. I mean, right now, we're focused on our launch, Both have surfaced and Windows 8 next week. And so that's really what we're excited about and the opportunity to show people all the great devices, all the great capabilities. And so we're not talking about that now. As we mentioned on the call, we're working hard on production. We're ramping production. We're excited about What we've heard so far, the feedback has been great. The reviews have been really good. And I think that demonstrates what we've been talking about, the capabilities and experiences That Windows 8 delivers across various form factors. Operator, next question please. Our next question comes from Adam Holt with Morgan Stanley. Your line is now open. Hi. Thanks guys. I'm going to shift The server and tools business, the billings were a little bit better than we thought, but the recognized revenue in the forward guide was a little bit lighter And I just wanted to drill into some of the expectations for the forward guidance. Are you assuming the transactional environment remains weak, do you still think you can out PACE, the transactional piece in terms of your business and what should we be thinking about in terms of the convergence of billings and recognized revenue? Thank you. Yes. Thanks, Adam. What we are continuing to see is the migration from transactional revenue to multiyear Licensing agreements, which is great because it's one of the things that's driving the business, which is the vision we have The road map, the resonance that has with our customers, and so they're making long term commitments to the platform. And so it's one of the reasons we gave you The bookings number and the multi year licensing revenue number of 20% 19%, because that's what you're seeing. And so as that's growing faster than The transactional, you'll see the bookings and the backlog grow and the recognized will follow over time. So that's really the thing to watch And we continue to be very bullish on that opportunity sort of across the board, whether that's through Windows Server, System Center, what we're doing in the private cloud and public cloud and certainly with SQL Server. So that trend that we're seeing in the migration to the multiyear licensing agreements He's driving that business both now and for the long term. Yes. And just to build on that, this is one of the strongest bookings quarters we've had in the last several years. Again, for a $19,000,000,000 business to have over 20% bookings growth, we feel, obviously, in addition to the All the products that have come so far this year, I think we feel pretty excited about the opportunity in that business. Thanks for asking that question. Gabrielle, next question please. Our next question comes from Mark Meuler with Sanford Bernstein. Your line is now open. Thank you. So question, given the slowdown in the PCs, how should we think about the Change or what's going on in the Windows adoption process? Are we seeing continuation at the current rate? Or is there some proportional slowdown in the rollout of Windows 7? We saw we continue to see you're talking about enterprise adoption, we continue to see that grow This quarter, although at a slower rate than we have in past quarters, but that opportunity remains very large. We're over 50% deployed. And remember, the end of life for XP is about 1.5 years away. So that remains a great opportunity for us that we see continuing on. But it is slowing a bit. It did this quarter. It did, yes, just this quarter. And it's a summer quarter. So I don't know that I would read too much into just one period. Gabriel, next question please. Our next question comes from Walter Pritchard with Citi. Your line is now open. Thanks. Just a follow on with some launch questions. So there's sort of 2 changes here to the business that we'll see going forward. 1 is the hardware piece in Windows and the other What looks like a pretty big ramp up on the retail side with some store presence. Understanding that the latter is probably in your guidance, can you just remind us On the store side, where you're allocating the expenses and is that present potentially grows over time, how you expect that to impact your financials? And then On Surface, should there be anything we think about other than sort of a price times the unit and making margin assumption? Is there any other nuances around the way you account for Surface In your financials. First question was about the retail stores and where that's showing up? Yes, where the expenses are. Got it. The expenses are in corp and they show up a little bit in COGS and a little bit in operating expenses. I'm sorry, what is the second part of your question? Just on Surface, I mean, is there anything else we should be thinking about in terms of how to model the impact of We know the price. We can make a unit assumption. We can make a margin assumption. Is there any deferrals, any OpEx impact, any warranty You're thinking about it, right? Okay, great. Thanks. Yes, Gabriel, next question please. Our next question comes from Kash Trangan with Merrill Lynch. Your line is now open. Hey, thank you very much. As you enter the world of the new form factors, Since you're coming a little bit behind relative to Apple, what is the right way to think about your differentiation relative to the consumer market opportunity for tablets And the enterprise market opportunity for tablets. Thank you. Well, I think one of our differentiations is we give everybody what they not What they want for the purpose they want it. When I talk to CIOs, for example, in enterprises, one of the things they're really excited about Is that Windows 8 devices give them a chance for their employees, the users of the technology to have the devices they want and bring to work, They get the kind of manageability, security, integration with their line of business apps they want. So I think there's a big differentiation in the enterprise across All the form factors, especially tablets that are increasingly coming into the workplace. On the consumer side, I think there's a range, not only a range of Price points and different kinds of form factors, but also unique and differentiated set of services and experiences that come with The device including Office, including SkyDrive, including Xbox Music. So I think across the board, you see Our next question comes from Brent Thill with UBS. Your line is now open. Thanks. Peter, if surface is successful, shouldn't the COGS be well above The high single digit growth for the fiscal year, I was just curious why you excluded it. Are you just waiting to see how the traction is before you give us More guidance or what is the explanation for that? Yes, that's exactly right. We'll see how it goes. Okay. Next question please. Okay. Our next question comes from John DiFucci with JPMC. Your line is now open. Thank you. I have a question on the deferred revenue for Specifically for the Windows business, even if you exclude the adjustments, deferred revenue for this business increased in the quarter And you normally or actually you always see a seasonal decline. I guess can you talk a little bit about that? What are we seeing there? Is this tied to multiyear Deals in this business now or is it something to do with some of these adjustments maybe we're not accounting for correctly? Yes. No, great. Thanks, John. It actually is that. It's multiyear licensing deals growing continuing to grow double digits. So that's what's driving the deferred there. So that's one sort of example of how enterprises are continuing to see value in adopting Window. Great. Thanks, Peter. Thanks, John. Gabriel, next question please. And our next question comes from Collyn Gillis with BGC Financial. Your line is now open. Great. Thank you. Looking at the server and tools line again, when the results first printed, we were asked quite a bit if that was showing any weakness In the enterprise spend environment, it sounds like a lot of that was just driven by the rotation of multiple year contracts. But can you talk about The marketplace right now and if the marketplace is weakening, do you find that to be an advantage given the cost preferences in that line? Well, it definitely is the migration from transactional licensing. Irrespective of weak market, strong market, we've got a great value proposition. It does Play very well in tough macroeconomic times because one of our great value propositions is the savings and efficiencies people get From using integrated technology across their stack at a really good price performance characteristic. So I would say we feel great about our value proposition in any environment. It does play well in a tough macro environment. But what we're seeing now in the financials, this is why we highlighted Bookings growth and the multiyear licensing growth is related more towards the migration from the transactional business. Okay. Thank you. And Gabrielle, next question please. Okay. Our next question comes from Philip Winslow with Credit Suisse. Your line is now open. Hi. Thanks, guys. I just have a question on just the margins of surface. Just kind of at a high level, don't want to know the exact margin percentage, but how did you sort of price your Surface relative to BOM, I mean, obviously, you guys have talked about sort of including implied revenue amount for a Windows license. Did you also take into account sort of a, Call it a weighted average attach rate of Office for a device and then add on a gross margin for the hardware, just kind of how you Built up to that and then just kind of at a high level, what was sort of the pricing thoughts behind service? Was it to drive just adoption of the platform? Was it to Was it actually make this a business and does that change at all near term versus longer term? Thanks. Yes, thanks. As with any pricing decision, it's really about The value proposition you have for your customers and the degree of capabilities and value you're delivering to them at a variety of price points for what they want. And that's really fundamentally what drives all of our pricing decisions. Do we have a really compelling value to offer our customers for the capabilities that we're delivering? And that's what we do across all our business and that's what drives our economic performance. Gabriel, next question please. And our next question comes from Ed McGuire with CLSA. Your line is now open. Looking at how you're beginning to combine product and services with Office 365 For home and then the bundling of services with Windows RT, looking forward, is this going to change the way that you allocate What might have been transactional revenues in the past to a combination of transactional and services revenues? Yes. Generally, that is correct. As we move to more delivery and services, that will show up as services revenue as opposed to transactional revenue. That's correct. But I do think it's just a it's a long term trend and you saw that in the commentary that we made around Our server and tools business, but we're having people that are making longer term commitments to Microsoft and that shows up in our annuity business and server. It shows up in things like Office 365, where people are having a subscription service. It shows up in things like Xbox Live, which you've seen happening over the last couple of years. So, Ed, I think you've got it right that we're seeing a lot more people that are committing to a longer term Relationship with Microsoft, which is clearly what we're striving toward. Gabrielle, next question please. Okay. Our next question comes from Brad Ryvak with Stifel Nicolaus. Your line is now open. Great. Thanks a lot. Peter, historically, the transactional aspect of MBD has followed the PC market roughly. Is there any reason to think That's not the case here for the final three quarters? Yes. In general, there's 2 things that impact the transactional business of MBD. 1 is the PC market and the other is product cycles. So one of the things we also see right in a period right before a launch of a new product on the transactional side in businesses is a slowdown and also it does track the PC market. So those are the two things to keep an eye on. Thanks, Gabriel. We've got time for 2 more questions. All right. Our next question comes from Raimo Lenschow with Barclays. Your line is now open. Thank you. Historically, when we had the launch of Windows product, there was a big uptick, especially on the consumer side. Now this time around, it's obviously different form factors that are playing in and consumers need to get used to it. How do you think about the momentum we should see in In terms of the Q1 out, the Q2 out, etcetera. Thank you. Well, without giving specific guidance, we're certainly very Excited about the capabilities that come with Windows 8 and the excitement that comes from that, and we're excited to talk about that at the launch next week. I think I'm encouraged by what we saw from the Windows 8 Sell in, that we've seen so far, the 40% growth over the comparable period last time. So we'll just keep And Gabriel, last question please. All right. Our final question comes from Gregg Moskowitz Cowen, your line is now open. Okay. Thank you. This is somewhat of a follow-up to Raimo's question. Over the past several months, many of those reviewing Windows 8 for PCs while praising the significant innovation behind the OS have also continued to focus on the dual interfaces and the adjustment that users will Is that something that causes you concern just when it comes to initial adoption levels of Windows 8? Just wondering how you think about that? Not a lot. I hear the feedback and as a user, we sort of have gotten used to it very quickly. At Microsoft, When we do innovation historically across our products, oftentimes, there's new things that come. And I understand initially people look at those things. And what we've seen over time is that those innovations have delivered way more value and way more productivity and way more better usability. And so I'm very confident that, That is even more true with the great technologies and capabilities and experiences that we have with Windows 8. And I think you have seen that The reviews of people who have used it over a longer period of time. And again, for those of you who will be hopefully using it early, You'll see that show up in your experience as well. Okay. So that's going to wrap up the Q and A portion of today's earnings call. We look forward to seeing many of you at the numerous events and conferences in which we'll be participating in this quarter. For those of you Unable to attend in person, these events will generally be webcast and you will be able to follow along at microsoft.com/investor. Please contact us if you need additional details. Thanks again for joining us today and have a great day. And that does conclude today's conference. Thank you very much for your participation. You may disconnect at this time.