Welcome to the Third Quarter 2014 Microsoft Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to turn the call over to Chris Suh, General Manager of Investor Relations. Chris, please proceed..

Thank you, operator. Good afternoon and thank you for joining us today. On the call with me today are Satya Nadella, Chief Executive Officer; Amy Hood, Chief Financial Officer; Frank Brod, Chief Accounting Officer; and John Seethoff, Deputy General Counsel.

On our website, microsoft.com/investor, we have posted a document summarizing our quarterly results, as well as a slide deck, which is intended to follow the quarterly results document and provide a reconciliation of differences between GAAP and non-GAAP financial measures.

Please keep in mind that all growth comparisons relate to the corresponding period of last year.

Unless otherwise specified, all impacted numbers have been adjusted for the cumulative effect of last year’s revenue deferrals and recognition related to the Windows Upgrade Offer, the Office Deferral, the Video Game Deferral, and the expense related to the non-tax deductible European Commission Fine.

As a reminder, in our segment reporting structure, we have consolidated revenue adjustments of this nature into Corporate and Other to provide better comparability of operating results. We will post this call’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 included in our live transmission, in the transcript, and in any future use of the recording. You can replay the call and view the transcript at the Microsoft Investor Relations website until April 24, 2015.

During this call, we will be making forward-looking statements, which 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-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission.

We do not undertake any duty to update any forward-looking statement. And with that, I will turn the call over to Satya..

Thank you, Chris. It’s great to have the opportunity to join today’s call. From my first day, I have said I am committed to an ongoing dialogue with investors. Joining these investor calls going forward is going to be a big part of that, and I am enthusiastic about today’s call. It’s been an incredibly busy couple of months.

In addition to executing on our plan and announcing new products and services, I have spent a lot of time gathering feedback and exchanging ideas with customers, partners, employees and investors. It is important and valuable to see the company with a fresh perspective to get grounded both our current realities and future opportunities.

As I have told our employees, our industry does not respect tradition, it only respects innovation. This applies to us and everyone else. When I think about our industry over the next 5, 10 years, I see a world where computing is more ubiquitous and all experiences are powered by ambient intelligence.

Silicon, hardware systems and software will co-evolve together and give birth to a variety of new form factors. Nearly everything we do will become more digitized, our interactions with other people, with machines and between machines.

The ability to reason over and draw insights from everything that’s been digitized will improve the fidelity of our daily experiences and interactions. This is the mobile-first and cloud-first world. It’s a rich canvas for innovation and a great growth opportunity for Microsoft across all our customer segments.

To thrive in this world, we will continue to zero in on the things customers really value and Microsoft can uniquely deliver. We want to build products that people love to use. And as a result, you will see us increasingly focus on usage as the leading indicator of long-term success. To that end, we are already making progress.

Amy will provide additional detail, but I wanted to say a few words about the quarter itself. Today’s results demonstrate the breadth and strength of our overall business. We saw strong momentum in cloud services. Our commercial cloud business more than doubled year-over-year with Office 365 and Azure both performing extremely well.

Business customers continue to make Windows their overwhelming platform of choice, with solid growth in both Windows Pro and Windows volume licensing revenues. We saw continued improvement in search, with our U.S. search share growing to 18.6% and search revenue increasing by 38%. Bing continues to deliver platform capabilities across our products.

One recent example of this is the recently announced Cortana virtual assistant for Windows Phone. And very importantly, across all our businesses we continued to have a rigorous focus on execution and cost discipline, resulting in solid revenue and earnings per share. I sum up this quarter in two words execution and transition.

We delivered solid financial results and we took several steps to reorient Microsoft. In recent weeks, we talked about how we are advancing Office, Windows and our data platform and how we think holistically about the constituencies we serve IT, developers and people at the center in a mobile first cloud, first world.

We will continue to invest in our cloud capabilities including Office 365 and Azure in the fast growing SaaS and cloud platform markets. We are committed to ensuring that our cloud services are available across all device platforms that people use. We are delivering a cloud for everyone on every device.

At the same time, we have bold plans to move Windows forward. We are investing and innovating in every dimension from form-factor to software experiences to price.

Windows platform is unique in how it brings together consistent end user experiences across small to large screens, broadest platform opportunity for developers and control and assurance for IT. And with the addition of Nokia’s talented people and their depth in mobile technologies we will enhance our device capabilities.

The past two and a half months have been a period of significant change at Microsoft, but also a period of nailing the basics and delivering against our product and financial plans. In the months ahead, we will continue to be intensely be focused on two things rock-solid execution and pivoting the company towards the future.

We will continue to push hard and move quickly and you will see the proof of that month after month in the products and services we build for the mobile-first, cloud-first world. What you can expect of Microsoft is courage in the face of reality. We will approach our future with a challenger mindset. We will be bold in our innovation.

We will be accountable to our customers, partners and shareholders. And with that, I will turn it over to Amy to go further into the details of our quarter. And then we will be happy to take your questions after that..

Thank you, Satya and good afternoon everyone. Let me start with a few things I think are notable this quarter. Then, I will give our outlook before moving on to Q&A. We had a very good third quarter with solid results across our businesses and strong momentum in our most strategic areas.

At the same time we remained focused and disciplined in our spending. Total revenue was $20.4 billion, up 8%, and earnings per share grew 5%. We had outstanding momentum and results in our cloud services. As Satya mentioned, Commercial Cloud revenue more than doubled again this quarter.

Office 365 is now on an annual revenue run rate of $2.5 billion and Azure revenue grew over 150%, driven by both new customers and increased usage. In our Office 365 Home service, we added nearly 1 million new users this quarter and now have over 4.4 million subscribers.

We continued to enhance its value proposition with new features, premium services and cross platform functionality. As we cross the one year anniversary since launch, we are pleased with the renewal rates we are experiencing thus far. With Bing, we made clear progress again this quarter. We grew our U.S. share and improved RPS significantly.

Display revenue related to portal and email declined, while we saw ad revenue growth in products like Skype and Xbox. Importantly, we are innovating while expanding our cloud gross margins through both improved scale and continuous engineering efforts to drive efficiency. Businesses are clearly expressing their overwhelming preference for Windows.

Windows Pro revenue grew 19% driven by growth in business PCs, mix shift to developed markets where attach is higher, continued strength in the enterprise, and an increased mix of Pro in small and medium businesses. Windows Volume Licensing also had a solid 11% revenue growth.

Windows XP End of Support contributed in part to this growth we saw this quarter as did a general hardware refresh. Our commercial results reflect ongoing strength and we again outperformed the enterprise IT market. Customer movement from transactional purchasing to subscriptions and multi-year agreements was better than our expectations.

Therefore, our commercial unearned revenue grew 12% this quarter, which was above our expectations and our contracted not billed balance exceeded $22 billion. We had double-digit growth in SQL, System Center, Windows Server Premium and Lync. Clearly, our value proposition and product roadmap is resonating.

Xbox One has sold in over 5 million units since launch and engagement has been high with users spending nearly 5 hours per day on their console. We will continue to extend the unique entertainment value proposition of Xbox One, particularly in markets outside of the U.S. where some services aren’t as mature.

Xbox 360 sales exceeded our expectations this quarter. And across the platform, Xbox Live members continued to embrace the service with transactional revenue growing 17%. We do expect to work through some inventory in Q4.

We continue to enhance the value proposition of Surface through both hardware and software innovation, which makes Surface one of the best high value productivity devices available. This quarter, the mix of sales moved to our second generation and Pro devices. And this change had a positive impact on gross margin. Now, let’s turn to operating expenses.

As a result of our ongoing prioritization efforts, OpEx was favorable to what we expected in January. Across the company, we are focused on continually aligning our resources to our top priorities, which includes investing in the next wave of innovation for our customers.

We are devoting resources to our sales team and partner ecosystems to ensure they are positioned for the migration to cloud services. And finally, our agility is also improving. As planned, marketing spend was redeployed from Q3 to Q4 in support of a commercial cloud campaign. With that summary of Q3 results, I would like to talk about our outlook.

Given the Nokia Devices and Services transaction is closing tomorrow, the guidance I will walk through next excludes any related impact. Let’s start with Devices and Consumer. In licensing, we expect revenue to be $4.1 billion to $4.3 billion. This range reflects an expectation that the benefits of XP End of Support will moderate.

In hardware, we expect revenue to be $1.3 billion to $1.5 billion in what is a seasonally slower hardware quarter. This number also reflects channel inventory drawdown for Xbox consoles. In devices and consumer other, we expect revenue to be about $1.9 billion. We expect to see continued growth in Office 365 Home and Bing as we drive additional usage.

Moving on to commercial, we expect revenue across our two segments to be $13.1 billion to $13.3 billion. Within this, we expect commercial other revenue to be about $2.1 billion on the strength of the transition to our cloud. And in Corporate, we expect to defer revenue of about $100 million.

We expect COGS to be $5.7 billion to $5.8 billion, with variability primarily due to hardware. And moving on to operating expenses. For the fourth quarter, we expect OpEx to be $8.4 billion to $8.6 billion when adjusting for the prior year European Commission Fine. This represents full year operating expense growth of about 4%.

This is on the low end of our original guidance that we provided a year ago of 4% to 6%, as we invested in R&D and sales efforts while rationalizing our marketing spend. As a reminder, other income and expense includes dividend and interest income offset by interest expense and the net cost of hedging.

We expect these items to generally offset each other. We expect a higher tax rate in Q4 and the full year tax rate to be between 18% and 20%. We expect capital expenditure to be about $1.5 billion as we build out our cloud infrastructure.

We are concentrating on hardware, software and datacenter optimization and supply chain efficiencies to maximize the benefits of our cloud scale. The benefits of this work are realized in improving gross margins. We expect unearned revenue to grow in line with normal seasonality. Now, let me share some thoughts regarding Nokia Devices and Services.

The acquisition will close tomorrow, which is about four months later than the deal economics we outlined in September assumed. Since then, the Nokia business results have also changed. We are focused on the transition from planning to implementation which accelerates with the deal closing tomorrow.

Given this is a complex body of work that will take time we do not intend to update our financial guidance for any Nokia impacts during the quarter. However, I want to share the following to help as you update your models.

Under the existing commercial agreement between Microsoft and Nokia, license sales and platform payments are reported in the D&C Licensing segment. Once the acquisition closes, results for Nokia Devices and Services will be reported in the D&C Hardware segment.

For Q4, we will clearly show the impact of the ending of the commercial agreement, Nokia’s ongoing operations and any one-time integration and severance costs. And we remain committed to achieving annual cost synergy targets of at least $600 million within 18 months of close.

Now, looking towards fiscal 15, Satya and I, along with the rest of the senior leadership team are working together to solidify our plans for the year ahead.

Our goals are clear get more out of the tremendous resources we have available, drive innovation in products that people love to use and execute in areas where Microsoft can uniquely succeed in today’s mobile-first, cloud-first world. And with that, let me turn it back over to Chris and we can move to Q&A..

Thanks Amy. And with that we will move to Q&A. Operator please go ahead and repeat your instructions..

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Our first question comes from the line of Brent Thill with UBS. Please proceed with your question..

Good afternoon. Question for Satya, just if can reflect on your initial time as CEO and maybe give everyone a sense of how you prioritized your near-term objectives here in the next several quarters that would be helpful? Thank you..

Thank you, Brent.

The first 10 weeks or so have been extremely energizing and as I have said for me what was important to us to reach out, talk to lots of different constituents and relearn the place and see it for the first time and just get a different fresh perspective even in spite of having spent 22 years here it’s been fascinating to get that fresh perspective.

And the way I look at it is even from day one I have had this deep conviction that our vision is about being going boldly into this mobile-first, cloud-first world.

And we feel that we are well on our way and if there is anything that I want to do is how do we make sure we would remain focused on it with every device launch, with every service launch we keep coming back and reinforcing that vision, because at the end of the day, it’s the purpose with which we approached the vision and the execution behind it which is what counts.

And to me being able to think about that deeply what does it means for us culturally, what does it mean for us in terms of our plans. And then just getting behind it, leaning into it as an entire company is what’s my priority and that’s what I obsess about, that’s what I focus about..

Thank you, Brent. Next question please..

Thank you. Our next question comes from the line of Mark Moerdler with Sanford Bernstein. Please proceed with your question..

Thank you very much. Satya welcome on board and thanks for joining on the call. If you don’t mind I am going to ask an overall question either of Amy or of Satya.

Looking at commercial license business, how much of the shrinkage year-over-year in commercial license is driven by the move of traditional license players from license or license paying customers from license to the cloud, how much is related to guys moving from software assurance, how much from license, can you give any color on that?.

Thanks Mark for that question. Why don’t I take that one, overall in commercial licensing I often talk as you know about the commercial business all up, mostly because I think some of the core dynamics really reinforce that we see a bit of what you are talking about, which is that renewal rates have remained high and in line.

Our ability to recapture revenue in those contracts remains strong and our ability to attach cloud products has grown. And so what we see in this quarter and what you see even in the commercial licensing line itself is that continued switch. And in fact it was faster this quarter than we had thought.

Really, when you look at our commercial on our revenue along with the C&B balance that we talked about last quarter, we have so many billings at the end of last quarter when you really normalized for those in the quarter billings, bookings were also better than we had expected in terms of the annuity stream.

So, I think both a transition to long-term agreements is encouraging, the addition to premium product, the addition of new product as well as the transition to a cloud is really core to thinking about the health of the segment all up..

Thank you. I appreciate it..

Thanks Mark..

Next question please operator?.

Our next question comes from the line of Keith Weiss of Morgan Stanley. Please proceed with your question..

Actually, thank you for taking my question guys. And Satya, again, thank you for joining the call, it’s great to have your views and inputs here.

One of the questions I get most often from investors is trying to understand sort of how you are going to approach the role and what you are doing initially in terms of is there a strategic review that’s going on? Are you reviewing the businesses? And should we expect any big changes in the strategy of Microsoft? So I am going to pose that question to you, in terms of over the next couple of weeks, months, quarters, even is there anything of a strategic review going on? Is there any big changes in the Microsoft strategy that we should be expecting from that review?.

Thanks Keith for the question. The framework I have in terms of how I am approaching my job and how we as a leadership team and as a company are going to execute and plan, because one of the things that I strongly believe in is you are planning on a continuous basis, you are executing on a continuous basis. It’s not episodic if you will.

The only way we are going to succeed here is by having this notion that you are planning all the time and you are also making the changes to your plan based on the change circumstances. And I think that’s the way to run a company like ours in a marketplace that’s as dynamic as ours.

But that said, I start with though a vision that’s very grounded on what the future opportunity is. So this mobile-first cloud-first thing is a pretty deep thing for us. When we say mobile-first, in fact what we mean by that is mobility first. We think about users and their experiences spanning a variety of devices.

So it’s not about any one form factor that may have some share position today, but as we look to the future, what are the set of experiences across devices, some ours and some not ours that we can power through experiences that we can create uniquely.

So that notion of having a central focus and the central purpose is what, I think we have already signaled and we are well on our way to execute on it. Now you also need to continuously build some new capability.

When you think about mobility first, that means you need to have really deep understanding of all the mobile scenarios for everything from how communications happen, how meetings occur. And those require us to build new capability. We will do some of this organically, some of it inorganically. A good example of this is what we have done with Nokia.

So we will – obviously we are looking forward to that team joining us building on the capability and then execution, even in the last three weeks or so we have announced a bunch of things where we talked about this one cloud for everyone and every device.

We talked about how our data platform is going to enable this data culture, which is in fact fundamentally changing how Microsoft itself works. We always talked about what it means to think about Windows, especially with the launch of this universal Windows application model.

How different it is now to think about Windows as one family, which was not true before, but now we have a very different way to think about it. And so we are well on our way to execute on it, but your core question of are we going to review, we are all of the timing reviewing.

And one of the things that I feel as the leadership team we have really picked up the pace on asking the hard questions, what is the believability of any of our plans and pushing ourselves, because at the end of the day to me, I want to be very accountable to you all to our customers, to our partners as a team by executing on our plans very well, because at the end of the day that’s what matters.

But so that at least gives you a framework for how we are approaching it..

Excellent. Thank you very much for that..

Thanks Keith..

Thank you. Next question, please operator..

Thank you. Our next question comes from the line of Rick Sherlund with Nomura. Please proceed with your question..

Thanks.

First Satya on Platform-as-a-Service I am kind of curious how aggressively you plan to maybe change your business model to a subscription model and drive kind of like Adobe did, less upfront revenue, more encouraging subscription and cloud based and whether we should begin to anticipate what it might look like to Microsoft as you make this transition to more of a subscription business, I am just not sure what the margins are on your cloud business.

And as you transition most SaaS companies have 70%, 80% gross margins, I am not real sure where you are on your cloud businesses today.

Do we think this is going to be a smooth transition or might we expect it to be a little more disruptive as you gain more and more traction on a subscription in cloud basis?.

Great Rick. Thanks for the question. I will start and maybe Amy you want to even add. The way I look at it Rick we are well on our way to making that transition, in terms of moving from pure licenses to long-term contracts and as well as subscription business model.

So when you talked about Platform-as-a-Service if you look at our commercial cloud it’s made up of the platform itself which is Azure. We also have a SaaS business in Office 365. Now, one of the things that we want to make sure we look at is each of the constituent parts because the margin profile on each one of these things is going to different.

The infrastructure elements right now in particular is going to have different economics versus some of the per-user applications in a SaaS mode have. It’s the blending of all of that that matters and the growth of that matters to us the most in this time where I think there is just a couple of us really playing in this market.

I mean this is gold rush time in some sense of being able to capitalize on the opportunity. And when it comes to that we have some of the best, the broadest SaaS solution and the broadest platform solution and that combination of those assets doesn’t come often.

So what we are very focused on is how do we make sure we get our customer aggressively into this, having them use our service, be successful with it. And then there will be a blended set of margins across even just our cloud.

And what matters to me in the long run is the magnitude of profit we generate given a lot of categories are going to be merged as this transition happens. And we have to be able to actively participate in it and drive profit growth..

And let me add a bit Rick. I think specifically as you think about the transitions and where you will see it. First, I would say year-over-year we had flat to improving gross margins in all segments but hardware, where we had a mix shift to the Xbox console, which from our business model perspective obviously drives gross margin decline.

With that being said, within the Office 365 business, I will start from the fact and a principle which is having a user whether they be in the consumer or in the enterprise have access to our most recent, most innovative, most secure product which is always going to be for us probably the one born in the cloud will be a driver of satisfaction and a driver of usage.

Those two things lead to revenue. You are already seeing that transition in the enterprise where we already sold that way. The transition is quite easy from an economic standpoint. In the transactional business you saw the impact of it this quarter. We had a bigger mix shift to annuity more went on the balance sheet.

We still had strong growth, but you do see the impact inter-quarter. And in the consumer side of the business which you also referenced with Adobe, I think we have just launched another SKU in addition to Home called Personal as we continue to drive consumer usage that way.

The launch of Office on the iPad is an example of where we will add the most value which is in the subscription..

Thank you, Rick. Operator, next question please..

Thank you. Our next question comes from the line of Heather Bellini of Goldman Sachs. Please proceed with your question..

Great. Thank you. And Satya I will echo everybody’s thoughts but it’s great to have you on the call and share your perspective.

I was wondering if you could share with us the decision recently to offer Windows for free for sub 9-inch devices and how you think this impacts your share in that arena? And also how should we think about Windows pricing, given your comment about how Windows is going to kind of play in different market segmentations, how do we see Windows pricing evolving, if at all, for other types of form factors over time?.

Overall, first of all, thanks Heather for the question. Overall, the way I want us to look at Windows going forward is what does it mean to have the broadest device family and ecosystem? Because at the end of the day it’s about the users and developer opportunity we create for the entirety of the family.

That’s going to define the health of the ecosystem. So, to me, it matters that we approach the various segments that we now participate with Windows, because that’s what has happened. Fundamentally, we participated in the PC market. Now we are in a market that’s much bigger than the PC market.

We continue to have healthy share, healthy pricing and in fact growth as we mentioned in the enterprise adoption of Windows. And that’s we plan to in fact add more value, more management, more security, especially as things are changing in those segments.

Given BYOD and software security issues, we want to be able to reinforce that core value, but then when it comes to new opportunities from wearables to internet of things, we want to be able to participate on all of this with our Windows offering, with our tools around it. And we want to be able to price by category.

And that’s effectively what we did. We looked at what it makes – made sense for us to do on tablets and phones below 9 inches and we felt that the price there needed to be changed. We have monetization vehicles on the back end for those.

And that’s how we are going to approach each one of these opportunities, because in a world of ubiquitous computing, we want Windows to be ubiquitous. That doesn’t mean its one price, one business model for all of that. And it’s actually a market expansion opportunity and that’s the way we are going to go execute on it..

Okay, thank you..

Operator, next question please?.

Our next question comes from the line of John DiFucci with JPMorgan. Please proceed with your question..

Great, thank you and welcome Satya. I am going to give Amy a question here for numbers. Amy, we see our sales and marketing expense declined 7% year-over-year in this quarter.

Can you remind us if there is anything unique last year or is this just better controls? And along these same lines free cash flow, excluding acquisitions grew 2%, which is a bit of a surprise, given the direction the company is going and the first time in seven quarters we have actually seen growth in free cash flow.

So, can you tell us how we should be thinking about this going forward?.

Thanks, John. I was getting lonely. I didn’t have any questions. So I appreciate it. Let me start with your first one, which was there any sort of unique thing that resulted in that comparable in sales and marketing.

We didn’t have more a launch expense going on a year ago, but we also focused on rationalizing and focusing our marketing dollars in quarter. So I don’t – I think it’s a combination of both.

And I would probably say more of the latter, which is really thinking and prioritizing more effectively throughout the year to earn the highest ROI on the dollars we are spending. We also did invest in sales year-over-year.

So most of that is specifically around marketing, so I want to make sure that you understand that where we see opportunity, we are investing in our selling engine to get it, which is, I think an important caveat to make sure is clear when you see year-over-year sales and marketing decline.

The second half of that, in terms of cash flow, I think as we remain focused on prioritizing and really thinking about the return on the dollars we spend, you did see also as I talked about earlier margins increase year-over-year. All of that had a positive impact on cash flow..

And going forward, should we – how should we be thinking about that, just continued discipline I guess around expenses, but also investment where it’s needed?.

Yes, I think when we talked at the end about how I think about ‘15 maybe it’s a better set of how we think about everyday, which is what can we do today, this week, this month to better invest behind places where we feel like we are uniquely capable of success and not being afraid to make those changes and finding the agility and the empowerment here to do those things is incredibly important.

And I would say culturally Satya mentioned about being more data driven. I think in addition to the day-to-day, which was more focused on customers, I think really it’s a cultural statement about how we are going operate more internally as well.

And so maybe that’s the most forward-looking comment I could tell you which is that being empowered to look weekly, monthly and see how we can get better and better and better. And I think that’s actually driven a lot of excitement around here..

Okay, great. Thank you..

Thanks John. We will move to the next question, please..

Thank you. Our next question comes from the line of Phil Winslow with Credit Suisse. Please proceed with your question..

Hi. Thanks guys and congrats on a great quarter and Satya great to have you on the call as well. I wanted to focus in on Office 365 I mean if you compared this quarter to last quarter you added 1.1 million Home Premium users, last quarter I think it was 500,000. In September you talked about run rate of I think $1.5 billion, now you are $2.5 million.

I wonder if you can just talk about the momentum that you are seeing in Office 365 and maybe give us your thoughts on sort of business versus the home/consumer side of that.

And then Amy when you think about Office 365, how do you think about the difference in sort of lifetime value of an Office 365 customer versus a traditional Office user?.

Let me start and then Amy you should definitely add on to it. Office 365 I am really, really excited about what’s happening there, which is to me this is the core engine that’s driving a lot of our cloud adoption and you see it in the numbers and Amy will talk more about the numbers.

But one of the fundamental things its also doing is it’s actually a SaaS application and it’s also an architecture for enterprises.

And one of the most salient things we announced when we talked about the cloud for everyone and every device and we talked about Office 365 having now iPad apps, we also launched something called the enterprise mobility suite which is perhaps one of the most strategic things during that day that we announced which was that we now have a consistent and deep platform for identity management which by the way gets bootstrapped every time Office 365 users sign up, device management and data protection, which is really what every enterprise customer needs in a mobile-first world, in a world where you have SaaS application adoption and you have BYOD or bring your own devices happening.

So to me the Office 365 growth is in fact driving our enterprise infrastructure growth which is driving Azure growth and that cycle to me is most exciting. So that’s one of the reasons why I want to have to keep indexing on the usage of all of this and the growth numbers you see is a reflection of that..

And Phil, specifically to some of your – how do we think about the lifetime value, maybe I will use the consumer actually SKUs which you started with as a good example. First, whenever we launch a new machine, a new SKU in this instance especially a subscription.

I do think it takes some time both for the customer to understand the value proposition as well as the retailers and partners to really hone their motion, to pivot, to selling a new subscription model I think you are starting to see some of the acceleration as well as increasing awareness of the product which I think is terrific.

And maybe more importantly as we think about the value we are adding the Office on the iPad announcement certainly brought attention as we continue to drive people to the subscription. And I made a comment around renewal rates and we are happy with them as we have just sort of passed the one year anniversary of the launch.

And I think when you look at the LTV we will be better off for many reasons including financially. When a person moves to the subscription, my deep belief is the most important thing we will do is continue to think about how we can modernize, add features, add innovation so that it’s more valuable to them everyday they use it.

And that is far easier in a cloud world than it is on premise. And so I think that’s probably the most important driver of LTV long-term..

Thanks guys..

Thanks Phil..

Next question please..

Our next question comes from the line of Walter Pritchard with Citigroup. Please proceed with your question..

Hi, thanks. Amy, just a question for you. I know you’re not providing updated guidance for Nokia.

I’m just wondering maybe a little bit of thought behind that decision, I know the deal closes tomorrow, you probably could easily move things around here a bit and reported on early next week and how that benefit? Is the lack of guidance there, is it just simply you haven’t been able to get your hands into that business at this point? Is there something else that changed in that business? Just trying to get a sense because it does sort of open up quite a bit of variability in terms of how people are going to model things over the next three months?.

Thanks, Walter. It really wasn’t a choice. The reality is we’ve not had the type of access on tool close where we could confidently begin to give the type of guidance that I believe we have come and you have come to expect from us in terms of the depth and analysis required to get there.

They do report the different accounting system; it needs to be converted to GAAP. We’ve not had access to forward projection; I haven’t had a deep access to their system and so until we get that which really starts tomorrow.

It’s not really a question of whether it was this week or next week, it’s really a question of us getting the confidence and access to be able to report at the level of details I know you all would expect me to do..

Thanks, Walter. Next question please..

Thank you. Our next question comes from the line of Karl Keirstead with Deutsche Bank. Please proceed with your question..

Yes, hi thanks. I’d like to focus on that server product revenue number of 10% and Satya I think you know a thing or two about this group so perhaps I’ll direct that to you. But that growth rate is so far still above what a lot of your mega-cap tech vendors, peers I should say are posting.

And I just wanted to ask you if you could try to outline for us the couple of factors that have enabled Microsoft to continue growing that server business well above your peers? And secondly if you think that kind of 10% ish growth is sustainable over fiscal 2015?.

Thanks, Karl. So I’ll start in fact both Amy and I looked on that business. So we’ll both take a crack at it. It’s a pretty exciting change that’s happening, obviously it’s that part of the business is performing very well for a while now, but quite frankly it’s fundamentally changing.

One of the questions I often get asked is hey how did Windows server and the hypervisor underneath it becomes so good so soon.

You’ve been at it for a long time but there seems to have something fundamentally changed I mean we’ve grown a lot of share recently, the product is more capable than it ever was, the rate of change is different and for one reason alone which is we use it to run Azure.

So the fact that we use our servers to run our cloud makes our servers more competitive for other people to build their own cloud. So it’s the same trend that’s accelerating us on both sides. The other thing that’s happening is when we sell our server products they for most part are just not isolated anymore. They come with automatic cloud tiering.

SQL server is a great example. We just launched a new version of SQL which is by far the best release of SQL in terms of its features like it’s exploitation of in-memory. It’s the first product in the database world that has in-memory for all the three workloads of databases, OLTP, data warehousing and BI.

But more importantly it automatically gives you high availability which means a lot to every CIO and every enterprise deployment by actually tiering to the cloud. So those kinds of feature innovation which is pretty boundary less for us is breakthrough work.

It’s not something that somebody who has been a traditional competitor of ours can do if you’re not even a first class producer of a public cloud service. So I think that we’re in a very unique place.

Our ability to deliver this hybrid value proposition and be in a position, where we not only run a cloud service at scale, but we also provide the infrastructure underneath it as the server products to others. That’s what’s driving the growth.

The shape of that growth and so on will change over time, but I feel very, very bullish about our ability to continue this innovation..

Great. Thank you..

Next question please..

Thank you. Our next question comes from the line of Ed Maguire with CLSA. Please proceed with your question..

Hi, good afternoon and it’s great to hear you Satya on the call. I had a question about the device and consumer licensing.

First of all the Windows Pro revenue is very strong and Amy I know you had alluded to receding impact of XP upgrades, but I wanted to get a sense of how sustainable you think that growth can continue? And also noticing that the particularly Office Consumer revenue is improving on attach rates and there had been a bit of a disconnect there because of the transition to Office 365.

Wanted to get your thoughts on how long that might be sustainable or whether this is related to sort of the broader XP expiration? Thank you..

Thanks, Ed. Let me take those in reverse actually. On the Office Consumer performance I will always first and foremost think about the combination of Office 365 Home as well as our consumer performance. And that grew obviously at a higher rate than 15% that we talked about this quarter that and increasing attach.

There were some dynamics this quarter that I think were important. Some stabilizing that we’ve seen in the consumer developed world PC market also benefits as you might imagine our Office business.

We have the highest attach rates in developed markets and so that tends to be an important driver of Office revenue whether earned as a license or as a subscription. The second thing is related a bit to your first question. These are – it’s sort of hard to separate oftentimes made the dynamics in our market.

As we’ve seen Pro, Windows Pro mix increase, for example in small business, when people buy PCs with Windows Pro they’re more likely to purchase a form of Office whether it would be a subscription or a license. That’s another dynamic you saw this quarter. A final dynamic that I’ll talk about relating to Office was around Japan.

We did see some pull-forward due to the tax increase and so that did have an impact on Office Consumer growth, but even without that as we talked about we still had increasing attach and very good performance for the quarter. Now backing up because it’s complicated was the Windows sustainability and in the business segment.

As we said it’s very hard to separate cleanly the impact of XP from what is an improving business PC refresh cycle as well as some positive macro-economic trends that we’re seeing. So as I said my comments – the end of XP does create a bit of a moderation in growth.

That being said the differentiation and value proposition of Pro is clearer than it has been. The investment in that SKU and the value proposition of Pro has had mix increasing within segments of the market. For example in small business and in the enterprise for people who buy Windows PC.

And so I think that’s an important dynamic that we’ll continue to invest in and we’re excited to say..

Thank you..

Thanks, Ed. Next question please..

Thank you. Our next question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question..

Thanks for taking my question. Question for Satya as we think about the new world in terms of more usage and more software driven rather than device driven.

Can you talk a little bit how you want to reengage or further engage with the developer community with the big theme of your presentation at Build? I noticed (indiscernible) submarine was kind of mentioned by a lot of guys and saw a lot of attention.

But talk a little bit about that, how the developer community is really important for you and what you’re doing around that to kind of get the software future of Microsoft going again?.

Great. So thanks for the question. Developers are very, very important to us. If you’re in the platform business which we’re on both on the device side as well as on the cloud side, developers and their ability to create new value props and new applications on them is sort of likes itself. I would say couple of things.

One is the announcements we made at Build on the device side is really our breakthrough worked for us which is we’re the only device platform today that has this notion of building universal apps with fantastic tooling around them. So that means you can target multiple of our devices and have common code across all of them.

And this notion of having a Windows universal application help developers leverage them core asset, which is their core asset across this expanded opportunity is huge.

There was this one user experience change that Terry Myerson talked about at Build, which expands the ability for anyone who puts up application in Windows Store to be now discovered across even the billion plus PC installed base.

And so that’s I think a fantastic opportunity to developers and we are doing everything to make that opportunity clear and recruit developers to do more with Windows. And in that context, we will also support cross platforms. So this has been one of the things that we have done is the relationship with Unity.

We have tooling that allows you to have this core library that’s portable. You can bring your code asset. In fact, we are the only client platform that has the abstractions available for the different languages and so on. And then on the cloud side, in fact one of the most strategic APIs is the Office API.

If you think about building an application for iOS, if you want single sign-on for any enterprise application, it’s the Azure AD single sign-on. That’s one of the things that we showed at Build, which is how to take advantage of list data in Sharepoint, contact information in Exchange, Azure active directory information for log-on.

And those are the APIs that are very, very powerful APIs and unique to us. And they expand the opportunity for developers to reach into the enterprises. And then of course Azure is a full platform, which is very attractive to developers. So that gives you a flavor for how important developers are and what your opportunities are..

Thank you..

Thanks Raimo. Operator, we have time for one more question please..

Thank you. Our final question will come from the line of Ross MacMillan with Jefferies. Please proceed with your question..

Thanks very much for taking my question as well. Amy, I just wanted to go back to D&C licensing, because I think the guidance for the next quarter suggests a relatively modest decline at the midpoint, certainly more modest than we saw prior to this quarter for the last few quarters. And I guess I have two questions.

One is, are you able to separate the XP End of Life impact from the broader improvement in corporate PC refresh, for example? And then two, Satya, what thought have you given around how you could potentially make what has been traditionally a unit model with Windows OEM revenue into something potentially more recurring in nature? Thank you..

Thanks, Ross. Let me take the first part of that. I think our guidance for the D&C licensing segment takes into account a moderate decline as I said in the benefit of the end of XP as well as some of the impact of the pull forward in Office for Japan. So I think in general, it’s pretty reflective of the trend lines that we discussed.

And I do think it is hard to really separate completely the difference between a general and the improving business PC environment and the end of XP. We tried our best to do that in the guidance and we will obviously learn more over the coming weeks..

And the thing I would add is this transition from one time let’s say licenses or device purchases to what is a recurring stream. You see that in a variety of different ways. You have back end subscriptions, in our case, there will be Office 365, there is advertising, there is the app store itself. So these are all things that attach to a device.

And so we are definitely going to look to make sure that the value prop that we put together is going to be holistic in its nature and the monetization itself will be holistic and it will increase with the usage of the device across these services. And so that’s the approach we will take..

Thanks, Ross..

Thank you, Ross. So thank you all. That wraps up the Q&A portion of today’s earnings call. We look forward to seeing many of you in the coming months at various investor conferences. For those unable to attend in person, these events generally webcast and you could follow the events at microsoft.com/investor.

Please contact us if you need additional details. And thanks again for joining us today..

Thanks everyone..

Thank you..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation..