Greetings and welcome to Microsoft’s Fourth Quarter Fiscal Year 2014 Earnings. 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 now like to turn the conference over to your host, Chris Suh, General Manager, Investor Relations for Microsoft. Thank you, Chris. You may begin.

Thank you, Roya. Good afternoon and thank you for joining us today. On the call with me are Satya Nadella, Chief Executive Officer; Amy Hood, Chief Financial Officer; Frank Brod, Chief Accounting Officer; and John Seethoff, Deputy General Counsel. On our website, microsoft.com/investor, we have posted a slide deck which provides summary of our financial results, a reconciliation of differences between GAAP and non-GAAP financial measures and the table of noted items to aid in understanding our results this quarter. Additionally, the slide deck contains detailed information regarding the impact of the Nokia devices and services acquisition on our financial results. Our press release is also on the website and includes an addendum with additional information about our fourth quarter performance. Microsoft is reporting the financial performance and acquired Nokia devices and services business in a new segment called Phone Hardware. Additionally, the devices and consumer hardware segment was renamed the Computing and Gaming Hardware. The products included in this renamed segment remain the same. Current year information reflects the financial performance of the acquired business beginning on April 25, 2014. Any reference to operating expense includes research and development, sales and marketing and general and administrative, but excludes integration and restructuring charges. Please keep in mind that all growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise specified all impacted numbers have been adjusted for non-GAAP and noted items which are detailed in our press release in slide deck. We will post the 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 in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website, until July 22, 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 and the comments made during this conference call and in the risk factor 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’ll turn the call over to Amy.

Thanks Chris, and good afternoon everyone. This month is an important time for Microsoft. As the leadership team we’re taking bold and decisive action to evolve our organization and culture. This includes difficult steps, but they are necessary to position Microsoft for future growth and industry leadership. Today, we’ll spend more time talking about the significant changes we’re driving. However, let me first start with this quarter’s results, after that Satya will talk more about our path forward and then I’ll share our financial outlook before we take your questions. As I think about our strong execution this quarter, there are three things that stand out to me, significant momentum with our cloud services, progress in a number of our consumer businesses and continued cost discipline. Our total fourth quarter revenue was $23 billion including $2 billion from the phone hardware segment. As you know our Q4 guidance did not include the impact of the acquisition of Nokia’s devices and services business. Excluding that we grew revenue 10% exceeding the high-end of our guidance range. Moving on to earnings per share. Before the impact of the acquisition and the noted items Chris highlighted earlier, EPS grew 12% to $0.66. These details can be found in the earnings slide deck on our Investor Relations website. Geographically, performance was strong across most markets, particularly in North America and in Europe. We did, however, see challenging conditions in China or like many other multinationals we’re experiencing a weak business environment which we do not expect to change in the near term. Our commercial cloud revenue grew 147% this quarter, driven by both Office 365 and Azure. Our commercial cloud annual revenue run rate more than doubled this year and now exceeds $4.4 billion and with this rapidly growing scale we continue to expand…

Thank you, Amy. Hello everyone. I’m proud of the results we delivered this quarter and across the fiscal year. In Q4, on an operating basis we grew revenue 10% and operating income 12%. We accelerated our commercial cloud business to a $4.4 billion annual run rate. And perhaps more importantly we made bold and disciplined decisions to define our core as the productivity and a platform company for the mobile-first cloud-first world. Before I get into the investment principles and decisions, I want to explain how our focus on productivity and platforms leads us to participate in cloud and mobile markets. Mobility for us goes beyond just devices. While we are certainly focused on building great phones and tablets, we think of mobility more expansively. We think the opportunity that comes from running our productivity experiences on Windows, iOS and Android device. Office 365 and dynamic SaaS offerings are targeted here. We also see great opportunity in simplifying and managing the user experiences spanning multiple devices ecosystems with our identity management, device management and data security. This is the focus of our enterprise mobility suite. Similarly, when it comes to the cloud opportunity, we run an at-scale public cloud service and provide servers for private and hybrid clouds. Azure, StorSimple, InMage and our datacenter additions of server products across Window Server, System Center and SQL Server all help us participate in the cloud growth. Our mobile and cloud opportunity views informs our decisions on what to build and where to invest. More specifically, we use the following three principles to guide our investments. First, focus investments on the core, productivity experiences and platform investments will prioritize across engineering, sales, marketing as well as M&A. Second, consolidate overlapping efforts. This means one operating system that covers all screen sizes and consolidated…

Thanks Satya. Before going into details about our outlook, let me first say that all forward-looking information assumes the macroeconomic environment remain stable throughout this coming fiscal year. As Satya detailed, we are taking bold steps to move Microsoft forward with a renewed sense of clarity and alignment. Our investment plan reflects those changes as to reallocate resources to aggressively drive toward our goals and pursue the highest growth and financial return businesses. Even as we invest for growth, we expect our total operating expense in fiscal year 2015 to be down from this past year before considering the addition of the Nokia cost structure and integration and restructuring cost. Now, let me address phone separately. In fiscal year 2014, we recorded about $750 million of operating expense for the phone business for the period post the acquisition. Annualized this would have been about $4.5 billion, but we are aggressively working to drive synergies across key functions such as development, supply chain and operations as we integrate and right-size the business. We set to realize more than $1 billion in synergies and as a result we will be on a path to reach operating break-even for the phone business in fiscal year 2016. Including phone, we expect operating expense to be between $34.2 billion and $34.6 billion in fiscal year 2015. In addition to the expense guidance I just provided and as we announced on July 17th, we expect to incur between $1.1 billion and $1.6 billion in restructuring expense. These will be substantially complete in the first half of the fiscal year. Separately, we will also incur about $150 million per quarter in integration cost such as systems work. Similar to this quarter, we will continue to report these items in a separate line item in the income statement.…

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 a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Mark Moerdler with Sanford Bernstein. Please proceed with your question.

Thank you very much. I have got two parts to it. The first is Satya you have been changing the engineering processes within the company adding more analytics to the process. How do you see this change impacting both the product and the speed to go to market?

Yes. Two things, Mark. One is the diversity of products that Microsoft has from Silicon tape outs to services that we’re continuously updating in Azure or Office 365 is a lot more than let’s say when we first created the Microsoft engineering system that was for retail packaged product, so since then a lot has changed and a lot has evolved. And so what we are doing is, we are introducing new functions and new skills, design is even more important than it ever was, data analytics as you said is very important to us and they are not outside functions. They are functions that are integral to how we do product development, how we do AB testing, how we do log analysis on a continuous basis. So that’s the engineering process and culture change that we have ongoing and in fact a lot of learning from variety of different teams that’s now spreading across a lot of Microsoft.

Thank you. And Amy one quick question, we saw a significant acceleration this quarter in cloud revenue, or I guess Amy or Satya, we saw acceleration in cloud revenue year-over-year what’s – is this Office for the iPad, is this Azure, what’s driving the acceleration and how long do you think we can keep this going?

Mark, why don’t I take it and if Satya wants to add, obviously, he should do that. In general, I wouldn’t point to one product area. It was across Office 365, Azure and even CRM online. I think some of the important dynamics that you could point to particularly in Office 365 I really think over the course of the year we saw an acceleration in moving the product down the market into increasing what we would call the mid-market and even small business at a pace. That’s a particular place I would tie back to some of the things Satya mentioned in the answer to your first question. Improvements to analytics, improvements to understanding the use scenarios, improving the product in real-time, understanding trial, ease of use, ease of sign-up all of these things actually can afford us the ability to go to different categories, go to different geos into different segments. And in addition, I think what you will see Mark as we initially moved many of our customers to Office 365, it came on one workload. And I think what we’ve increasingly seen is our ability to add more workloads and sell the entirety of the suite through that process. I also mentioned in Azure, our increased ability to sell some of these higher value services. So while, I can speak broadly but all of them, I think I would generally think about the strength as being both completion of our products suite, ability to enter new segments and ability to sell new workloads.

The only thing I would add is it’s the combination of our SaaS offerings like Dynamics and Office 365, a public cloud offering in Azure. But also our private and hybrid cloud infrastructure which also benefits because they run on our servers, cloud runs on our servers. So it’s that combination which makes us both unique and reinforcing. And the best example is what we are doing with Azure active directory, the fact that somebody gets on-boarded to Office 365 means that tenant information is in Azure AD that fact that the tenant information is in Azure AD is what makes EMS or our Enterprise Mobility Suite more attractive to a customer managing iOS, Android or Windows devices. That network effect is really now helping us a lot across all of our cloud efforts.

Thanks Mark.

Thanks Mark.

Thank you, I appreciate. Congrats on the quarter.

Thank you.

Thank you.

Next question please.

Our next question comes from the line of Brent Thill with UBS. Please proceed with your question.

Thank you. Amy, you’re taking a very disciplined approach on the expenses, just curious if you could help everyone understand how you are approaching that and your confidence in doing more with less?

Thanks Brent. Let me actually, I’ll start and I think Satya actually will have some things to add. This is first of all I would start by saying I wouldn’t describe the behavior to me. I would describe the behavior to a senior leadership team and to a group that’s focused on investing in the core, focus on making trade-offs, focused on really accelerating our growth in key areas. Our ability to make changes really throughout the second half of this year in particular and as we’ve led into fiscal year 2015 is really about a group focused on building and investing in something that can really be even greater than it is today. And so while I would use the word disciplined, I don’t think it’s about a person, and it shouldn’t be, it should be about an environment and which every person here thinks about how they can increase their ROI and accrue to the collective. And I think we’ve actually seen the benefits of that in the past few quarters and I think you’ll see it as we head into 2015.

I think you captured well.

Thanks.

Thanks Brent. Operator next question please.

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

Excellent, thank you for the question and a very nice quarter. First, I think to talk a little bit about the growth strategy at Nokia, you guys look to cut expenses pretty aggressively there, but this is – particularly smartphones is a very competitive marketplace, can you tell us a little bit about sort of the strategy to how you actually start to gain share with Lumia on a going forward basis? And maybe give us an idea of what levels of share or what levels of kind unit volumes are you going to need to hit to get to that breakeven in FY16?

Let me start and Amy you can even add. So overall, we are very focused on I would say thinking about mobility share across the entire Windows family. I already talked about in my remarks about how mobility for us even goes beyond devices, but for this specific question I would even say that, we want to think about mobility not just one form factor of a mobile device because I think that’s where the ultimate prize is. But that said, we are even year-over-year basis seeing increased volume for Lumia, it’s coming at the low end in the entry smartphone market and we are pleased with it. It’s come in many markets we now have over 10% that’s the first market I would sort of say that we need to track country-by-country. And the key places where we are going to differentiate is looking at productivity scenarios or the digital work and life scenario that we can light up on our phone in unique ways. When I can take my Office Lens App use the camera on the phone take a picture of anything and have it automatically OCR recognized and into OneNote in searchable fashion that’s the unique scenario. What we have done with Surface and PPI shows us the way that there is a lot more we can do with phones by broadly thinking about productivity. So this is not about just a Word or Excel on your phone, it is about thinking about Cortana and Office Lens and those kinds of scenarios in compelling ways. And that’s what at the end of the day is going to drive our differentiation and higher end Lumia phones.

And Keith to answer your specific question, regarding FY16, I think we’ve made the difficult choices to get the cost base to a place where we can deliver on the exact scenario Satya as outlined, and we do assume that we continue to grow our units through the year and into 2016 in order to get to breakeven.

Okay.

Thank you Keith. Operator next question please.

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

Hi, guys. Congrats on a great quarter. Just wanted to dig into Office 365, you put up another quarter of pretty impressive metrics gone up to 5.6 million home premium users, I think the commercial side grew, I think was 98% year-over-year and Satya you talked about some pretty meaningful download numbers as far as on iPad. I wonder if you could give us an update on Office 365 sort of how it’s doing versus your expectations and sort of and so what is your expectations are over the course of next 12, 18, 24 months as we continue this transition?

Thanks Phil. In terms of versus our expectations, in this quarter it did do better than we expected and frankly we had quite lofty goals. So I think that is encouraging. And I think I talked about some of those key drivers in the prior question, when I think really about Home and Personal, we haven’t had a chance to talk specifically about the consumer usage and you sort of referenced Office on the iPad in your question, I think it’s really about continuing to make the subscription value whether it’s through the Home SKU or the Personal SKU have the most value to a user. It’s about a user having the opportunity to access Office, the world’s leading productivity app on the device of their choice having a light up to the very best on Windows devices and having that accrue back to our subscriptions. And so I think our ability to execute on that over the past, I guess 18 months that we’ve had these SKUs in market is quite encouraging. I don’t really look to Office on the iPad as one item is a part of the value proposition that I think we make both in the consumer segment as well as in the commercial segment.

Okay, got it.

Thanks Phil.

Thanks Phil.

Next question please.

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

Thanks. I’m wondering if you could talk about the Office for a moment. I’m curious whether you think we’ve seen the worst for Office here with the consumer fall off. In Office 365 growth in margins expanding their – just sort of if you can look through the dynamics and give us a sense, do you think you are actually turned the corner there and we may be seeing the worse in terms of Office growth and margins?

Rick, let me just start qualitatively in terms of how I view Office, the category and how it relates to productivity broadly and then I’ll have Amy even specifically talk about margins and what we are seeing in terms of I’m assuming Office renewals is that probably the question. First of all, I believe the category that Office is in, which is productivity broadly for people, the group as well as organization is something that we are investing significantly and seeing significant growth in. On one end you have new things that we are doing like Cortana. This is for individuals on new form factors like the phones where it’s not about anything that application, but an intelligent agent that knows everything about my calendar, everything about my life and tries to help me with my everyday task. On the other end, it’s something like Delve which is a completely new tool that’s taking some – what is enterprise search and making it more like the Facebook news feed where it has a graph of all my artifacts, all my people, all my group and uses that graph to give me relevant information and discover. Same thing with Power Q&A and Power BI, it’s a part of Office 365. So we have a pretty expansive view of how we look at Office and what it can do. So that’s the growth strategy and now specifically on Office renewals.

And I would say in general, let me make two comments. In terms of Office on the consumer side between what we sold on prem as well as the Home and Personal we feel quite good with attach continuing to grow and increasing the value prop. So I think that’s to address the consumer portion. On the commercial portion, we actually saw Office grow as you said this quarter; I think the broader definition that Satya spoke to the Office value prop and we continued to see Office renewed in our enterprise agreement. So in general, I think I feel like we’re in a growth phase for that franchise.

Thanks Rick. Follow with the next question please.

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

Hi, thanks. Satya, I wanted to ask you about two statements that you made, one around responsibly making the market for Windows Phone, just kind of following on Keith’s question here. And that’s a – it’s a really competitive market it feels like ultimately you need to be a very, very meaningful share player in that market to have value for developer to leverage the universal apps that you’re talking about in terms of presentations you’ve given and build in and so forth. And I’m trying to understand how you can do both of those things once and in terms of responsibly making the market for Windows Phone, it feels difficult given your nearest competitors there are doing things that you might argue or irresponsible in terms of making their market given that they monetize it in different ways?

Yes. One of beauties of universal Windows app is, it aggregates for the first time for us all of our Windows volume. The fact that even what is an app that runs with a mouse and keyboard on the desktop can be in the store and you can have the same app run in the touch-first on a mobile-first way gives developers the entire volume of Windows which is 300 plus million units as opposed to just our 4% share of mobile in the U.S. or 10% in some country. So that’s really the reason why we are actively making sure that universal Windows apps is available and developers are taking advantage of it, we have great tooling. Because that’s the way we are going to be able to create the broadest opportunity to your very point about developers getting an ROI for building to Windows. For that’s how I think we will do it in a responsible way.

Great, thank you.

Moving to next question please.

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

Great. Thank you so much for your time. I wanted to ask a question about – Satya your comments about combining the next version of Windows and to one for all devices and just wondering if you look out, I mean you’ve got kind of different SKU segmentations right now, you’ve got enterprise, you’ve got consumer less than 9 inches for free, the offering that you mentioned earlier that you recently announced. How do we think about when you come out with this one version for all devices, how do you see this changing kind of the go-to-market and also kind of a traditional SKU segmentation and pricing that we’ve seen in the past?

Yes. My statement Heather was more to do with just even the engineering approach. The reality is that we actually did not have one Windows; we had multiple Windows operating systems inside of Microsoft. We had one for phone, one for tablets and PCs, one for Xbox, one for even embedded. So we had many, many of these efforts. So now we have one team with the layered architecture that enables us to in fact one for developers bring that collective opportunity with one store, one commerce system, one discoverability mechanism. It also allows us to scale the UI across all screen sizes; it allows us to create this notion of universal Windows apps and being coherent there. So that’s what more I was referencing and our SKU strategy will remain by segment, we will have multiple SKUs for enterprises, we will have for OEM, we will have for end-users. And so we will – be disclosing and talking about our SKUs as we get further along, but this my statement was more to do with how we are bringing teams together to approach Windows as one ecosystem very differently than we ourselves have done in the past.

Excellent, thank you.

Okay. Thanks Heather. Next question please, operator.

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

Hi, good afternoon. Satya you made some comments about harmonizing some of the different products across consumer and enterprise and I was curious what your approach is to viewing your different hardware offerings both in phone and with Surface, how you’re go-to-market may change around that and also since you decided to make the operating system for sub 9-inch devices free, how you see the value proposition and your ability to monetize that user base evolving over time?

Yes. The statement I made about bringing together our productivity applications across work and life is to really reflect the notion of dual use because when I think about productivity it doesn’t separate out what I use as a tool for communication with my family and what I use to collaborate at work. So that’s why having this one team that thinks about outlook.com as well as Exchange helps us think about those dual use. Same thing with files and OneDrive and OneDrive for business because we want to have the software have the smart about separating out the state carrying about IT control and data protection while me as an end user get to have the experiences that I want. That’s how we are thinking about harmonizing those digital life and work experiences. On the hardware side, we would continue to build hardware that fits with these experiences if I understand your question right, which is how will be differentiate our first party hardware, we will build first party hardware that’s creating category, a good example is what we have done with Surface Pro 3. And in other places where we have really changed the Windows business model to encourage a plethora of OEMs to build great hardware and we are seeing that in fact in this holiday season, I think you will see a lot of value notebooks, you will see clamshells. So we will have the full price range of our hardware offering enabled by this new windows business model. And I think the last part was how will we monetize? Of course, we will again have a combination, we will have our OEM monetization and some of these new business models are about monetizing on the backend with Bing integration as well as our services attached and that’s the reason fundamentally why we have these zero-priced Windows SKUs today.

Great. Thank you.

Thanks Ed.

Thanks Ed.

Next question please.

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

Thanks. I wouldn’t mind focusing for a moment on the enterprise server side that’s where at least for me much of the upside came. We haven’t seen server product revenue growth in the mid teens in a while. Total Microsoft bookings 20% x Nokia haven’t seen that in ages. Perhaps the answers to these questions are related but what’s happening with those two numbers to drive the upside. I’m sure a little bit came with Azure being strong but that’s relatively small so clearly there was an inflection up on the on-prem server tools business maybe part of it was renewal rates and if that’s the answer how much more room do we have to go on that? Thank you.

I mean I will start then Amy, you can add. Overall, we have had a major revamp of our server line-up, SQL 14 being the recent one which we launched in the last quarter. And it’s the strength of our server products, I mean this is that phenomena where our servers are becoming – are become much more competitive, Windows server for virtualization and private cloud, system center for datacenter management, SQL for all the in-memory work load capabilities it has and BI. All of that has really benefited from us running our own cloud pushing our own servers to run these add scale services. And with that being in place and these refreshers we are seeing increased investment in interest on our infrastructure when it comes to data centers. One of the things is as the public cloud is growing; we in fact don’t see it. It is for now as a zero sum. In fact, we see growth especially with the virtualization rates because people are not – overall the number of applications on mobile side are growing all of those mobile applications drive backend compute and storage. And that backend compute storage some of it goes into the public cloud, but a lot of it even goes into the datacenter. And that’s where we have a very good price performance equation and a TCO equation. And so we are being pretty competitive in grabbing share and Hyper-V share is a good example of that.

And I think Karl, you are right. When you triangulate the data around our strong trend line on earned, even commercial bookings growth of 23% and the numbers you exactly talked about, it really was a combination of Office 365 cloud growth as well as we talked about the benefits of our hybrid offerings a lot of on-prem server growth as well this quarter.

Okay. Thank you.

Thanks Karl.

Operator, we will take the next question.

Our next question comes from the line of Daniel Ives with FBR Capital. Please proceed with your question.

Great. Thanks guys. This is Jim Moore in for Dan. Can you just talk a little bit about the geographies mentioned in North America and Europe strength and maybe just talk a little more about the dynamics there in terms of where you are seeing this strength cloud or PC et cetera? Thanks.

Thanks Jim. Actually I would say the strength across the products isn’t geographically specific. So it’s relatively consistent. We have seen cloud growth globally. We have seen on-prem server growth globally. In general, the products get launched first and often in the U.S. and so it tends to be the most mature of some of those transitional markets. But, I think in general my geographic comments are far more holistic than they are product specific.

Thanks very much.

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

Thank you. And our last question will come from the line of Brad Reback with Stifel. Please proceed with your question.

Hey, hi, how are you?

Thanks very much.

Satya, you guys did a very good job this year of returning capital to shareholders over $15 billion. Can you give us some sense philosophically, if you see a lot of opportunity for additional repurchase/dividend activity or is this a level you are fairly comfortable with? Thanks.

Thanks for the question. Overall, my comments remain the same. I answered this even in the last call, which is the approach we have taken is a balanced approach and a thoughtful approach. We are going to look at our own need to invest in order to drive growth in the opportunities we see. I think today’s conversation and results show how some of the best we have made with our cloud are paying off. And it’s great to see that momentum and it’s in fact a pretty broad based momentum across Azure, Office 365 and Amy mentioned it pretty briefly even CRM online growth. So to me that remains the core, which is being able to place our capital to drive organic growth and for the long-term health of this company. That said, we will have a balanced approach in terms of both share buyback as well as dividends that’s the approach we have taken over the last multiple years and that will be the same thoughtful process that I expect us to do continue with going into the next fiscal and beyond.

Great. Thanks very much.

Thanks Brad.

Thank you, Brad. Okay. That’s 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. But those of you unable to attend in person these events will generally be webcast and you can follow our comments at our Investor Relations website. Please contact us if you need any additional details. And thanks again for joining us today.

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