Greetings, and welcome to the First Quarter Fiscal Year 2018 Microsoft Corporation Earnings Conference Call. 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.

Thanks, Jesse. 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 and Corporate Secretary. On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call. As a reminder, this is the first quarter we're reporting our results under the new revenue standard, ASC 606. As we detailed during a conference call we hosted on August 3, the adoption of the standard had several impacts, but most materially, the revenue recognition of Windows 10 OEM licenses and the license component of on-premises annuity contracts. As we discuss our Q1 results and share our outlook on the call, please keep in mind the following: first, the new standard allows us to simplify the communication of our results by eliminating the non-GAAP revenue reporting; second, there's no change in customer billings, cash flows or revenue recognition for our cloud services, hardware, enterprise services and advertising businesses; and lastly, the quarterly seasonality of our revenue within a given year does change, and we may experience higher quarterly volatility as well. The prior periods we will reference on this call and in the earnings materials on our IR website have been restated to reflect adoption of this new standard. During our August 3 call, we also translated our outlook for Q1 into the new standard, and all references to expectations on this call refer to that translated guidance. You can find additional information on this accounting change located on the IR website. All growth comparisons we make on the call today will relate to the corresponding period of last year,…

Thank you, Chris, and thanks to everyone on the phone for joining. We are off to a very strong start in FY 2018, delivering double digit top and bottom line growth and exceeding $20 billion in commercial cloud ARR, outpacing the goal we set just over two years ago. I'm proud of our team's work behind these results that spanned all of our segments. We now have 120 million monthly active users of Office 365 Commercial. We have more than 530 million LinkedIn members. Dynamics 365 customers grew 40% year over year. Azure Compute usage more than doubled this quarter and revenue grew 90%, and Windows 10 Commercial monthly active devices grew 90% year over year. These results reflect our accelerating innovation as well as increased usage and engagement across all businesses as customers continue to choose Microsoft to help them transform. Amy will cover our financial results in more detail, but today I wanted to talk about the key areas of innovation and opportunity for growth in 2018 and beyond. Our focus is on bringing our technology and products together into experiences and solutions that deliver new value for customers by galvanizing around five key solution areas. First, top of mind for every CEO is empowering their own employees for the modern workplace. Microsoft 365 is our core offering to address this $500 billion-plus market. We are bringing together Office 365, Windows 10 and Enterprise Mobility + Security as a complete integrated solution for organizations of all sizes. It represents a profound shift in the way we design, build and deliver our productivity solutions, moving to a people-centered approach, spanning all their devices to unlock creativity and inspire teamwork while simplifying security and management. This past quarter, we launched a wave of innovation across Microsoft 365. The Windows 10…

Thank you, Satya, and good afternoon everyone. This quarter revenue was $24.5 billion, up 12% and 11% in constant currency with better than expected performance across all segments. Gross margin increased 15%. Operating income increased 15% and earnings per share was $0.84, increasing 17%. Our strong start to the fiscal year with double digit top and bottom line growth is a result of our consistent execution and ongoing investment in product innovation and sales capacity. At a company level, LinkedIn contributed approximately 5 points of revenue and gross margin growth and had a 4 point drag on operating income. Excluding the cost of amortization of acquired intangibles, LinkedIn contributed $78 million to operating income. We are confidently ahead of our original financial commitment for LinkedIn. We now expect LinkedIn, ex-purchase accounting, to be accretive to EPS this fiscal year. Our results were in line with macroeconomic trends, with better than expected performance from large markets like France, Japan and the UK and stabilization in markets like Brazil and Russia. Our sales team and partners delivered strong commercial results this quarter. Multiyear commitments from customers contributed to an 89% annuity mix. On a roughly flat dollar volume of EA expirations, we grew commercial bookings 14% and 9% in constant currency. Commercial unearned revenue came in higher than we expected at $21.5 billion, primarily from higher Software Assurance billings and FX benefit. Our commercial cloud business had another quarter of robust revenue growth and material gross margin improvement. Revenue exceeded $5 billion this quarter, growing 56% year over year and gross margin increased 8 points to 57%, with improvement in each cloud service, most notably in Azure. Our company gross margin was 66%, up 2 points from prior year as sales mix of higher-margin products and services, along with improving cloud margins,…

Thanks, Amy. We'll now move to Q&A. Jesse, can you please repeat your instructions?

Absolutely. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question is coming from the line of Keith Weiss with Morgan Stanley. Please proceed with your question. Keith Eric Weiss - Morgan Stanley & Co. LLC: Excellent. Thank you, guys, for taking the question, and very nice quarter. Satya, a question for you. We've been seeing Intelligent Cloud growing very well for quite some time, Azure sustaining very, very impressive growth rates, but even the server and tools businesses sustaining growth. When we think about the drivers of that growth, is this just continued share gains by Microsoft, enabling you guys to outgrow the market? Or have you started to see stuff like AI and all these additional cognitive services that you bring to the market actually accelerating workload growth within your customers? You're actually like building new market opportunity for yourselves with these additional services.

Thanks, Keith, for the question. And I would say all of the above. One of the things that we started always, we always believed in distributed computing, and we've built for that so when we say hybrid, we never thought of it as some kind of a temporary state but we always thought the edge and the cloud was going to be where the application pattern was in fact going to get to. In fact, I'm very excited about some of the new workloads. If I look at whether it's IoT or AI, the two workloads that are new, both of them require both computation and intelligence on the edge and a very new way to do even computation, which event-driven computation. So we feel good about new workload growth. We feel good about this lift-shift modernize motions that are happening. We feel that we're well positioned for both meeting today's realities of our enterprise customers, but most importantly, where on a secular basis I believe hybrid computing is going, which is to this architectural pattern of intelligent cloud, intelligent edge.

Thanks, Keith.

Thanks, we'll take the next question now, Jesse, please.

Thank you. The next question is coming from the line of Heather Bellini with Goldman Sachs. Please proceed with your question. Heather Bellini - Goldman Sachs & Co. LLC: Great. Thank you very much. I had a question related to Azure. You guys mentioned on the call that premium services grew triple digits for the 13th quarter in a row. And I was wondering if you could give us a sense for how to think about the percentage of workloads that are now running premium services as a percentage of the total. And/or are we at the point now where that's a high enough percentage of the mix that we're at a tipping point here, where what seems like very significant gross margin progression is going to continue at this similar clip? Thank you.

I mean, I can start and, Amy, you can add to this. The premium services, for example, the way we think about them is in everything related to our data is, and especially the higher level databases, so I'm not talking about raw storage but this is Cosmos DB or Azure DB or any of data services, our IoT services, our AI services are all the premium services. And there is a path. Every customer sometimes just starts with infrastructure as a service and some storage. And then the lift-shift turns into lift-shift and modernize and that's where these premium services get activated. So they definitely are margin accretive for us, but most importantly, they add a tremendous amount of value to the customers. And I'll let Amy add any additional color to that.

And I think, Heather, it gives me a good opportunity to talk a little bit about the real drivers of the Azure gross margin improvement. There are really, when you think about it, three. The first one's just pure revenue scale. We've done such a terrific job, I think, of growing and focusing and the innovation we put in and having our sales teams, through investments we've made for the past couple of years, and competency building, land that at customers. The second component, and the one you'd asked about, is a little bit about that premium services revenue mix. And you're absolutely seeing the impact of that growth as mix show up in the gross margin. And addition to the workloads Satya mentioned, I'll also bring up EMF. EMF continues to be I think of incredible value to customers. And I think we've done a very good job of pointing out its competitive advantages, and we're seeing that also benefit margins. And finally, just the strong work on the infrastructure team, both between hardware innovation done at everything from the network, all the way to the prox and their integration with each other as well as the software innovation being done on top of it. Those things together, with premium being a component of that, are all lending itself to gross margin improvement. Heather Bellini - Goldman Sachs & Co. LLC: Great. That's very helpful. Thank you.

Thanks, Heather. We'll take the next question now, please.

Thank you. Our next question is coming from the line of Phil Winslow with Wells Fargo. Please proceed with your question.

Hi. Thanks guys, and congrats on a great quarter. I just wanted to focus in on Office because you've obviously spent a fair amount of time on Azure, the gross margins there. But within Office, you've got several secular trends as well as just mix shift going on there just from a price point perspective as well as the gross margin between the different levels of E1, E3, E5. So wondering if you could give us some color of what we're seeing there, because obviously, there's healthy, healthy seat growth, revenues outpacing and it seems like margins are as well. So just provide us more color on sort of what we've been seeing and kind of how you think about that trending going forward?

Let me just start at the highest of levels, because for us again, and in this last quarter, some of the innovation that we launched I think is also pretty key as you look forward to what it means for Office and Office growth. One of the new suites we have is called F1 and this is about first-line work. So Office is no longer limited just to the knowledge workers. In fact, we see significant opportunity for some of our teamwork, collaboration, communications, as well as scheduling software to be very, very relevant for anyone who's on the manufacturing plant or a retail specialist. Some of our social tools like Yammer are increasingly getting used for broad communications, inclusive of Skype for Teams. So I just wanted to put that in there as well, as there is of course E3. There is E3 to E5. But there is also F1, which is increasing the overall penetration and not to mention the small business segment, and of course all the markets that we participate in with Office 365 where we don't have much of a server business at all. We sold Office on-premise or Office perpetual clients. But now you can have a small business in a country like India, buy Office 365 as a subscription service. So those are all the things that are in play.

And I do think that's important, Keith, in terms of the innovation and the value. I think sometimes, on this call in particular, we talk about there's installed base growth and there's ARPU increases. Sitting underneath that is this very large 120 million dollar-monthly active users in commercial. And they're experiencing frankly the latest innovations that the company has built. So I look and say, seeing growth in that number allows us to actually grow the ARPU, and the new services that Satya mentioned continues to let us grow the installed base. Innovations around teams, innovations in AI in the actual Office products themselves are now being experienced by our customers. I think when you have that happen over time, it builds confidence in the product and it builds confidence in end-user confidence in itself. And then purchasers are happy to continue to add SKUs and add and move up the scale. We still, this is primarily the ARPU growth, continues to be some of the earlier transitions we've always talked about. It's that E3 transition as well as installed base growth. E5 continues to see encouraging signs. We're starting to see it enter but that will take a long time, as we've talked about, to actually land in ARPU.

Thank you, Phil. We'll move to next question, please.

Thank you. The next question is coming from line of Karl Keirstead with Deutsche Bank. Please proceed with your question.

Thanks. This one for Amy. Amy, just a general sort of corporate-wide question on gross margins. Your revenue and COGS guide, if I ran the math correctly, imply about 60% gross margins for the December quarter. So that's going to be down year over year and I suspect below some of the street estimates. But it sounds like your tone is a little bit better for gross margins for the full year. So I just want to make sure I leave the call understanding what's happening here. Is the conclusion that 2Q is somewhat of a one-off, given the uptick in lower-margin hardware and thereafter will return to a more normal year over year pattern on gross margins? Thank you.

Thanks, Karl. Actually, this is really all the gaming Xbox One console launch. It's very specific. And so every other gross margin trend across IC, across PBP and across the rest of the MPC portfolio exhibits the exact same fundamental drivers and improvement. And so really, this is really 100% the Xbox One X impact in Q2 of the launch on the company gross margin and in particular, the MPC gross margin.

Okay. Thanks.

Thank you, Karl. We'll take the next question, please.

Thank you. Our next question is coming from the line of Walter Pritchard with Citi. Please proceed with your question.

Hi, thanks. I think another question for Amy here. Just looking at the dependent – trying to figure out the dependency of your Azure growth this year on the volume of annuity up for renewal. I know last year, you had very, very strong growth in annuity on that renewal cycle, and you're talking about some pressure in the Q2 and then a slightly up trend for the year. But how dependent is Azure growth in customers attaching that to the volume of annuity up?

Yeah, I wouldn't call it pressure, Walter, just how I think about it. There's just an expiration base that comes up every quarter.

Understood.

And there's volatility to it. So the way to think about it is over the year, it's up a little and in Q2, it happens to be just a low quarter of the 12 that come up through the cycle, much like Q4 was quite large in the cycle. And Azure actually falls a couple of patterns. It's not just about EA attach although it absolutely can be one of the motions. Because it tends to be project-based as well and many of the investments we've made in sales capacity, and the reason we did some of the sales transformation, was to invest a lot more in that project-led motion, which is a bit disconnected actually from the EA renewal cycle, and you've really seen that. The Azure pace is not, if you drew a line, as correlated to EAs as it even was 3 years ago, as we've I think matured the product and matured our sales cycles.

Okay. Great, thank you.

Thank you, Walter. We'll go to the next question, please.

Thank you. The next question is coming from the line of Kirk Materne with Evercore ISI. Please proceed with your question.

Thanks very much and I'll add my congrats on the quarter. Satya, yesterday you were down at the GE event and announcing the partnership with them around Predix. And I was wondering, when we think about the opportunities for Azure to be that sort of trusted platform for ISVs, can you just talk about how you think the progress is going on that front? Because it seems to obviously just expand your overall TAM and the kind of use cases you can address by bringing partners like GE onto your platform. Thanks.

Yeah. Thank you for the question. Overall, I think you sort of speak to I think one of the big advantages and one of the big value propositions we have on to both sides. One is to the enterprise customer. We are a trusted partner. And we support them with their hybrid computing needs and their AI needs. One of the things that we emphasize is it's not about our technology, but it's our ability to transfer that capability to our customer because they're increasingly becoming, whether you're in retail or you're in oil and gas or you're in financial services, every one of them is trying to build their own software capability and we are uniquely capable of doing so. The second part is the ISVs. We now, in fact, one of the big areas of investment this year was the core sell capacity in our field so that ISVs can be successful on our platform. Whether it is GE or Adobe and many others can all now benefit, both because of our enterprise partnership and credibility, and more importantly because of the field resources we have put in place. So we are really looking forward to accelerating our business with GE and many others to come. But it's a very important core sell motion and more importantly building trust on both sides of that equation.

Thanks, Kirk.

Thank you. We'll take the next question, please.

Thank you. The next question is coming from the line of Mark Moerdler with Bernstein. Please proceed with your question. Mark L. Moerdler - Sanford C. Bernstein & Co. LLC: Thanks for taking my question, and again congrats on the quarter. I'd like to look at Dynamics 365. It's been growing really fast. It was center stage at Envision in almost every presentation and discussion. Can you talk more about how you think about the opportunity and give us a sense of which of the offerings right now within 365, whether it's CRM or Talent or ERP or whatever, are driving the growth and could be part of the future growth? Thanks.

Thank you, Mark, for that question. The way we designed Dynamics 365, both on the technology front as well as on the business model front was to get away from what I would describe as the old-school suite-based selling or suite-based building of these things, whether it's CRM or ERP or SCM. Because we realized that, for example, you take any IoT project that is starting in Azure, it first translates into an analytics workload that pulls through some Azure high router analytics services. And then immediately after you do something like preventive maintenance, you need field service. And all they need is just a very robust field service module that's cost-effective and efficient. And so we're able to attach that to that project. Similarly on Talent, they want to be able to – if you start on LinkedIn with hiring, you want to be able to do the on-boarding and talent management. That's the module you want. Even on the operations side, we are realizing that even if you keep your financials the same, there is need, and with increasing digitization, there is more operational modules that you need. So that's what we've designed it for. So the growth is actually across the board. It's coming in customer service. It's coming in sales. It's coming in talent. It's coming in operations, and we have some very competitive price points there. The other one is that there is no such thing as a canonical business. There's no such thing as a canonical business in time. That means things are always changing. So customization, customization and composition, especially with Office 365, is very important, and this is where we have some very differentiated offer with Power BI, PowerApps and Flow. And that's another big driver of some of that growth across our enterprise customers.

Thanks, Mark.

Thank you. Mark L. Moerdler - Sanford C. Bernstein & Co. LLC: Thanks.

We'll go to the next question, please.

Thank you. Our next question is coming from the line of Adam Holt with MoffettNathanson. Please proceed with your question.

Hi, everyone. That was some quarter. I'm tempted to ask about the strength in Windows, which I know you don't talk about much and don't get much questions about. But really since we've launched, the question that I get by far the most is around the long-term margin potential in Azure. And with the gross margins being as good as they were this quarter, without giving us long-term guidance, is there any reason to believe that the long-term operating margins in Azure couldn't be – we just saw AWS put up a mid-20s operating margin. Is there anything structural that would lead us to believe that you couldn't do something in that range? Or how should we think about the long-term framework for that business? Thank you.

I'll start, Adam. The one thing I'd say is when I think about the long-term margin, I actually think of the long-term margin across our cloud. I mean, when we even make our CapEx decisions, which is one of the drivers of margin, we think of first of all, first party equals third party. A lot of what we do even in Windows, mostly people don't recognize it, but one of the most important services we run is Windows Update as a cloud service. And so we have a lot of value that is across the board cloud services, whether it's Xbox Live, Windows Update, Office 365, Dynamics 365, and of course all of the Azure services. And we're going to build scale across all of them. And so we would not – in fact, we will be very aggressive in taking margin in one place, which is different as we see a path to margin in a different spot. That's something that we want to make sure we follow more our opportunity in a customer across the board versus trying to micromanage to certain margins in very specific opportunities, because we think that it's the integrated ability for us to deliver value is which I think long term is what the customers expect of Microsoft.

And I would just add that as we think about that long-term trajectory, our ability to continue to improve margins in our SaaS portfolio and our PaaS portfolio and IaaS portfolio still exists. And our ability to blend them into interesting products that solve customer solutions, which may not even be priced as the component parts, is I think how we think about, especially in our solution areas that Satya talks about, how we talk about delivering it to a customer. So while I'm confident in our ability to continue to grow the core margin, I do think for us in particular, it really is a portfolio that we believe that we need to manage appropriately.

Thank you.

Thanks, Adam. Thank you. We'll go to the next question.

Thank you. The next question is coming from the line of Michael Nemeroff with Credit Suisse. Please proceed with your question. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker): Hi. And thanks for taking my question. My question is on the Gaming business. Given the even larger focus you're putting on this segment in the near-term, how quickly or in what timeframe do you think Gaming revenue could grow at or above the average gaming industry growth rate of mid to high-single digits? And I know you don't break out segment margins, but could you give us a sense of how you think about Gaming from a normalized contribution margin perspective relative to MPC and your overall company-wide margins, excluding the one-time Xbox launch effects? Thanks.

I can start again. I would say from a Gaming perspective, one of the bigger changes that has happened in the last, I would say, couple of years is one, of course the vibrancy of the Xbox Live network across the PC and the console and now increasingly even on the phone because of titles like Minecraft. And once you have the network, you have plenty of different opportunities. In particular, we now have a subscription offer with Game Pass that's off to a good very good start and our goal is to be able to have essentially a Netflix for games, so that we can have the game subscriptions that people can use across all of the devices that they play in. The other area is streaming. As you know, there is game playing and game watching and there is secular growth on both fronts. And we feel very, very good about the engagement increases in a pretty unique value proposition we have in Mixer. So that's another opportunity that we believe will shape in addition to things like e-sports and so on. So it's the totality of that. And one of the numbers that I did put in my script was that 20% growth in what we call software and services, that's perhaps a leading indicator of where we think the opportunity lies. These are early days for us, but that said, that's probably one of the key numbers to watch as we make progress and execute.

And because of that, you're actually already seeing that impact in the MPC gross margins. Even this quarter is a great example. There was material improvement in gross margin in that segment, and a lot of that was actually due to the higher margins that we have structurally in that software and services revenue from Xbox. And as I believe, the industry that Satya is talking about pivots to be more about the engagement and monetization of that member network, you can expect that margin profile as well of our traditional, more hardware-focused Xbox to evolve, to be a real combination of those two things going forward. And structurally, that would of course have higher operating margin. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker): Thank you very much.

Great. Thanks. We'll take next question, please.

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

Hey, thanks for taking my question. The conversation we have on around Azure and adoption there seems to be changing with customers, where they seem to be seeking a deeper relationship with you guys now, given that your maturity has increased quite a bit over the last few quarters. Can you talk to that? Is that something that just I picked up, or is that what you're seeing in your conversations as well? Thank you.

Hopefully, we picked it up a lot earlier than you did. But we have. So we do have a very different dialogue. You think about it, all of the customers that we have worked with, we have always worked with them historically even in our server days. But to your point, Raimo, I think what has happened is the change, even in the financial services, the segments that you all represent, the kinds of workloads now that are moving to the cloud has qualitatively changed. In the past we participated, but a lot of Tier 1 workloads were not on Microsoft stack, whereas now, a lot of Tier 1 workloads are in fact increasingly on Microsoft cloud. And so to me, that represents a qualitative change, and so the type of dialogue we have, whether it's with an auto company or a financial services company or a retail company, is much deeper, much broader. And I would use the word we are deeply partnering with them. It's no longer just simple vendor relationships, because as they are trying to build their own software capability, they need a trusted partner who's more interested in making sure that they build their own technology capability. And that's what we're investing in.

And I would say, Raimo, a way to think about this is we've always had that trusted relationship, which we're incredibly proud of as a company with our enterprise customers. The investments we've made over the past years are about hiring the type of talent that can go and sit with a customer and drive the customer's successful outcomes of the projects they deploy. And that's what we mean. It's about the investment we've made in capability, the evolution of the product and its innovation. And I think using and trying to continue to earn the customer trust to deliver these world-class workloads. So I do think this is really an output of multiple years of concentration on delivering that capability.

Perfect. Thank you.

Thank you, Raimo. Jessie, we'll have time for one more question, please.

Thank you. Our last question comes from the line of Ross MacMillan with RBC Capital Markets. Please proceed with your question.

Thanks for taking my question. Satya, I was curious. You've made a number of announcements with Adobe over the last year or so. And it seems like Microsoft's product and Adobe's products are getting more intertwined. And just curious from your perspective, if you could just maybe give us some insights into where you see the big opportunities to work with a vendor like Adobe and what are the go to market actions that you're seeing being more successful? Thank you.

Yes, we're very excited about the partnership with Adobe. And as you said, Adobe and Microsoft have partnered. In fact, across our entire histories in many of the areas, but increasingly across of the creative cloud and their Document Cloud as well as their Experience Cloud, we have plenty going on. In fact, we are very excited about what we are doing with our devices and Adobe and with Windows because I think Windows and Windows 10 Creators Update is the ideal platform for all of the creators in the world because of the innovation in Windows and the innovation in devices, both Surface Book as well as our OEM devices. So that's one area that I think you will see. I would love if you're an illustrator or a Photoshop user, you should just check out the dial support that they have in Surface, which just is beautiful. And then you go to Office 365. We have a partnership with them on e-signatures. We have good interoperability between our respective document clouds. That will in fact continue. And then on the creative side or on the experience side, in fact we are adding a lot of data and AI capability, which is obviously key to Adobe as an ISV. So we're looking forward to the, ultimately the impact all this has with customers in terms of their ability to take advantage of our respective value and for them to be able to benefit from it all. And so these kinds of partnerships, whether it's with Adobe or others, we are very focused on making sure that ISVs and partners have success on our platforms. And that's sort of our core heritage, and that's something that we want to absolutely focus on.

Thanks Ross.

Thank you, Ross.

So that wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with all of you soon. Thank you so much.

Thanks.

Thank you all.

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