Subtitles section Play video Print subtitles Greetings, and welcome to the Microsoft Fiscal Year 2018 Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Spencer, General Manager of Investor Relations. Thank you, sir. You may begin. Good afternoon and thank you for joining us today. On the call with me are Satya Nadella, CEO; Amy Hood, CFO; Frank Brod, CAO; and Carolyn Frantz, Deputy General Counsel and Corporate Secretary. On the Microsoft IR 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 and provides reconciliation of differences between the GAAP and non-GAAP financial measures. Unless otherwise specified, we refer to non-GAAP metrics on the call. The non-GAAP financial measures provided should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's fourth quarter performance, in addition to the impact that these items and events had on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. We will also provide growth rates in constant currency when available as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we refer to growth rate only. We will post our 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 on the Microsoft IR website. (Forward-Looking Cautionary Statements) And with that I'll turn the call over to Satya. Thank you, Mike and thanks to everyone on the phone for joining. I'm proud of our strong results this quarter and even more proud of what we've accomplished over the last 12 months. We delivered more than $110 billion in revenue for the full-year with double-digit top line and bottom line growth. And our commercial cloud business surpassed more than $23 billion in revenue for the year with gross margin expanding to 57%. The strength of our results reflects accelerating innovation and the trust customers are placing in us to power their digital transformation. I shared our vision for the intelligent cloud and the intelligent edge a little over a year ago, a vision that is now quickly becoming reality, and impacting every customer in every industry. Everything we've accomplished this year has been about accelerating our lead in this new era and the tremendous opportunity ahead. We focus on the right secular technology trends and growing markets and follow that up with solid roadmap execution. We reorganized our engineering teams to break free of the categories of the past and better align with the emerging tech stack from Silicon to AI to experiences, to better serve the needs of our customers today and long into the future. We reoriented our sales and marketing teams adding industry and technical expertise to partner more deeply with our customers on their digital transformation journeys. And most importantly, we drove innovation to deliver differentiated value across the cloud and the edge. Now I'll briefly highlight some of our innovation in momentum. We introduced Microsoft 365 to empower employees in the modern workplace. Microsoft 365 is now a multi-billion dollar business that gives our customers the path to the cloud and broadens our reach with new and under penetrated markets, including more than 2 billion first line workers and industry-specific workflows. Across Microsoft 365, we are helping people be more productive, collaborate and stay secure on any device with AI infused experiences they use every day, and it's driving usage. We have more than 135 million users of Office 365 commercial, Outlook Mobile is being used on more than 100 million iOS and android devices, and more than 200,000 organizations are using Microsoft Teams as the hub for team work. We invested to make Windows 10 the most modern, secure always up-to-date operating system. Windows 10 is now active on nearly 700 million devices and the growth of the enterprise deployment this year exceeded our expectations. It was a record year for LinkedIn. Now with more than 575 million members, and revenue growth of 37% in Q4, the fifth consecutive quarter of revenue acceleration. We saw record levels of engagement in job postings again this quarter with sessions growth up 41% YoverY. The strong engagement is driven by the quality of the feed, video messaging and acceleration of mobile usage with mobile sessions up more than 55% YoverY. We will continue to reinvest to make LinkedIn the essential platform to connect the world's professionals and help them achieve more with experiences followed by LinkedIn and Microsoft Graphs. Dynamics 365 gives organizations an alternative to monolithic style of suites of business location with modular modern extensible and AI driven apps that unlock insights across every part of the organization, from sales to HR. It gained traction as our third commercial cloud growth engine with revenue up 61% YoverY. Our investments in Power BI, PowerApps and Flow, as the new analytics and application platform are gaining significant momentum with ISVs and enterprise customers. Azure is the only hyper-scale cloud that extends to the edge across identity, data, application platform, security and management. And our differentiated architectural approach drove another strong quarter of growth. We are investing aggressively to build Azure as the world's computer. We expanded our global data center footprint to 54 regions, more than any other cloud provider and with the most comprehensive compliance coverage in the industry. We added nearly 500 new Azure capabilities in the last year alone focused on both existing workloads and new workloads such as IoT and AI at the edge. We introduced Azure Stack and Azure Sphere, two first of their kind cloud to edge solutions that are already seeing strong customer demand. We're democratizing data science and AI with Azure Cognitive Services, Azure ML and data services such as Azure Cosmos DB to help organizations of all sizes convert their data into insights and experiences for competitive advantage. The world's leading companies are running on Azure and I'm especially proud that Walmart chose Azure and Microsoft 365 to accelerate its digital transformation for their associates and customers. In gaming, we are pursuing our expansive opportunity from the way games are created and distributed to how they're played and viewed, surpassing $10 billion in revenue this year for the first time. We are investing aggressively in content, community and cloud services across every end point to expand usage and deepening engagement with gamers. The combination of XBox Live, Game Pass subscriptions and (inaudible) are driving record levels of growth and engagement. Not only are we investing to grow organically, but we're also investing inorganically in opportunities that expand our total addressable market and accrue value to our platforms and our customers. Take LinkedIn, we have united the world's leading professional cloud with the world's leading professional network and proved that we have an integration model that works, enabling LinkedIn to accelerate growth while retaining its member-first ethos. With Get Help, we recognized the increasingly vital role the developers play in value creation and growth in the era of the intelligent cloud and intelligent edge. Our pending acquisition will enable us to bring our tools and services to new audiences, while enabling Get Help to grow and retain its independence and developer-first ethos in community. PlayFab accelerates our vision to build a world class cloud platform for the gaming industry across mobile, PC and console and the addition of five new gaming studios bolsters our first body content development to support our fast-growing gaming services. Microsoft has always been a partner-led company, and partners increasingly see more opportunity on our platforms inspiring leading companies like SAP, Adobe and GE as well as fast-growing start-ups like in Mobi to play an even larger role in our vibrant and growing partner ecosystems, an asset that gives us scale in this new era. In closing, our opportunity has never been greater. We will continue to innovate and invest across our solution areas in serving our customers and their unmet and un-articulated needs. With this tremendous opportunity comes great responsibility. We're relentlessly working to instill trust in technology across everything we do, it's why we will continue to lead the industry dialogue on trust, advocate for customer privacy, drive industry-wide cybersecurity initiative and champion ethical AI. Our investments in business model are fundamentally aligned with our customer's long-term interests and success. This opportunity and responsibility grounds up in our mission to empower every person and every organization on the planet to achieve more. I'm proud of our progress and I'm proud of the more than 100,000 Microsoft employees around the world, who are focused on our customer success in this new era. Now I'll hand over to Amy, who will cover our financial results in detail and share our outlook and I look forward to rejoin you for the questions. Thank you, Satya and good afternoon, everyone. This quarter, revenue was $30.1 billion, up 17% and 15% in constant currency. Gross margin dollars increased 19% and 16% in constant currency. Operating income increased 30% and 24% in constant currency. Earnings per share was $1.13, increasing 7% and 3% at constant currency. As a reminder, FY17 included a $1.8 billion tax benefit related to previously non-deductible losses. In our largest quarter of the year, our sales teams and partners delivered exceptional commercial results. We saw strong performance in most of our geographic regions against the backdrop of favorable macroeconomic conditions and positive IT spending trends. Customer commitment to our top platform continues to increase. In F Y18, we closed a record number of multi-million dollar commercial cloud agreement and more than doubled the number of $10 million plus Azure agreements. Our annuity mix increased 3 points year-over-year to 89%. As a result, commercial bookings increased 18% even with a strong prior year comparable. Commercial unearned revenue was $29 billion, growing 23% and 21% in constant currency, significantly higher than anticipated due to stronger than expected cloud billings. Our commercial cloud revenue was $6.9 billion, growing 53% and 50% in constant currency with strong performance across the US, Western Europe and the UK. Commercial cloud gross margin percentage increased 6 points to 58%. In line with our commitment at the beginning of the year, we improved the gross margin percentage in each cloud service with Azure seeing the most significant improvement. Our company gross margin percentage was 68%, ahead of our expectation and up 1 point year-over-year from improvement on personal computing segment driven by Surface. FX increased revenue growth by 2 points, 1 point lower than anticipated due to a stronger US dollar. At the segment level, FX had a positive impact of 3 points on productivity and business process within intelligent cloud and 1 point on more personal computing revenue. The FX impact was immaterial. This quarter, operating expenses were 9% and 8% in constant currency, above our expectations due to revenue driven expense, such as sales compensation given the strength of the quarter and severance expense primarily in our sales organizations, offset by FX favourability. Strong revenue growth improved device gross margin percentage and continued to targeted investment in cloud engineering, cloud sales capacity and LinkedIn created operating income leverage. This quarter, operating income increased again up 3 points year-over-year. Now to our segment results. Revenue from productivity and business processes was $9.7 billion, increasing 13% and 10% in constant currency, in line with our expectations even with the headwinds from a stronger dollar and a higher-than-anticipated mix of cloud billings in our Office Commercial and Dynamics businesses during the quarter. As a reminder, under ASC 606, cloud revenue is ratably recognized, while annuity on-premises revenue has a component of upfront recognition. A higher mix of cloud billings is reflected in more on our revenue and less in period recognition in a quarter. Office Commercial revenue increased 10% and 8% in constant currency. Office 365 Commercial revenue grew 38% and 35% in constant currency and Office 365 Commercial Seats grew 29%. We continue to see healthy installed base growth and ARPU expansion from customer adoption of premium workloads in E3 and E5. Office consumer revenue increased 8% and 6% in constant currency, driven by recurring subscription revenue and growth in the subscriber base, now at 31.4 million. Our Dynamics business grew 11% and 8% in constant currency, with double digit billings growth. Dynamic 365 grew 61% and 56% in constant currency. LinkedIn revenue grew 37% and 34% in constant currency with strong execution across all businesses. As Satya highlighted, engagement continue to accelerate and we also saw record levels of job postings, benefiting from a robust US job market. Segment gross margin dollars grew 13% and 10% in constant currency. Gross margin percentage was relatively unchanged year-over-year, even as cloud mix increased, driven by margin expansion in Office 365 and LinkedIn. Operating expenses increased 7% as we continue to invest in LinkedIn, cloud engineering and commercial sales capacity. Operating income increased 20% and 13% in constant currency. Revenue from the intelligent cloud segment was $9.6 billion, increasing 23% and 20% in constant currency, with better than expected results in both our on-premise and Azure businesses. Server products and cloud services revenue increased 26% and 24% in constant currency, driven by continued strong Azure revenue growth of 89% and 85% in constant currency. Azure producer services have performed ahead of expectations with our enterprise and mobility installed base growing 55% year-over-year to over $82 million. Our on-premises server business grew 8% and 6% in constant currency with double-digit growth in premium server products revenue and healthy renewals benefiting from a significant value customers seek in our hybrid solutions. Enterprise Services revenue grew 8% and 7% in constant currency, as growth in Premier Support Services and Microsoft Consulting Services was partially offset by declining customer support agreements for Windows Server 2003. Segment gross margin dollars increased 23% and 20% in constant currency. Gross margin percentage was relatively unchanged as material improvement in the Azure gross margin percentage was offset by a growing mix of Azure IaaS and PaaS revenues. Operating expenses increased 11% with ongoing investments in cloud engineering and sales capacity to support top line growth. Operating income grew 34%, up 30% in constant currency. Finally, More Personal Computing. Revenue was $10.8 billion, up 17% and 16% in constant currency, with better than expected results in Windows Commercial, OEM Pro and Surface. In the commercial space, we saw an accelerating pace of Windows 10 Enterprise deployment this quarter. Customer demand for modern and secure hardware and stronger than expected PC growth in geographies were (inaudible) high contributed to OEM revenue growth of 14%, ahead of the overall commercial market. Windows Commercial Products and Clouds Services grew 23% and 19% in constant currency, driven by double-digit billings growth as well as the higher mix in quarter recognition for multi-year agreements. In Consumer, OEM non-pro revenue declined 3%, slightly below the consumer PC market driven by continued pressure in the entry level price category, even as we continued to take share in the premium category. Inventory levels were within the normal range.