Chris Suh - General Manager of Investor Relations Satya Nadella - Chief Executive Officer Amy Hood - Chief Financial Officer

Heather Bellini - Goldman Sachs Keith Weiss - Morgan Stanley Karl Keirstead - Deutsche Bank Walter Pritchard - Citi Mark Moerdler - Bernstein Research Philip Winslow - Wells Fargo Kash Rangan - Merrill Lynch Mark Murphy - JPMorgan Ross MacMillan - RBC Capital Raimo Lenschow - Barclays Brad Reback - Stifel

Welcome to Fourth Quarter Fiscal Year 2017 Microsoft Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer 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.

Thanks, Reyna. 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 and Corporate Secretary. On the Microsoft Investor Relations website, you can find our earnings press release and the financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures. Unless otherwise specified, we will 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 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 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. At the start of fiscal 2018, Microsoft adopted ASC 606, the revenue accounting standard. Today’s Q4 earnings report and any forward-looking statements follow the current revenue accounting standard consistent with our recording throughout fiscal 2017. In early August, we will be holding a conference call to provide you with information that will aid you in the transition to the new standard. 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 on 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 Investor Relations website until July 20, 2018. During this call, we will make 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'll turn the call over to Satya.

Thank you, Chris, and thank you to everyone joining on the phone. This quarter, we delivered $24.7 billion in revenue, up 10% in constant currency. For the year, we’re at $96.7 billion in revenue, up 5%. I’m proud of the progress, particularly the strength of our commercial cloud results. FY 2017 all up was a tremendous year of customer momentum with cloud, AI, and digital transformation. Our technology world view of an Intelligent Cloud and an Intelligent Edge is resonating with businesses everywhere. Every customer I talk to is looking for both innovative technology to drive new growth, as well as a strategic partner who can help build their own digital capability. Microsoft is that trusted partner. Now let’s look at the progress we have made this quarter by segment, starting with Productivity and Business Process. The workplace is transforming from changing employee expectations, a need for more diverse skills and globally distributed teams, and an increasingly complex threat environment. Only Microsoft gives customers a comprehensive approach for this new culture of work. Earlier this month, we introduced Microsoft 365, which brings together Office 365, Windows 10, and Enterprise Mobility & Security in a complete, secure solution to empower employees, safeguard businesses, and simplify IT management. Microsoft 365 is a fundamental shift in how we design, build, and go-to-market to address customer needs. Fortune 500 customers Fed-Ex, Dow Chemical, Staples, Progressive Insurance all chose Microsoft 365. The success of our Secure Productive Enterprise offering with its triple digit seat growth is one reason we are investing in Microsoft 365 for businesses of all sizes. We continue to see strong growth of Office 365 with customers like Nissan, Quicken Loans, Key Bank, Deutsche Telekom all choosing Office 365. And importantly, customers are moving beyond core workloads to adopt higher value workloads. For example, we’ve seen a significant increase in SharePoint usage, which nearly doubled year-over-year. The classroom is also transforming. This quarter, we introduced Microsoft Teams in Office 365 for Education, the digital hub for students and teachers. Microsoft Teams gives educators a whole new way to create and inspire modern classroom environments. With rich learning tools and the ability to have digital conversations with students, share materials and manage assignments, Teams gives educators more time to focus on doing what they love most, teaching. Now I’ll talk about the second part of our ambition in this segment, reinventing business process. We are investing in the LinkedIn flagship experience to create new value for members and customers and accelerate growth. We saw continued momentum in mobile and strong engagement across the platform, with sessions up more than 20% for the third consecutive quarter. And we continue to innovate new ways for members to maximize the value of the platform. We launched a new messaging overlay resulting in record levels of messages sent on LinkedIn, and introduced a career advice marketplace that will let members easily tap into the professional expertise of more than 500 million members around the world. On top of that, Talent Solutions saw record level growth in confirmed hires and InMail response rates this quarter. I’ve talked about the opportunities with Dynamics and LinkedIn. Earlier this month, we launched Microsoft Relationship Sales solution, bringing together LinkedIn Sales Navigator and Microsoft Dynamics, as well as Dynamics 365 solutions for Retail and Talent. In a world where customers are increasingly digitizing every business process, we continue to invest and expand our portfolio of modern, modular business applications that are infused with AI. We also introduced ISV Cloud Embed to make it easier for partners to modernize their existing business process applications, build new ones using Dynamics 365, Power BI, Power Apps, and Microsoft Flow. A global healthcare solution provider and partner Indegene is using it to create a mobile CRM solution for medical sales. Customers like HSBC, Best Buy, and Dolce & Gabbana all chose Dynamics 365 to transform their own businesses processes and experience the benefits of moving away from monolithic suites. Now, let’s talk about the progress we are making in our Intelligent Cloud segment. Our commercial cloud annualized revenue run rate now exceeds $18.9 billion. This quarter’s cloud growth puts us squarely on track to reach the goal we set a little over two years ago of $20 billion in commercial cloud ARR in fiscal 2018. More than ever before, customers are placing their trust in the Microsoft cloud. Azure revenue accelerated this quarter, growing 97% year-over-year. CIOs and Business Decision Makers increasingly prefer Azure as they make decisions about their cloud strategy. They value our hybrid consistency, developer productivity, AI capabilities, and trusted approach. And we keep investing in cloud computing to create broader economic benefit and opportunity, as we’ve done with our South Africa datacenter expansion, bringing Azure to 40 regions globally - more than any other cloud provider. And as part of our commitment to trust, we are helping our customers prepare to be GDPR compliant and meet the requirements of the European Union ahead of the enforcement deadline. AXA Global, KPMG, Dun & Bradstreet, Hearst, Walgreens, T-Mobile and Sephora all chose Azure to transform their businesses. Box announced that it will bring its content and collaboration services to Azure and plans to use our AI to simplify discovery and use of all types of content across the enterprise. And Baidu will use Azure to take its autonomous driving platform worldwide. The core currency of any business going forward will be the ability to convert their data into AI that drives competitive advantage. It all starts with having support for the comprehensive data estate spanning Azure Database, Cosmos DB, Data Warehouse, Data Lake, combined with SQL Server. Azure Cosmos DB is the industry’s first globally distributed database service. It enables customers to securely and reliably power data-intensive applications at unprecedented scale and performance from IoT to AI to mobile and much more. Retailer Jet.com is using Azure Cosmos DB to process trillions of transactions every day. Customers are infusing AI into their products & services using Azure AI infrastructure and services such as Bot Framework and Cognitive Services. Sabre, a leading technology provider to the global travel industry, is piloting AI-powered solutions for travel agencies to better serve customers. And Dixons Carphone is using Azure and our Cognitive Services to boost customer engagement and provide a more consistent, seamless experience across online and in their stores. Azure is also unique in its support for this emerging intelligent cloud and intelligent edge applications. Azure IoT Edge extends cloud intelligence to edge devices. This means IoT devices can act locally at the edge, while taking advantage of the cloud for global coordination and machine learning at scale. Azure is the first cloud to provide true hybrid support that customers predominately choose. Azure Stack extends Azure to enable developers to build and deploy applications the same way whether they run on the intelligent cloud or at the intelligent edge, so customers can meet any regulatory requirement and bring cloud applications to remote or disconnected locations like cruise ships or oil rigs. Now I’ll turn to our progress in More Personal Computing. Against the backdrop of more than 500 million Windows 10 monthly active devices and continued broad progress across the Windows ecosystem, I want to highlight a couple of key strategic areas this quarter. Windows 10 is made to inspire the creator in all of us and is pivotal to enabling employees to transform the way they work. Increasingly, commercial customers value Windows 10 as the foundation for a secure, modern workplace. Enterprise and education deployments increased 33% over the last quarter, as companies like NASCAR, Emirates Airline, BMW Group, Bank of China all adopt Windows 10. This quarter, we introduced Windows 10 S, streamlined for simplicity, security and superior performance and tailored for the classroom. Our goal for Windows 10 S is to develop a vibrant ecosystem with partners like Acer, ASUS, Dell, Fujitsu, HP, Samsung, and Toshiba to introduce a new class of modern devices that enables affordable, powerful new scenarios from Windows ink to 3D. We also introduced Surface Laptop and the new Surface Pro this quarter to continue to build and create momentum for new Windows device categories. Now on to gaming. Our gaming business is now more than $9 billion, and growing profitably. The gaming world is evolving faster than ever before - from game play across multiple devices, to the explosive growth in streaming and eSports, to new subscription services and mixed reality scenarios. We are uniquely positioned to capture a large share of this opportunity because of our ability to unite the global community of gamers through Xbox Live, now 53 million strong and growing, and to enable new experiences across PC, console and mobile. Our approach is to let gamers play the games they want, with the people they want, on the devices they want. At E3, we celebrated the passion of gamers by introducing Xbox One X, broadening our portfolio of gaming devices with the world’s most powerful console. We launched two new services that broaden our reach and enrich the gaming experience, both of which are off to a very strong start. Mixer, our new live streaming service, makes it easier than ever before for gamers to create and share across platforms and to interact in entirely new ways. The Xbox Game Pass is a digital subscription service that expands our existing gaming value proposition. In closing, I’m proud of the progress this year, both in our own continued transformation and in how we are empowering customers to digitally transform. As technology disrupts every industry and has the power to make a difference in the lives of everyone, we strive to create local opportunity and growth and impact in every country around the world. Our platforms and tools help drive small business productivity, large business competitiveness and public sector efficiency. They also support new startups, improve educational and health outcomes and empower human ingenuity. Our sense of purpose lies in our customers’ success. Transformation is a continuous process of renewal and reinvestment. We will continue to invest in the high growth opportunities, lead innovation in cloud and AI, and bring our technology and products together into experiences and solutions that unlock new value for customers. Now, I’ll hand it over to Amy to walk through this quarter’s results in more detail and share our outlook. And I look forward to rejoining for your questions.

Thank you, Satya, and good afternoon, everyone. This quarter, revenue was $24.7 billion, up 9% and 10% in constant currency, with stronger than expected performance across all segments. Gross margin grew 11% and 12% in constant currency. Operating income increased 13% and 16% in constant currency. And earnings per share was $0.98, increasing 42% and 43% in constant currency, which includes $0.23 from the utilization of phone-related losses from prior years that were previously non-deductible. At a company level, LinkedIn contributed approximately 5 points of revenue and gross margin growth. LinkedIn’s operating loss of $361 million was a 6 point drag on total company operating income growth, and is entirely attributable to the $371 million of amortization of acquired intangibles recorded in COGS and OpEx. From a geographic perspective, our results were mostly in line with macroeconomic trends, though large markets like the US, Germany, and Japan performed better than we expected. We had a strong quarter in our commercial business, reflecting terrific execution from our sales teams and partners in the largest quarter of our year. We increased commitment to our commercial cloud and healthy renewals on a record volume of expirations. We closed the highest number of multi-million-dollar Azure deals to date, and improved our annuity mix to 86%, up 3 points year-over-year. As a result, commercial bookings grew 30%, and commercial unearned revenue was $27.8 billion, significantly higher than we expected. Our contracted not billed balance increased to more than $31.5 billion. As Satya mentioned earlier, our commercial cloud annualized revenue run rate exceeded $18.9 billion this quarter, growing 56%. We finished the year with nearly $15 billion in commercial cloud revenue. At the start of the year, we committed to material improvement in commercial cloud gross margin percentage and dollars. This quarter, our commercial cloud gross margin percentage was 52%, up 10 points year-over-year, with positive gross margin in each cloud service. Commercial cloud gross margin dollars grew 92% from strength across all services. Our company gross margin was 66%, up 1 point from the prior year, as sales mix of higher margin products and services offset the impact of the growing mix of cloud revenue and $217 million of LinkedIn amortization costs. FX was mostly in line with our expectations, with 1 point of negative impact on total revenue growth even with a slightly weaker than expected US dollar. At the segment level, FX had a negative impact of 2 points on Productivity and Business Processes, 1 point on Intelligent Cloud and 1 point on More Personal Computing. Total operating expenses grew 9% and 10% in constant currency, with LinkedIn contributing 12 points of growth, including $154 million of amortization of acquired intangibles expense. Now, to our segment results. Revenue from our Productivity and Business Processes segment grew 21% and 23% in constant currency to $8.4 billion, with LinkedIn contributing 15 points of growth. Office Commercial revenue increased 5% and 6% in constant currency. Office 365 commercial revenue grew 43% and 44% in constant currency with continued installed base growth across all workloads, ARPU expansion and emerging E5 momentum. For the first time, Office 365 Commercial revenue surpassed revenue from our traditional licensing business. Office Consumer revenue increased 13%, driven by recurring subscription revenue and growth in our subscriber base. Our Dynamics business grew 7% and 9% in constant currency, and Dynamics 365 grew 74% and 75% in constant currency. LinkedIn revenue for the quarter was approximately$1.1 billion, a bit better than expected. Segment gross margin dollars grew 14% and 16% in constant currency, with 12 points of contribution from LinkedIn, including $217 million of amortization. Gross margin percentage declined from an increasing cloud revenue mix and the impact of LinkedIn related amortization. Operating expenses increased 41%, with 40 points from LinkedIn, including $154 million of amortization expense. Operating income declined 8% and 5% in constant currency, with 12 points of impact from LinkedIn. The Intelligent Cloud segment delivered $7.4 billion in revenue, growing 11% and 12% in constant currency. Our server products and cloud services revenue grew 15% and 16% in constant currency with double digit annuity revenue growth. Azure revenue growth accelerated to 97%, up 98% in constant currency. Azure Premium revenue grew triple-digits for the twelfth consecutive quarter. Enterprise Services revenue declined 3% and 1% in constant currency, driven by a lower volume of Windows Server 2003 custom support agreements, partially offset by growth in Premier Support Services. Segment gross margin dollars grew 8% and 9% in constant currency, and segment gross margin percentage declined due to increasing cloud revenue mix and lower Enterprise Services margins, partially offset by material improvement in Azure margins. We grew operating expenses by 2% and 3% in constant currency with continued investment in sales capacity and developer engagement. Operating income increased 15%, up 18% in constant currency. Now to More Personal Computing. Revenue from this segment was $8.8 billion, down 2% and 1% in constant currency, with 4 points of decline from phone. Our OEM business grew 1% this quarter, as both our commercial and consumer OEM businesses were slightly ahead of the PC market. OEM Pro revenue grew 3%, ahead of the commercial PC market, mainly due to a higher mix of premium SKUs. Windows 10 deployment cycles continue to drive commercial customer hardware demand. OEM Non-Pro revenue was flat, ahead of the consumer PC market, with continued positive impact from Windows premium device mix. Inventories remain in the normal range. Windows commercial cloud products and services grew 8%, driven by annuity revenue growth. Enterprise customers increasingly chose Windows 10 on new and existing devices, which led to install base growth and higher adoption of our cloud security solutions. Patent licensing declined this quarter, primarily from lower revenue per unit. Search revenue ex-TAC grew 10% and 11% in constant currency, driven by higher revenue per search and search volume. Devices revenue declined 28% and 27% in constant currency. Our Surface business performed better than we expected, declining 2% and 1% in constant currency, with strong sales execution on our Surface Pro product transition and early positive signals from customers and partners on our Surface Laptop launch in June. Our gaming business grew 3% and 4% in constant currency. Xbox software and services growth of 11%, 13% in constant currency, offset declines in hardware. And our engaged user base grew 8% to 53 million monthly active users across console, mobile and Windows 10 platforms. Segment gross margin dollars increased 9% and 10% in constant currency. Gross margin percentage increased, primarily due to sales mix shift to higher margin products and services. Operating expenses declined 10%, and 9% in constant currency, from lower Phone expense, as well as Surface and gaming marketing spend in the prior year. As a result, operating income grew 68% and 72% in constant currency. Now back to the overall company results. This quarter, we invested approximately $3.3 billion in capital expenditures, including capital leases, up sequentially in part due to the planned Q3 datacenter spend pushed into this Q4. This includes approximately $2.3 billion of cash paid for property and equipment, which was down year-over-year as we utilized more capital leases. Free cash flow grew 50% year-over-year, driven primarily by operating cash flow growth of 30%, as well as lower cash outlays for CapEx. Operating cash flow increased due to higher collections from customers following strong billings growth, as well as working capital improvements in our hardware business. Other income and expense was $215 million, more than originally planned, as we continue to see opportunities in the equities market to realize gains throughout the quarter. Our non-GAAP effective tax rate was negative 6%, significantly lower than we expected, due to a $1.8 billion impact related to the utilization of prior years’ losses from our phone business that were not deductible in the years incurred. Excluding this item, our non-GAAP effective tax rate was 19% this quarter and 20% for the full year. This quarter, we returned $4.6 billion to shareholders through share repurchases and dividends. Now let’s turn to the outlook. The key trends for FY 2018 from the Financial Analyst Briefing remain largely unchanged. For the full year, we expect about 1 point of negative FX impact assuming current rates remain stable. In our commercial business, we anticipate that increasing demand for cloud services and healthy renewals will continue to drive a higher annuity mix. Our commercial transactional business will continue to decline driven by the transition to the cloud. We remain focused on improving our commercial cloud gross margin percentage in each of our cloud services. As a reminder, given seasonality and revenue mix, commercial cloud gross margin will experience quarterly variability. Cloud migrations, deployments and new scenarios are driving greater customer usage. We will increase our capital investment to meet growing demand and capacity needs. Total CapEx spend will continue to have variability quarter-to-quarter. At the company level, our gross margin percentage should decline about a point in FY 2018 with increasing cloud revenue mix, a full year of LinkedIn amortization and hardware launches, including our new console, Xbox One X. We expect LinkedIn quarterly amortization expense in COGS to be approximately $220 million, or about $880 million for the full year. Next, operating expenses. You should think about our FY 2018 operating expenses in two categories. First, organic Microsoft expenses, which we expect to grow between 3% and 4%, reflecting the investments we are making to support our top line growth. Second, LinkedIn. We are making incremental investments in LinkedIn to fuel its continued strong revenue growth. Additionally, we will recognize our first full year of operating expenses, including $620 million of amortization expense. Importantly, we expect our company operating margin to only decline by about a point as we continue to grow our cloud revenue, we fund new investment to support growth in strategic areas and absorb $1.5 billion of LinkedIn amortization in COGS and OpEx. Excluding the LinkedIn impact, operating margin should be flat year-over-year. Next, our effective tax rate. As a reminder, our tax rate is impacted by at least three major factors: the proportion of services revenue versus licensing revenue, the geographic mix of revenue, and the timing of equity vests. As cloud revenue mix increases, we anticipate our tax rate will move higher. With quarterly variability based on these factors, we anticipate our full year non-GAAP tax rate to be 23%, plus or minus 2 points. And finally, we expect LinkedIn, ex-purchase accounting, to be non-dilutive in FY 2018, as it was in Q4. Now, to the outlook for next quarter. Based on current FX rates, we expect less than 1 point of negative impact on revenue growth overall and for each segment. We expect commercial unearned revenue to be within the range of $24.85 to $25.05 billion. In Productivity and Business Processes, we expect revenue between $8.1 and $8.3 billion. Office 365 commercial revenue growth will continue to be driven by install base growth, ARPU expansion, and adoption of premium services like E5, and should outpace the rate of transactional decline. We expect a more moderate rate of growth in our Office consumer business given prior year comparables. In our Dynamics business, Dynamics 365 will continue to drive our cloud mix higher. And we expect approximately $1.1 billion of revenue from LinkedIn, adjusted for the impact of purchase accounting. For Intelligent Cloud, we expect revenue between $6.9 billion and $7.1 billion. Customer demand for Azure and our hybrid cloud offerings remains strong, and we anticipate another quarter of double-digit revenue growth across server products and cloud services. Enterprise Services should decline, given lower volumes of custom support agreements. We expect More Personal Computing revenue between $8.6 billion and $8.9 billion. We anticipate OEM revenue will move more closely in line with the PC market. Devices revenue growth will continue to be impacted by the prior year phone comparable. Surface revenue will continue to be driven by the product lifecycle transition between Pro 4 and our new Surface Laptop and Surface Pro. In Search, Bing’s revenue growth ex-TAC should be similar to prior quarters. And we expect gaming to have the typical seasonality revenue pattern for a pre-holiday quarter. We expect COGS between $8.2 billion and $8.3 billion, including approximately $400 million from LinkedIn. LinkedIn COGS include about $220 million of amortization. We expect CapEx, on an accrual dollar basis, to be similar to Q4 as we grow our investment to meet demand. We expect operating expenses of $8.6 billion to $8.7 billion, with about $1 billion from LinkedIn, of which roughly $155 million is related to amortization. Other income and expense should be about $250 million, as we expect to realize more gains from our equities portfolio. Given the volume of equity vests that occur in our first quarter and based on today’s stock value, we expect our first quarter non-GAAP effective tax rate to be approximately 4 points lower than the estimated full year tax rate. Finally, we adopted the new revenue standard, ASU 606, effective at the start of fiscal year 2018. To assist in the transition, Chris along with our Chief Accounting Officer, Frank Brod, will be hosting a conference call in early August to discuss these changes, present historical restated financial results, and share Q1 guidance converted to the new standard. And with that let’s go to Q&A.

Thanks Amy. We will not move to the Q&A. Reyna, can you please repeat your instructions?

Certainly. Thank you. [Operator Instructions] Our first question comes from the line of Heather Bellini with Goldman Sachs. Please proceed.

Great, thank you very much for taking the question. Amy I had a question about commercial cloud COGS, and I was wondering if you could give us a sense of what percentage of these roughly is related to depreciation and how should we think about the pace of your CapEx deployments versus what you have been experiencing in commercial cloud to support the initiatives in the vast growth opportunities that you see ahead as we look out over the next 12 months to 24 months if there is anything you could share with us around that. Thank you.

Let me break down the question in a couple of ways. Overall, when you think about COGS and the pacing, the depreciation rates of our servers don't change. It’s generally over a three-year period and there is other pieces of equipment that have a longer, shorter depreciation life. So that piece of depreciation doesn't change per se. If you're looking to see how we see demand, obviously this quarter in Q4, we felt very good about cloud demand across all three services, but in particular with Azure. I feel confident in our ability to produce gross margin improvement across all those services. I feel confident in our ability to continue to make progress on our overall commercial cloud gross margin growth, and I am encouraged by the demand signals we are getting. All of those things I think, it’s not really about the pace, it is much about the progress and demand and meeting those things as closely as we can and I feel really good about the team's execution.

Great, thank you.

We will move to the next question please.

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

Excellent, thank you guys for taking the question and very nice quarter. There’s lot of rumors and speculation around sales reorganization of you guys sort of shifting around resources is sort of better distributed to cloud and new technologies, I was wondering if you guys could dig into that for us a little bit, what kind of changes are taking place in terms of go to market distribution heading into FY 2018?

Let me start, first of all thank you for the question Keith. Overall, the approach we have taken for multiple years now is to transform everything that we do inside the company, whether it’s the product creation, how we’re organized in the R&D, how we think about breaking down any silos and category definitions we may have had in the past, how we think about even marketing and the marketing approach, and then of course even with the go to market, and this transformation is ongoing. This has been happening over multiple years, but we have now got very good customer momentum because ultimately this is all driven by the opportunity at hand, which is much bigger than anything that we have participated in the past, so the total addressable market is much bigger. And second, our customer expectations and our partner expectations of how we show up with them has changed, and so over the years we have been making changes and now that we have a lot more momentum and critical mass, we are going to that next phase and that’s what you are seeing us in terms of changing the skill set, changing the scope of how we show up to support the digital transformation needs of both large customers, as well as small businesses.

And I think in many ways Keith what we have done is a really a natural extension of some of the investments we’ve made over the past 18 months to add technical resources to be more present in customer accounts, to really drive their transformation towards success outcomes. You are seeing it even in our intelligent cloud results for the last quarter and this quarter. We’re taking that learning over the past 18 months and really applying it at a broader scale across the sales force to put those resources where we feel confident that they will have a good long-term return in that next phase of transformation.

Thank you, Keith. We will take the next question please.

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

Thank you. Question for Amy, Amy there were a lot of numbers in this print that look very strong, but one that stood out to me was the commercial bookings growth of 30%, you did touch on it a little bit in your remarks, but if you don't mind I’d love to ask you a few questions, one is you mentioned that may be part of the strength was terrific execution on renewals, does it feel like maybe last quarter was a little bit of a renewal flush and in other words it might have been a one-time phenomenon? Secondly, is Microsoft doing anything different around contract, structure, or invoicing to that would result in bookings being unusually high, maybe collecting a little bit more upfront? And lastly, is it fair to interpret the strong bookings performance as giving us and I suppose you comfort in your revenue growth profile in fiscal 2018 as all those bookings obviously convert to reported revs? Thank you.

Thanks Karl. Let me make sure I cover of on most of those. Let me start by saying, the biggest driver in commercial bookings growth this quarter was excellent execution on a large base of renewals. The second component of that is the execution on new revenue; in particular Azure, as well as Windows commercial, and billings in the quarter were very good and quite encouraging overall. There was no change in any way to invoicing people paying earlier, paying more upfront, that’s definitely not an impact on that number. And so overall, I think while it is certainly aided by the large expiry base because it tends to impact the CNB balance the most, it is really I think to your point; it is clearly encouraging because it gives us a very good base of support going into FY 2018 to come in to the GAAP reporting numbers.

Got it. Thank you, Amy.

Thanks Karl.

Thanks Karl. Next question please.

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

Hi, thank you. Amy I’m wondering on the gross profit growth, I was looking through the slide deck, and looks like gross profit growth in PBT was up about 2%, you saw some strong trends in different parts of that business and I think that 2% I would have thought would have been higher, could you help us understand the puts and takes around gross profit growth in PBT?

There’s a couple of things, but in general it is almost always mix shift. While we saw improvement in the gross margin percentage in Office 365 and continue to make progress on that it is also the balance, right. This is the first quarter where we’ve actually seen the balance tip in terms of recognized revenue to online versus perpetual. So, I actually feel very good, but as we continue to accelerate the growth trajectory that you are not seeing frankly much impact on the gross margin line and we are seeing a lot of leverage in that through OpEx all the way down to the operating income line.

Okay. Thank you, Walter. We will take the next question please.

Our next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed.

Thank you, and congrats on the quarter. Amy commercial cloud ARR grew 24% Q-over-Q, which is the largest Q-over-Q growth so far. Completely understand that Q4 is a big quarter for closing business, but 3.7 billion is a large number, can you give us some more color on exactly what is driving this growth and then I have a quick follow-up.

Sure. When you think about, you are right, it is a big number, and I feel very good about it, and for the year on a pure basis it was $15 billion of commercial cloud revenue. So we are starting to get to that point Mark where you have a big base, which is still growing at a fast rate, and so especially ARR numbers can see big jumps in the one that you saw this quarter, and your right, Q4 is also historically quite a big quarter and this one certainly was as well. But you also saw - and what really does matter, especially in Azure is usage of growth, really consumption growth having customers use deploy, be successful, and really continue to get you think sort of meters up and running and that continues to build on itself, and so when you start to see that you can, and I do think and we will continue to see good growth in this number.

Excellent. As a quick follow-up, how should we think of how that sets us up to 2018 in terms of hitting expectations, beating expectations, continuing, you know strong 40%, 50% year-over-year growth.

Let me start by saying, first I feel very good about meeting our stated goal of $20 billion in commercial cloud ARR. Next, I think across every service the momentum we’ve seen in Q4 and in particular, I would say, I think not many people focus on it, but even things like Windows E5, advanced threat protection services, those types of deployments really will add to momentum in our offerings. One of the things we often talk about is, we sell Microsoft 365. That’s Windows 10 with securities and services. It is a modern workplace that includes up-to-date Office 365 and it includes EMS. We really did see strength across all of them. So I don't really think it’s about a percentage, but it’s about each of them continuing to make progress.

Excellent and congrats.

Thank you.

Thanks Mark. We will take the next question please.

Our next question comes from the line of Philip Winslow with Wells Fargo. Please proceed.

Hi thanks guys and congrats on another great quarter. Question first for Amy on Office 365, Office 365 commercial revenue continues to outpace the unit growth monthly active users, so are you still seeing that trend up to E35 cetera, I wonder if you could take us through where we are in that life cycle and also just to follow on your comments to the last question, you know Satya you launched at Inspire your Microsoft 365 that Amy just mentioned, how should we think about Microsoft 365 in the context of Office 365, also just given the fact that Windows commercial actually accelerated this quarter as well.

Yeah, maybe I can start and then…

Why don't you start and I will do the next one.

So one of the things that we are very excited about and have learnt a lot from is the secure productive enterprise offer that we have had now last year and impacted Q4, it really accelerated significantly, and so that has helped us in fact come up with Microsoft 365 at this very strong offering that brings together Office 365, Windows 10, as well as our enterprise mobility and security. And support even cross-platform devices. So we think of the modern workplace as having a very significant footprint of Windows, but also people will use phones of iOS and Android, but they need both productivity, creativity, and security across all of this estate of theirs, and that’s where I think we have a competitive advantage and a great value proposition. So that’s what Microsoft 365 embodies. It’s today available for enterprises and in the fall you will have the midmarket version of it, which I think is a another very big opportunity because it really helps take what we have learnt in the large enterprises and scale it to where perhaps the need is even more acute and so we are excited about that and at Inspire the partner channel obviously is very excited about it as well.

And so to your point and it’s a nice transition from Satya's point about, especially the midmarket offering coming in the fall for Microsoft 365 is installed base growth. You are right, in terms of Office commercial 365 the primary driver is still installed base, both the transition as well as new. I think we are optimistic as we head into FY 2018 for the installed base growth possible in particular for some of these midmarket offerings that we’re quite proud off The ARPU growth that you saw and have seen in the past couple of quarters continues to primarily, Phil, be related still to the E1 to E3 transition. When we mentioned E5, I think that’s frankly encouraging for us because all of these premium offers do best when you start the deployment motion. People start using E1 then they use E3 and then you start to see the momentum in E5, and we did see that. However, in terms of ARPU impact very, very small in quarter. So that’s something that over time you will continue to see improvement in terms of impact on ARPU.

Awesome guys thanks a lot.

Thanks.

Thank you. We will take the next question please.

Our next question comes from the line of Kash Rangan with Merrill Lynch. Please proceed.

Hi, thank you very much. I'm curious if you can shed a little bit more light on commercial bookings growth of 30%, clearly that’s off the chart and also when I look at the $18.9 billion of annualized revenue and judging from the fact that the commercial business non-Azure component of it was about steadying growth rate up [indiscernible] Azure went through some significant acceleration, which is yet to be reflected in your forward-looking revenues. If you could just shed a little bit more light and drill into any two or three products SKUs or areas or geographies that contributed to that on the chart performance that will be great? That's it from me, thank you very much and congrats.

Thanks Kash. Let me go through the bookings, again with that 30% the first and best contributor to that is the strong performance on the renewals in quarter. It was a reasonably consistent Kash, there was not a geo in particular that I would say was a massive outlier although in two of our largest geos, the U.S. and Germany they did have very good years in particular in Q4. Now if you separate the fact that we had the larger base with clearly contribute to that bookings number being big, aside from that in particular Azure in the last year point did really show up in that 18.9, it didn't, the strong billings growth really showed up in that unearned outperformance, which you saw versus the guide and it was significant, a lot of that is the Azure fillings. I think we felt very good, those as well, I think we’re pretty broad-based across industry. I would also say across geo. And so while we of course get some strength from our largest geos, and I would say they were probably the largest contributors if it was actually quite broad there is not only one place for me to say that we just saw it here, and then the final component that I would say was better than we anticipated and the way you’d see that cash, again versus the unearned guidance and the beat that we had there with that final piece around our security value prop, ATP - Windows annuity growth was very good. That’s in the KPI Windows commercial products and services. It is the place you will look and see that number and outside of that I mean those really are the biggest contributors.

Thank you.

Yes, I am going to - if I add one thing, I will just say that nothing shows up in just one quarter. We have been working on this for a long time whether it is the product and the approach we have taken from IaaS to PaaS to SaaS, even the diversity of our SaaS offerings, and also how we think about going to market. All of these have been multiple years of hard work, and clearly there is momentum across the board, and that I think is what you are seeing and we are excited about this quarter's execution and performance, and I think it bodes well for what we do in the future, but the key is for us to recognize that this is about the sort of long-term commitment to a big opportunity in making sure that you line up your execution against that.

And I think maybe, I should have also mentioned, when you think about seeing that type of performance and Satya mentioned it is not just because of work done this quarter, it is a great point, but it’s also the investments we’ve made. We’ve committed, we did sales overlays. We added technical resources. We put resources at customers ahead of the curve, we did that you saw that and the operating in the intelligent cloud OpEx growth over the past few quarters, that execution is what’s landing.

Clearly something inflected and looks like you're gaining share. So congratulations thank you.

Thank you, Kash. We will move to the next question please.

Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed.

Yes, thank you very much and I will add my congrats. Amy, going back to the size of the large size of the expiry base in Q4, when we look back three years to June 2014, in that quarter the commercial bookings grew 23%, I am just curious, is that representative of the portfolio that flowed through into this quarter on a three-year cycle, or is it more complex than that and also does it include or exclude LinkedIn contributions for the current period? And just finally, I’m wondering again looking back three years, it was a different number in the September quarter that follows. And could you help us just with the year-over-year growth of the expiry base for the September quarter, I’m not sure if you had commented on that?

Okay, you are right, Mark it’s not exactly if I said is the Q3 from three years ago exactly the expiry base it is not exactly, but it is directionally. And so that’s a good example to say, every three years tends to be the length of our agreements and so you to tend to see that repeated, and that’s what we mean by sort of the record or the largest expiry base and that is the pattern. In terms of LinkedIn having any impact? It did not. So that is the cleanest way to think about that number.

Thanks Mark. We’ll move to the next question.

Our next question comes from the line of Ross MacMillan with RBC Capital. Please proceed.

Thanks very much and my congratulations as well. I’m actually going to ask a question about the traditional server products business, which once again had a pretty strong growth rate up 5%. I think the last three quarters you have been trending at mid-single digits or even higher, and Amy I just love your thoughts as we progress through fiscal 2018, just so we think about this in the right way, you know how would you expect that sort of growth rate to trend and should we be sort of aware of the comps that come up in Q2 and beyond?

Maybe I can start and at least give you what or how we think about it technically and product –wise, and then we can go into talking about the future in terms of the results itself. First of all, we don't think of our servers as distinct from our cloud. In other words, there is intelligent cloud and the intelligent edge is the architecture of pattern for which we are building, whether it is SQL server 2017 or with Windows server, the container service everything that we do assumes that distributed computing will actually remain distributed, and it turns out that it’s helpful to think about it that way both for customers who are rationalizing their portfolios of apps as they lift shift modernize as to what they run in their data centers are in our data centers, but also forward-looking new workloads. If you look at some of the most exciting things that are happening in the cloud, is cloud applications that actively require an edge Azure IOT, or Azure Stack are becoming the runtimes of the edge where you do need not only the ability to do compute and storage, but to run the AI inference and the edge. So to me that’s what we’re building to. It’s actually a big architectural shift from thinking purely as a migration to some public cloud to really thinking of this as a real future distributed computing infrastructure and applications, but I quite frankly feel very, very good about leading and so in that context our server license revenue will fluctuate based on what the macro is and these transitions and mix shifts, but from a forward-looking perspective, I want us to be very, very clear that we anticipate the edge to be actually one of the more exciting parts of what’s happening with our infrastructure.

And so that leads why I always tend to say, I don't focus as much on the mix per se. I know both of them will matter and both of them are important, and so that’s why I tend to focus on that all up server KPI combination of the progress in the cloud, Azure, as well as the edge which is the on-prem. And so I think, we remain confident that double-digit target that we have for that KPI and is it really, I don't think sort of a comparability challenge per se, but that’s why we try to keep it at that high level to not get too tied to one or the other, given we know the TAM expansion that’s possible, we know we can grow within it. And I apologize, I didn't answer Marks last component, so let me just go back and I had forgotten, which was, was there anything unique in the expiry base for Q1, the answer is, it is up a little year-over-year, but in certainly not through the same type of Q4 comparable. When we tend to have these, we tried to call them out like we did in Q3 leading into Q4. So, Q1 I would say is just up a little. So I wouldn't expect any material impact.

Thank you, Ross. We will take the next question please.

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

Hi, thanks for taking my question. I wanted to drill in on the premium services in Azure, Satya you talked a little bit about SharePoint taking off and being a big part. Can you talk a little bit about the portfolio you have there, and I also wanted to contrast it a little bit with one of your main competitors who keeps coming up when new products just to kind of get to that premium service, and the advantage that you guys have given the IP that you build up over the years? Thank you.

Yes, I mean I think we have premium services whether it’s an Office 365 or in the SaaS side with a Dynamic 365 and that’s where the SharePoint comment came, but there is a lot more in Office 365 adoption cycle beyond exchange or email. On the Azure side, my comments in fact walked that entire tree so to speak, which is the infrastructure there wherein flat even in the infrastructure side there is no such thing as one generic infrastructure when I look at the diversity of the virtual machines, what’s happening with AI infrastructure with GPU compute. So there’s a lot of richness there. The layer about that for me is the data state, one of the exciting things is the growth in Azure DB, the growth in Cosmos DB, data warehouse product, the Datalake, so that is a place where we are seeing significant attach. On top of the data is where the AI services, where the bot framework, the cognitive services. So that’s all the rich services where we are seeing significant customer action. The other side of it is the edge, so Azure IOT, our service both in the cloud and the edge and Azure Stack now truly are starting this quarter is going to be another way to extend out the rich services of Azure even beyond public cloud deployment. So that’s what hopefully gives you a flavor for the IP that we have. And then one linchpin that we have between, in fact, our SaaS services, as well as Azure is Azure active trajectory. 90% of all the enterprises use Active directory and all of them rendezvous with Azure Active Directory irrespective of what applications they have in whichever cloud because that becomes a very key control plane for IT.

Perfect, thank you.

Thanks Raimo. We will just have one more question Reyna, please.

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

Great thanks very much. Amy, as the Azure business continues to gain scale and to Raimo’s question the premium mix continues to be kind of bigger part of that, is there any reason to think that the gross margin gain shouldn't accelerate in 2018 versus where they were in 2017? Thanks.

Thanks Brad. The way I tend to think about it is, with any service you want the gross margin itself to improve, and that includes in the Azure services components themselves. The difference between core compute in-store versus the premium layers can be significant and we’ve had improvements across all of them. So, the real question on how and where should the Azure gross margin be is about sort of the ultimate mix of those. Anyhow, we saw significant improvement this year. We expect a lot of improvement again next year on each of those service lines. And where the actual mix occurs among those lines, I think we will just have to wait and see, but that’s why I tend to not focus at that layer it’s like can you get every service better, can you make material improvement, and then of course can you get usage and consumption going that leads to premium service usage, and of course over time you’d expect a higher mix of premium versus core.

Great, thanks very much.

Thanks Brad. So that wraps up the Q&A portion in today's earnings call. As Amy mentioned, Frank and I will be hosting a conference call in early August to discuss the changes under the new revenue standards, you can find additional details for that on the Microsoft Investor Relations website when available. Thank you again for joining us today.

Thank you all, thanks.

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