Welcome to the fourth quarter fiscal year 2015 Microsoft Corporation earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'll now turn the conference over to Chris Suh, General Manager of Investor Relations. Chris, please proceed.

Thank you. Good afternoon and thank you for joining us today. On the call with me today are Satya Nadella, Chief Executive Officer; Amy Hood, Chief Financial Officer; Frank Brod, Chief Accounting Officer; and John Seethoff, Deputy General Counsel. On our website, microsoft.com/investor, is our financial summary slide deck, which is intended to follow prepared remarks and provide the reconciliation of differences between GAAP and non-GAAP financial measures. The non-GAAP measures exclude the impact of impairment, integration, and restructuring charges, and are included as additional clarifying items to aid investors in further understanding the company's fourth quarter and fiscal year performance and the impact of these items and events had on the financial results. The non-GAAP financial measures provided above should not be considered a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. Unless otherwise specified, we will refer to non-GAAP metrics on the call. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. For selected metrics on the call and in other earnings materials, we have provided growth rates in constant currency. We present constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuation. Additionally, any mention of operating expense refers to segment operating expenses as defined in the footnotes of our Form 10-K and includes research and development, sales and marketing, and general and administrative, but excludes the impact of impairment and integration and restructuring charges. We will post the prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript, 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 21, 2016. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainty. 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. Good afternoon, everyone. Today, we will share the results of the final quarter of the year and our optimism for the year ahead. We delivered $22.2 billion in revenue this quarter and $93.6 billion total revenue for the fiscal year 2015, an increase of 8% year over year. We pushed forward in our transformation by focusing our investment in areas where we have differentiation and significant opportunity for future growth in large addressable markets. We galvanized around our mission and ambitions. We aligned our structure to deliver better products at a more rapid pace. We focused our advertising business on search. We focused our mapping efforts on higher-level experiences and development services. We restructured our phone portfolio so that we can operate more efficiently near term while driving reinvention long term. We invested more in new mobile applications like Wunderlist, Acompli, and Sunrise. We also strengthened our enterprise cloud platform by acquiring Revolution Analytics, Datazen, and BlueStripe in this quarter alone. And we are at the threshold of the Windows 10 launch. I'm proud of these steps and I'm proud of the results we delivered in tandem. In cloud alone, our annualized commercial cloud run rate surpassed $8 billion this quarter, and the revenue grew 88% year over year. We are on a strong trajectory towards our goal of $20 billion in fiscal year 2018. With that as the backdrop, I want to walk you through the progress we are making in each one of our three ambitions. Let me start with reinventing productivity in business processes, including our efforts across Office 365 and Dynamics. We continue to see strong demand for Office 365 and Dynamics products. We now have more than 15 million Office 365 consumer subscribers, and customers are signing up at a pace of…

Thanks and good afternoon, everyone. Our fourth quarter results demonstrate the strong progress that we've made as a company over the past year. Key strategic initiatives such as cloud, first-party hardware, and consumer services delivered significant growth as well as improved profitability. Commercial customer renewals remained healthy with strong adoption of cloud services and a higher mix of annuity than we expected. And our disciplined approach to resource allocation has allowed us to increase investment in the growth initiatives Satya mentioned while reducing the company's operating expenses. This allows us to better compete in markets with structural growth where we feel we have unique competitive advantages. With that said, I will start with an overview of our financial performance before moving into a more detailed discussion of the results. This quarter we recorded an impairment charge related to our phone hardware business and incurred integration and restructuring expenses. Additionally, like most multinational companies, the strengthening of the U.S. dollar continues to have a significant impact on our reported results. Accordingly, when applicable, I'll give results and growth rates adjusting for the impairment, integration, and restructuring expenses, but also in constant currency to help you better understand the underlying business fundamentals. Revenue was $22.2 billion, down 5% and down 2% in constant currency. As a reminder, last year included $382 million of revenue that we recognized at the conclusion of our commercial agreement with Nokia. Significant gross margin improvement across commercial cloud, Surface, and our consumer services helped to mitigate the impact on gross margin from the decline in D&C licensing. Total gross margin declined 7% and 3% in constant currency. Operating income declined 3% and 1% in constant currency. Earnings per share were $0.62, growth of 11% and growth of 8% in constant currency. Unearned revenue grew 1% to $25.3…

Thank you, Amy. We'll now move to Q&A. Operator, please repeat your instructions.

Thank you. Our first question comes from Phil Winslow from Credit Suisse. Philip Alan Winslow - Credit Suisse Securities (USA) LLC (Broker) Thanks, guys, and congrats on a great quarter. I just wanted to double-click on Office 365. You guys showed another huge quarter of growth in terms of your consumer seat count, and I think it was 86% growth on the commercial other side for Office 365. I'm wondering if you could just drill into both the consumer and then enterprise side, just the trends you're seeing there. And obviously the guidance you all just provided, it looks like you expect those trends to continue in Q1, so any color there would be great.

Yes, I'll take that. Overall, we are very excited about the growth we are seeing in Office 365. On the consumer side, as you noted, we are growing 1 million subs a month, and that's fantastic growth for us. The consumer value, especially now that we have even all the endpoints covered with Office, the definition of Office and where all it's present is also changed, and that all accrues to consumers being willing to have a subscription relationship with us. On the enterprise side, the growth remains very exciting for us, and the growth comes in multiple forms. It comes in the form of just the EAs renewing more to Office 365. It also comes in the form of some of the more comprehensive suites, the E3 and the new E5. That's the commitment we are seeing. And we also see small businesses. I talked about the 50,000 businesses, small and medium-sized businesses each month signing up for Office 365. That's pretty unprecedented. Having been in the server business all my life, I've never seen a lot of the small business customers adopt some of the rich capabilities like it's possible now, and that's great growth as well. And that cloud revenue number that is the 88% is all up cloud revenues inclusive of Office 365, EMS, and Azure. And it's good to see that kind of growth at that kind of scale now with $8 billion.

One thing I would add, Phil, to that is an important dynamic that we're seeing in Office 365. As we are having this momentum build, in fact we talked about some of the new customers we're adding, and the way we see that is the install base growing. And we were able to see that this quarter across all the core workloads in Office. And when you think about why that's so critical long term, it's our ability to sell some of the workloads Satya actually referenced that will be in E5 when it launches. They have the capability of upgrading on a more consistent basis using more of these premium services. So when you can both add to your install base and add overall market opportunity, we do feel good about our line of sight in that business for our long-term goals. Philip Alan Winslow - Credit Suisse Securities (USA) LLC (Broker) Great. Thanks, guys, and congrats again.

Okay, thank you, Phil. We'll take the next question now, please.

Our next question comes from Brent Thill from UBS.

Good afternoon. Satya, the server business continues a steady outperformance and, as Amy pointed out, better growth than your peers. I guess a couple questions as it relates to the Windows 2003 retirement and any impact you're seeing there. And then secondarily, if you could, just comment on some of the new product launches. It seems like there's a stack of new solutions that are coming on the server side that look pretty exciting. Your partners are excited about it. If you could highlight what you see as the most interesting from your perspective over the next several quarters. Thank you.

Overall, I'd start even with the bold view that my server business is not a legacy business. We fundamentally think about servers as the extension of the cloud. I even describe it architecturally as the edge of our cloud. Every server, for example, has things like disaster recovery, backup, and tier-ing with the cloud. And so we will continue to push that differentiation because I think that view architecturally and the delivery of it is what makes us pretty unique. And you see it in the numbers. Our servers even this quarter grew 9%. And compared to the industry peers, we're obviously gaining share with Windows Server, on SQL Server, and pretty much all of our management and security products as well. And going forward, we have a fantastic lineup of servers, not just the infrastructure, but even SharePoint, Exchange, Lync Server continues to have significant on-premise deployment. So as our cloud continues to grow, obviously, we are getting where there is more capability in the cloud. We're incenting customers and our partners to move to the cloud. But at the same time, we are going to have a great server wave. I'm excited about our SQL product. I think it goes into the first preview next – in fact, tomorrow. And that product I think is a pretty revolutionary product because for the first time you can take a single table in a database and you would tier it with the cloud, and that kind of capability only we can provide, and that's something that I'm looking forward to.

And, Brent, to your specific question on Windows Server 2003, we did have a good quarter, as we talked about, in Windows Server. But in general, that business, unlike the quiet upgrades that we see, just because so much of the business is already on annuity, you don't see that type of incremental impact in an in-quarter release. That isn't to say there isn't ample opportunity for us to make sure we upgrade customers to the higher-value product and more secure and more manageable offerings we have in the server business.

Thanks, Brent. Operator, we'll take the next question, please.

Our next question comes from Mark Moerdler from Bernstein Research.

Thank you, nice quarter. I want to drill in, in terms of the move to the cloud. This quarter the year-over-year server product and services revenue growth was slower than it was in the past quarters. How much of that is because you're seeing now some revenue shift to Azure, or is it not yet seeing any revenue shift going? And then I have a follow-up question.

Why don't I take that one, and we'll see what Mark's follow-up is? At 9% growth and continuing to take share, I feel like our performance in this continues to be a positive outlier to the peer group. And for me, that type of performance in double digits for the year, I still feel quite good about. In general, what's interesting I think is you're getting to the crux of it is do we have incremental workloads that are unique to the cloud. We continue to see that. The very best example, frankly, as Satya mentioned in his comments, which is our EMS performance, Enterprise Mobility Suite offerings. It's taking something that's very unique, builds off of our core in the server business, and allows us to both grow and add new perspective there. So I don't think of it as reflecting a bigger shift than we've seen in particular this quarter. Also, if you'll remember, a year ago we had a very big base of expirations in Q4 and had very strong performance a year ago. So I don't look at it as a direct trend line.

The only thing I'll add is when I look at the total growth of Azure, the growth that's coming now from some of the premium services, these are businesses that we actually did not ever participate on premise at all. Even EMS, when I think about our management, our management was just about Windows management. But we now have management data protection and identity systems that cross all devices in the enterprise, including the Internet of Things, and that makes it pretty exciting. And that growth is great to see. Same thing on server management, we have a new suite called the Operations Management Suite, which also spans all the cloud units as well as on-premise units. Cortana Analytics, we never participated in any of the advanced analytics workloads at all in spite of all the success we had in the database business. So I'm excited about built new workloads that in many cases are born in the cloud workloads where we are expanding our market opportunity and continuing to outperform our peers and grab share when it comes to on-premise.

That's very helpful. Switching gears a bit, on Windows, obviously you're seeing some amount of delay due to Windows 10 on the OEM side. Can you give maybe a little more higher color in terms of how you're thinking about that, how big a delay is it, how much we could see that starting to be replaced next quarter and beyond?

I'll take that and, Amy, you can add to it. The way the Windows ecosystem works is there are phases to it. And in fact, if anything, this release of Windows 10, just the way we have built it with the Insider program, everything is of course speeding up because in some sense we've taken a very different approach with this Windows-as-a-service even when it comes to OEM relations and how they're able to co-create the products with us. But that said, there are three distinct phases. The first phase is what I will describe as the upgrade phase. That's what starts in a week's time, and that is a more retail execution and upgrade. Then come the fall, you will see the devices from all the OEMs going into the holiday quarter. And then the enterprise upgrades; in fact, we have a release of enterprise features, which I mentioned in my script, which will ship in that timeframe. And I expect piloting to start and deployments to start in the second half of the fiscal year. So that's how I would think about the OEM as well as enterprise adoption. So my bullishness for Windows 10 is more in the second half of the fiscal year, and of course it will build. It will build starting in a week's time in retail and in the upgrades, but I see this in three phases.

And to your specific question, Mark, before every launch we tend to have a tightening in the channel as they prepare and run reasonably lean. This is a healthy state. It's within the range of normal. So I don't think of it as a delay in the way you're talking about it. It is pretty standard in fact, as Satya talked about, in terms of the dynamic. And he mentioned we are feeling I think a lot of excitement from the ecosystem about what's possible with some of the new devices that will come. And so I don't really think of it in that way. I think about it as an encouragement that they want to fill the channel as quickly as they can over the coming quarters with new machines.

Thank you, I appreciate it.

Thanks, Mark. We'll take the next question, please.

Our next question comes from Keith Weiss from Morgan Stanley.

Excellent, nice quarter, guys, and thank you for taking the question. I wanted to drill into the new strategy around the phone business a little bit. The revenue expectation for Q1 I think was below our expectations and I think a point below what the Street was looking for. Can you give us a sense of how you see that business trending over a longer period of time? Because there is a significant restructuring going on and I think – I would think a lot of guys have a good view in their head of what your expectation is for this business on a revenue run rate basis? Or what do you expect to be selling this year on a going forward basis is right now?

Let me start and then, Amy, you can add to this. The big shift that we are making when it comes to phones is to not think about phones in isolation. That's perhaps the biggest shift because I think about Windows 10 in its entirety, the Windows ecosystem in its entirety. We clearly are going to have premium first-party portfolio, and you've seen some of the numbers, some of the progress we have made in Surface. I feel that we have a formula there that I would like to apply more broadly in terms of growing, just delivering innovation, growing our own economic return for it, stimulating demand, creating categories. All of that is what I want to do broadly. And it applies to phones, it applies to Surface hardware, it applies to Hololens, and that's how I view it. I believe our participation in the phone segment by itself with Windows phones and Lumia phones being there is important, and that's why we picked the three areas where we have differentiation and we want to focus on it. We're going to have great flagship phones for Windows 10. That's actually a segment we don't today have good devices, and we hope to change that with Windows 10. We have in fact good traction in the business segment. This is business customers who are actually buying phone devices, which is basically a radio with essentially a smartphone to be able to deploy their line-of-business applications. That's where we have pretty unparalleled value, which is we have Visual Studio Online and some of the tools I talked about, so you can generate these apps at a low cost of ownership, manage them, secure them, and deploy them to our phone endpoints, and then of course, management and security. So that's a place where we want to continue to focus. And in the value smartphones, that's the place where I want us to be much more efficient. We clearly have some value to add there because of the uniqueness of Office and Skype and our services. But at the same time, I think we want to be smart about how many of these phones do we want to generate, how many, which price points we want to participate. That's where you will see the most significant operational changes from how we operated last year to the coming year.

And so, Keith, the way that I think about it and I tried to outline it in my comments is that the significant revenue declines quarter over quarter through the year are a reflection of the focused approach we're going to take in phone. It's an approach that we've executed in other hardware segments that I feel is a proven model for us. Our profitability will also improve. More of that comes in the second half of the year structurally as we complete some of the restructuring efforts and those costs come out of our operating expense run rate. But I think that's probably the way to more appropriately think about over time you expect to see gross margin improvement and operating profit improvement as opposed to focusing on the revenue line.

Got it. And if I could sneak one more in just on the security side of the business, I think a lot of guys have thought traditionally about security as something that Microsoft does to make their platform more secure, and it does provide more confidence in users using your platforms and your tools. On a going-forward basis, is there more of an opportunity for you guys to sell security as more of a standalone opportunity? It's something that's in very high demand today with those looking for more secure solutions. Is that something that could potentially be more of a standalone opportunity for Microsoft on a go-forward basis?

In fact, we are adding significant value in security. It's much better for us, for example, to add capabilities. There are no (46:55) 365 in security, and that's all in, for example, this new suite that we have just announced called E5, the secure lock box. That's actually a pretty – a very cool set of features that allow both regulators and businesses to have, for example, audit ability and control over their movement in the cloud. Similarly Azure, where we launched a whole set of security offers around how people can encrypt and manage keys. So those are all security features. We bought a company in Colorado that's essentially a firewall on all your identity management. So when we talk about enterprise management suite growth, a lot of it is just obviously is management growth, but it's also security and data protection growth. So the approach we're taking is we are essentially creating, to your point, security value around our products, which allows us to participate in essentially a security market that we never did in the ways that we are. So it's more than just launching one point security product. It's much more broadly participating in the security market, and you have seen some of that in the inorganic moves and the suites we have created.

Excellent. Thank you, guys.

Thanks, Keith. We'll take the next question, please.

Our next question comes from Walter Pritchard from Citi.

Hi. Amy, just for you on the annuity, it looks like annuity was about 82% of the commercial revenue for the last two quarters. How high do you think that goes? It sounds like you do expect that to continue to go up, although it probably never gets to 100%.

I do think over the long term you're right. That is how I think about it. And frankly, inherent in the conversation around moving to the cloud with the aggressive targets we've given, that is implied, to your point. And so I think 100% is not the logical answer. There will always be somebody who chooses to purchase on a one-time basis, or there's a logic to it. But I do think over time, we do expect that to trend in that general direction.

And then, Satya, you mentioned CRM in your comments, your prepared comments, which we haven't really heard you talk that much about as an area of interest in the past. I'm wondering. What changed in your view, or how do you look to bring that into it sounds like more the core productivity scenario that you deliver?

Overall, business process collaborations, communications, these category boundaries are things that I believe are going to change. I've always felt that in some sense, most of the time we even automate business processes, but we spend really getting our business done in our communication and collaboration tools. And this impedance is something that I've always dreamt of how do we go forward. And CRM has taken our own Dynamics product, has taken some pretty unique approaches. And quite frankly, I was the one who opened up our communications and collaborations for other CRM vendors. One of the things that I'm very explicit about is we will have an open platform for other business process applications because it's a very fragmented market the world over, especially if you add SMB. And so we want to be having a platform play as well as our own business applications play, and both of them should be high-growth for us. And in the last year, we just added more focus and we put more selling capacity around it, more marketing capacity, and now for the mainstream that's across Microsoft because I'm a big believer in this because I think we have something unique to add. As opposed to driving our own top line/bottom line growth, I think we can bring real innovation, and that's what is exciting to see. And it's not just CRM. I'm actually excited about our ERP business. Some of the numbers that Amy talked about is growth in the seats. And when I think about data as the new currency, we have lots of managed seats and a lot of data which all will move to the cloud. And so things like Power BI and Cortana Analytics can help customers transform. So in fact, that's one of the reasons why we have been very optimistic about some of our new data capabilities because we have the attach capability go out even in the install base of Dynamics.

And, Walter, just quickly, this is one of the areas that we have invested in actually leading into this past fiscal year, FY 2015. And the results have actually been better than we anticipated when we first made the investment. So I think we both feel very good about the momentum that's built through the year.

Great, thank you.

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

Our next question comes from Karl Keirstead from Deutsche Bank.

Hi, thanks, a question for Amy on the cost control front. It looks like you once again came in below your OpEx guide, but I think the COGS number came a little bit above what you had guided to three months ago, and I'm just wondering if you could talk through that. Obviously, it affects everybody's gross margin calculations. Was it the hardware mix shift? Was it the challenges with the phone business? Perhaps a little color there might help us. Thank you.

Sure, Karl. Because of the performance in Xbox and in Surface, you're right, it is a hardware mix shift a bit. We outperformed significantly in both those products in Q4, and that took us a little bit outside the COGS range but not as much as our revenue outperformed. So actually, margins structurally were better than I thought they would be. And so I actually feel quite good with that outperformance and our ability to see that outperformance fall to the bottom line through stronger executional gross margin percentage, particularly in that segment.

Okay, good. That's helpful, thank you.

Thanks, Karl, next question, please.

Our next question comes from Raimo Lenschow from Barclays.

Thanks for taking my question. I wanted to go back to Azure. You obviously have strong momentum there. Can you talk a little bit about the use cases you see from the enterprise and SMB customers? Is this very much a test and development situation, or are you thinking of broader adoption there as defined by obviously Office 365, et cetera? Thank you.

At this point, I would say it's pretty broad even use cases for even enterprise customers. There's definitely dev/test happening. There is production IaaS infrastructure-as-a-service deployment given some of the new high-performance SKUs and storage options that we have. And we've seen significant adoption of SQL, so this is Azure DB, machine learning-as-a-service. One of the things that we realize is as every company out there becomes a software company, beyond even our traditional reach through IT, everyone has a digital office inside the company. They are, in fact, doing things in advanced analytics and using machine learning, and that's a place where we have some very unique capabilities. So that's another place where we're seeing wide adoption. We are seeing adoption in the building of new front ends, back ends for new front ends, so essentially using Azure as the cloud back end for their mobile apps across Android, iOS, and Windows as well as their web. That's another use case that's high growth for us. And of course, Cortana Analytics; this is the big data side of it. This is happening in IT. It's happening, as I said, in digital offices within each one of the customers. So we have a pretty broad spectrum of use cases. And some of the customers have talked about it in their recent set of conferences, from our Partner Conference to our Ignite Conference. We have been in fact showcasing; even our ad campaign showcases some of these use cases.

Perfect, thank you.

Thanks, Raimo, next question, please.

Our next question comes from Heather Bellini from Goldman Sachs.

Great, thank you. I just had two questions, pretty quick ones. Just to follow up on Azure, I was wondering if you could share with us what you're seeing in the mix between IaaS and PaaS and how you've seen that shift evolve over the last few quarters. And then secondly, just to follow up I think on Walter's question, yes, you've definitely been focusing on the customer relationship management opportunity and the financials market more. But given the big SaaS incumbent already competing in that area, can you share with us? Do you think you have the assets you need internally to execute against your long-term goals?

Sure. On the IaaS with the SaaS, it's an interesting question. I've not looked at it in isolation, because what happens is at least the use cases, what starts off as IaaS suddenly will start using Azure AD for identity management, will use a little bit of our media services, for example, just doing content and encoding. So there's a mix always. So there's nothing pure PaaS, nothing pure IaaS. That's the trend I see, but it's a split that we should go take a look at and then offline maybe even talk about it. But overall, we see significant amount of IaaS in the last year, because that's probably the place where we had more of a weakness which we have now overcome. And so we're seeing significant growth of IaaS in the enterprise. But the place where we continue to have significant differentiation is in some of these managed services and PaaS. And that I think is the mix on it. And then on the Dynamics side, I absolutely believe we have a huge opportunity. Having worked in business applications for a long time, first of all, the market is very fragmented. I think people like to talk about leaders, and there are clearly leaders when you go to the very top of the enterprise customers and segments. But the way the market splits into verticals and into horizontals and then the platform affects it, there's plenty of opportunity. For sure, you've got to be one of the players. It will be three players, four players, whatever, but in every technology paradigm, you want to be one of them. We already have a $2 billion-plus Dynamics business. I talked about the total number of seats. And now we have this triple-digit CRM online growth. So I feel that we are in a good position. And I feel that things – we'll look at and even some of the inorganic means to keep growing it. In fact, the field service acquisition I talked about in my script is an example of that. So that's my bullishness on our business process prospects.

Thank you very much.

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

Our next question comes from Ross MacMillan from RBC Capital Markets.

Thanks for taking my question. First on OpEx, the guidance, Amy, is impressive. I presume that fully accommodates the restructuring announced two weeks ago. And then last year, you said core Microsoft ex-NBS would be down slightly in OpEx. I wondered if you could provide a similar comment for fiscal 2016 for core Microsoft ex-phone.

Sure. Look, I talked a little bit about it, but let me go into a bit of detail on that. I think the first half of your question was does the $32.1 billion to $32.4 billion full-year OpEx guide reflect the timing of the implementation of our restructuring, and it certainly does. And so what you can then see, relating to the second half your question, is that we are taking some of those savings and investing them back into the business in some of these key growth areas we've seen. I outlined three on the call. The third one I probably could have expanded more on. The first one is Windows 10. The second is the first-party hardware, where we just had such terrific performance again this Q4. And then finally, the third bucket was about accelerating our commercial cloud lead. And I do feel like in that area, we could invest in Office 365 some of the new E5 capabilities and look forward to adding sales capacity to take advantage of that. We'll also add sales capacity across some of the other opportunities we've seen broadly. And so I look and see that as an opportunity to accelerate top line growth.

And one thing I would just add because a lot of folks even ask about our business process and business applications, I want to build a long-term profitable business. In other words, one of the keys in business apps is you can always get into the trap of overspending in sales and marketing and not having long-term leverage at all. One of the things I feel very good about our position is how do you really build a long-term profitable business; that's front and center to me. So we will not overspend there in sales and marketing because we do believe the products – in fact, there is a different way to sell even business process applications because of the cloud, and that's something that we want to take advantage of.

And I had have one quick follow-up, if I could. That's helpful. At Analyst Day you did talk about – I think it was 8% unit growth in the Office ecosystem over the last three years. And it sounds like you continued to see nice unit growth in Office. How should we think about that going forward? Are you fully expecting to continue to see unit growth? And then also just a clarification, I think your customer lifetime value was based on existing SKUs. So as you introduce E5 and others, does that open up the potential for even higher customer lifetime value? Thanks.

Great. I do think the work we showed at the analyst meeting on the importance of increasing the install base across Office and Exchange, that it did occur again this quarter. So I feel good that we're staying on the trajectory that we showed in the projections. I do continue to expect that to happen, as we shared back that last week in April. On the second half of your question, I tend to think you're right. Generically, each of the examples was quite different. There were people that were upgrading from X to Y. There were people that were just simply moving to the cloud. But one of the things that the cloud, to your point, makes fundamentally possible is the opportunity for us to quickly iterate the opportunity's billed value and deploy it more quickly to customers. Generally, I do think that they will pay us for that, to your specific question. I also think the importance of it is that it tends to also come with higher margin. So our improvement and continued improvement in our commercial cloud gross margin portfolio, I think this is a key criteria of that. So I associate it, yes, with lifetime value, and I also associate it with our ability to move our gross margin percentage up.

That's great, thank you.

Thanks, Ross. We have time for one last question, please.

Thank you. Our last question comes from Daniel Ives with FBR Capital.

Thanks, just one last one just on M&A. Maybe you could just talk through the change in the strategy. Obviously, given what's happened with the Nokia write-down, the security acquisition going to Pivotal-Cisco year, how you're thinking about M&A in the scheme of everything, especially as you guys have been pretty tight on cost controls and everything else. Thanks.

Overall, again, the way I look at it is, first of all I'm most focused on obviously our organic growth. And in there, Amy alluded to this. We've made significant changes in how we've allocated our own organic dollars, both in R&D as well as in sales and marketing. And we'll continue to do that because I think there are significant new opportunities for us to go after, and that will require us to reallocate aggressively, and that to me is core. But beyond that, we will look at inorganic means. When I look at all the acquisitions that we have made over the course of last year and our OpEx guidance for next year shows how disciplined we are in bringing new talent in, be it in R&D, be it in sales and marketing. So we are not afraid to bring in new capability, but then also questioning what is the allocation we have. Of course, we have done smaller acquisitions, but they add up. They're pretty significant when you add up all the things that we have done in the Office 365 space, all of the things that we have done in the Azure space. So we'll continue to do that. And if anything comes up in M&A which allows us to pursue our strategic vision that we will need to even allocate more to on an OpEx basis, post-acquisition we will look at that. So I won't shy away from it because what's important to us is growth in areas where we have something unique to contribute and long-term profitability.

Thank you.

That wraps up the Q&A portion of today's earnings call. We look forward to seeing many of you in the coming months at various investor conferences. For those unable to attend in person, these events will generally be webcast, and you can follow our comments at the Microsoft.com/investor website. Please contact us if you need any additional details, and thank you for joining us today.

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