Greetings, and welcome to Microsoft's Fourth Quarter Fiscal Year 2016 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Chris Suh, General Manager, Investor Relations. Thank you, you may begin.

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 and Corporate Secretary. On our website, microsoft.com/investor, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provide the 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 that these items and events had on the financial results. Additionally, any mention of operating expense refers to segment operating expenses as defined in the footnotes of our Form 10-Q, which include research and development, sales and marketing and general and administrative, but excludes the impact of integration and restructuring charges. As a reminder, in May, we announced plans to further streamline the Phone Hardware business. During the fourth quarter, restructuring and related impairment expenses were $1.1 billion. All growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. We will also provide growth rates in constant currency, when available, as a framework for assessing how our underlying business has performed, excluding the effect of foreign currency rate fluctuation. At the segment level, we provide constant-currency growth for both revenue and gross margin. However, due to recent changes to our segment reporting groupings, we're not able to provide segment level constant-currency operating expense growth and, consequently, cannot derive constant-currency segment operating income either. We do provide constant-currency operating expense and operating income growth at the company-wide level. We'll post our prepared remarks on 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 19, 2017. During this call, we will be making forward-looking statements which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, 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 to everyone on the call for joining. I want to thank all the Microsoft team members and partners who contributed to a successful year. We are proud of what we achieved and particularly how we are positioned for new growth. Today, Amy and I will share our fourth quarter results and our perspective on the year ahead. We delivered $22.6 billion in revenue this quarter, an increase of 5% for the quarter in constant currency. This past year was a pivotal one in both our transformation and in our partnerships with customers who are also driving their own digital transformation. Our progress is best captured in the results of our 3 ambitions, starting with Productivity and Business Process. In a world of infinite information but finite attention and time, we aim to change the nature of work with digital technology. In pursuit of this ambition, we continue to add value to our products, grow usage and increase our addressable market. Along these lines, let me start with Office 365 and then move to Dynamics 365. In the last quarter, we advanced our collaboration tools. We launched Microsoft Planner, which helps teams manage operations as well as Skype meetings, which is aimed at helping small businesses collaborate. In June, we further strengthened our security value proposition with the release of Advanced Security Management. Lastly, we continue to add intelligence and machine learning to Office to help people automate their tasks and glean insights from data. These advancements help to drive increased usage across enterprises, small and medium businesses and consumers. In the enterprise, Office 365 commercial seats grew 45% year-over-year, and revenue grew 59% in constant currency. Also, 70% of our Office Enterprise Agreement renewals are in the cloud. Innovative companies like Facebook, HERSHEY'S, Discovery Communications, Cushman…

Thank you, Satya, and good afternoon, everyone. This quarter, revenue was $22.6 billion, up 2% and 5% in constant currency. Gross margin was flat but up 4% in constant currency. Operating income this quarter declined by 3% and grew 6% in constant currency. And earnings per share were $0.69, increasing 11% year-over-year or 27% in constant currency. Across most markets, our execution and results were generally as expected, with some strength in the U.S. But we did see additional softness in Brazil, the Middle East and Africa, which were impacted by macroeconomic headwinds. From a seasonality perspective, the fourth quarter is always an important one for our commercial business. Our results were strong as our sales teams led with our cloud offers. Healthy renewal helped to drive double-digit annuity performance in constant currency. Our total annuity mix reached 83%, up 1 point year-over-year. While our commercial cloud continued to drive a higher annuity mix overall, we also had better-than-expected transactional revenue performance as products like Office 2016 and SQL Server 2016 generated more deal volume. The dollar volume of expiring enterprise agreements was smaller this quarter than last year. On that base, our commercial bookings increased 4% in constant currency, driven by customer preference for our cloud offers. Commercial unearned revenue slightly beat our expectations at $24.6 billion or 8% growth in constant currency. Our contracted not billed balance exceeded $25.5 billion. As Satya called out earlier, our commercial cloud annualized revenue rate exceeded $12.1 billion, growing more than 50% year-over-year. Additionally, more than 70% of customers who signed Enterprise Agreements this quarter attached cloud offerings. Our commercial cloud gross margin was 42%, declining year-over-year, driven by investments for cloud capacity, deployment and support. Now let's turn to company gross margin performance. We were above our COGS expectations due to…

Thanks, Amy. We'll move now to the Q&A section. Operator, can you please repeat your instructions.

[Operator Instructions] Our first question comes from the line of Keith Weiss with Morgan Stanley.

I wanted to dig into Azure. I may have one question for Satya and one question for Amy. Satya, you mentioned the Boeing agreement. What was interesting about that is not just a large company moving significant workloads onto Azure, but from my reading, it sounds like there's a distribution side to this agreement that you guys are going to help them distribute some of those applications on a going forward basis. I was wondering if you could touch a little bit on that. Is that a onetime thing? Or is that something that you look to do more often with some of these large companies, moving workloads onto Azure? And then for Amy, thank you for the additional detail on sort of the cloud risk margin profile on a going-forward basis. When we dig into just Azure, you said in the past that you sort of -- you expect to match the gross margin profile of what we're seeing in Amazon Web Services. Does that commentary still hold? And maybe you could give us a sort of mark-to-market on how you're doing in terms of matching up Azure's gross margin profile to what you're seeing from your top competitor there?

Thanks, Keith, for those questions. So let me start on the first one. You're absolutely right that one of the phenomena now is that pretty much anyone who is a customer of Azure is also, in some form, an ISV, and that's no longer just limited to people who are "in the classic tech industry" or the software business. That's the same case with GE, it's the same case with Boeing, it's the same case with Schneider Electric or ABB or any one of the customers we are working with, because they all are taking some of their assets and converting them into SaaS applications on Azure. And that's something that we will, in fact, have distribution agreements with. And AppSource, it's a pretty major announcement for us because we essentially created, for SaaS applications and infrastructure applications, a way to distribute their applications through us and our channel. And I think it makes, in fact, our cloud more attractive to many of them because of that. So we look for -- I think going forward, we will -- you'll look to see -- or you'll see us do much more of this with many other customers of ours.

And to your question on Azure gross margin specifically and how we think about that in comparison. Let me first say the additional color I gave in terms of comments, in terms of material improvement, clearly also apply to our Azure portfolio as well. We're encouraged by the improvements we've seen year-over-year, and we do expect a material improvement in FY '17, both from the benefits of scale and the investments we've made, but importantly also, in the revenue trajectory we're seeing and the makeup of that revenue. Boeing's agreement is one such agreement in terms of embedding a sort of premium service at a premium gross margin. We signed many of those this quarter that we feel quite good about. We -- I think I have a strong line of sight to AWS' margin profile and still feel good about the progress we're making not just on the workloads that are relevant, apples-to-apples with Azure, but also in our broader cloud portfolio and our ability to have very healthy margins across Dynamics 365 as well as Office 365 in conjunction with many of the innovations we're doing across Azure. So while I am focused on both the workload improvement, I'm also focused on what's possible across the entirety of the cloud. Thanks, Keith.

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

So Satya or Amy, last quarter, the stock was hit in part on a deceleration in your on-premise server product business. And I think your commentary around the transactional part of that suggested it softened a little bit. I think your tone on this call is a lot better around the transactional performance, and it looks like that business accelerated a little bit. Perhaps you could explain what changed in the course of the 3 months to make the transactional piece, at least, if I'm hearing you correctly, feel a little bit better.

Yes. Let me start, and then Amy you can add to it. Overall, Karl, the focus for us is in what I would describe as this hyperscale plus hybrid approach when you think about the cloud approach, which is pretty unique to us. And the way we track progress is to see how is our annuity growth of our server business and how is our cloud growth. And if you look at this last quarter, we -- our annuity grew double digits and our cloud grew triple digits, and that's a pretty healthy growth rate and that's something that, by design, both in terms of the technical architecture as well as the traction we have in the marketplace and our sales efforts and so on, are playing out well and we are very bullish about that going forward. The transactional business is much more volatile because of the macro environment, IT budgets and also the secular shift to the cloud. The question again that gets asked is about the cannibalization. But if you look at Boeing or you look at any of the other examples that I talk about when it comes to the cloud, our servers never did what these customers are now doing in our cloud. So at a fundamental long-term secular basis, we have new growth, new workloads, and that's what we are focused on and that's a much bigger addressable market than anything our transactional server business had in the past.

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

Amy, in Q3, the transactional business was weak, and you said that the business bounced back in Q4. Was that just a mere fact of you cleaning up some of the flip business? Or did you see additional strength on top of some of those closed transactions on the transactional business in Q4?

Thanks, Brent. I -- let me split your question into 2 components. The first thing really that I think Satya and I both focus on every quarter, every month is how much of our business are we continuing to shift to annuity and, specifically, to the cloud. We structure all of our motions at this company, from how we engineer to how we do our go-to-market to how we think about sales engagement to how we do our investments, fundamentally toward that long-term structural transition in the market. And so to your question on transactional performance, there were some deals that didn't get done in Q3 that got done in Q4. And there were some deals done in Q4 on the Office side with large companies that I'm thrilled by. But at the same time, we still will focus on those deals moving to the cloud over time. And so this volatility that we are going to see because of macro and because of budget constraints, especially on transactional, we will focus on because we expect excellent execution and have accountability to do that in the field. But our first priority every time is to make sure we are focused on annuity growth and digital transformation at our company, which is best done through that motion.

Just to be clear, Amy, in terms of the sales motion, are they incented more towards cloud versus transactional going into this year?

Yes.

Absolutely.

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

Great. Satya, I had a question for you on Azure. I was just wondering if you could talk about the percentage of Azure revenue coming from ISVs. And then how do you see this helping you compete with AWS? And can you talk about why these partners may be choosing you over the competition?

Sure. Let me take that second part in terms of what is our differentiation. And in my remarks, I sort of pointed out the couple of dimensions. But overall, I believe this hyperscale plus hybrid architecturally helps us a lot with enterprise customers because we meet them where the realities are today and also the digital transformation needs going forward. So that's one massive advantage we have. And the second area for us is also the nexus between what's happening in Office 365, Dynamics 365, AppSource and, in fact, this last quarter, some of the most strategic announcements were all around our application platform. At our Partner Conference, there was significant amount of excitement with the tools that we announced like Power Apps and Power BI, Azure Functions and Flow. These are tools that our developers and system integrators and solution partners will use in order to be able to customize applications around Azure. And so to me, that's another huge advantage and a competitive differentiation for us. And then, lastly, we have the best support for what I would say is the most open platform for all developers, not only is .NET first-class, but Linux is first-class, Java is first-class, Azure Container Service cuts across both containers running on Windows, running across Linux, so, again, speaks to the enterprise realities. So those would be the places where we are fairly differentiated, and that's what you see us gaining, both for enterprise customers and ISVs. The question you asked is an interesting one, which is if I had to sort of slice it by classic ISVs, it would be 1/3 or so of our revenue. But the thing that -- the first question that Keith asked is probably more indicative of what's happening, which is every customer is also an ISV. So every customer who starts off consuming Azure is also turning what is their IP in some -- most cases, into an ISV solution, which ultimately will even participate in AppSource. So at least the vision that we have is that every customer is a digital company that will have a digital IP component to it, and that we want to be able to partner with them in pretty unique ways.

And I would also add, Heather, the importance of the motion in our field organization and go-to-market with ISVs is incredibly high in terms of selling with and along with those ISVs, both making them successful and thereby helping us build very important scale through the platform. And we've seen a lot of improvement in the past 4 quarters on that front.

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

Amy, how much of the weakness in transactional has been caused by clients that otherwise would have bought a license now under annuity? In other words, are you driving the transactional weakness to some extent by driving the growth in on-prem? And then I have a quick follow-up for Satya.

It's probably not exactly how I would say it, Mark. I do believe that every conversation that we're having with customers is cloud-led. That cloud-led conversation and making a plan for customers to best change and perform their own business is certainly a far more in-depth one than on occasion is required by long-time transactional purchasers especially in Office, as an example, because what we're talking about now is really pivoting your business for the long-term. And so I'm sure there are examples where that has elongated the sales cycle for good reason, but I would generally point back to say that most of these are driven at the structural level, which is structurally, over time, on-premises transactional business will move to the cloud or to a hybrid structure through an annuity revenue stream. Now over any short-term period, the majority of what we have seen is really budget -- is either budget constraint, a macroeconomic economic change or people, to the question you've laid out, maybe in the midst of making their cloud transition plan and maybe that has elongated the sales cycle to an extent. But again, I don't view that as negative performance, I view that as a strategic relevance long-term inside of digital accounts.

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

Amy, I'm wondering, you're seeing -- you saw very strong unearned revenue in the quarter, but I note that you saw contracted backlog that grew sequentially below what a typical June quarter does, and commercial bookings that were up about 4% off of a fairly easy comp. And I'm wondering if you could just help us understand the dynamics between -- in new and renewal signings that drove that combination of really strong unearned but somewhat weaker trends in the bookings.

Sure. Strong unearned, in particular, was actually better-than-expected Azure billings in the quarter that drove unearned above the high end of our guide. And I think we were quite pleased by that performance. In terms of C&B, that's the reference I made in my comments to the lower expiry base. Quarter-to-quarter and year-to-year, we just have different amounts of contracts expiring. And so this was one of our lower contract bases and was lower than a year ago. So the fact that we were able to grow on that low expiry base is actually very good structural performance.

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

Two questions on the Office side. First of all, you're obviously, really reaching the very large numbers in terms of the numbers of seats that you have. Can you talk a little bit about towards the seat growth because both for consumer and for commercial, it seemed to be coming down? Is that kind of the law of large numbers coming in? Or is there anything else? And then in Consumer Office, so the Consumer Office performance was very, very strong and almost needs to be stronger from transactions because otherwise, I don't get to the numbers. Can you talk a little bit about the source of the strength there?

Thanks, Raimo. Let me start with the Office Consumer question. We haven't had a chance to touch on that, and then we'll talk about commercial seat growth. You're right; the Office Consumer growth still has quite a bit of transactional business to it, even though we have moved. And you saw that growth of the subscriber base sort of materially. The growth in quarter versus our expectations was really 2 things that are transactionally focused. One, the PC market was a little better than we thought and, particularly, in developed markets, the PC growth was better than we thought. And developed markets are where we see the most transactional business with Consumer Office that impacts in quarter. So the strength from that outperformance or better market in consumer PCs in developed markets is a direct correlation to our performance in Office Consumer, and so that's how to think about that big delta. The other thing was Japan was a little better. And when Japan is better, it's why you also see the interesting relationship in constant currency. We have a lot of yen exposure in that segment, so the Japan performance being better also helped. And that is a purely -- it's more transactional than even our rest of world business. So you're right, Raimo, in terms of what impacted that number in quarter versus the underlying market dynamics. On commercial seats, listen, we're very proud of that big number -- growth number. But you're right; we're also getting a very big base. And so while we feel great about continuing to add seats at that type of rate, converting and adding net new into our installed base, you will see that growth rate come down just because the business is getting quite big.

Our next question comes from the line of Gregg Moskowitz with Cowen and Company.

Amy, you spoke about a slowdown in the cloud CapEx growth curve in fiscal '17. I assume you're referring to the growth in absolute dollars moderating and not just the rate of change in percentage terms, but any additional color that you could provide on the company's CapEx requirements over the course of the next year would be appreciated.

Thanks, Gregg. You're right; my comments are more pivoted toward the absolute dollar amount, which is what I intend to focus on in my comments, so that's a good clarification, and thanks for asking. In terms of how we think about the absolute numbers, first, I should say, I think most people assume, and it is true to a certain extent, so much of this is the growth in our commercial businesses across Azure and Dynamics and Office 365, and that's true. But we're also seeing quite good growth in some of the consumer businesses, which also are built on our cloud infrastructure: Search, some of our gaming assets, our Xbox LIVE business going forward. And so many of these assets, including increased usage of our consumer properties inside our Productivity business and Office, do require capital spend. And so the growth is pretty broad-based to support. And so as I think about moderation, it is the absolute dollar. It's from -- it's not due to any change in our aspiration or belief in the growth curve of revenue. And I want to be clear on that, it really is about continuing to benefit from scale and engineering improvements that will allow us to do that even as we see broad-based growth.

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

Amy, I had one on the same lines on CapEx, and I just wondered if you could provide some insights. We're at 26 data center regions today. I think you have 34 planned, so that would imply we're about 3/4 of the way through that spending cycle. But should we view 34 as a ceiling? Or is it possible that we could see further data center regions built out beyond that 34? And then I had one follow-up.

Sure. Let me start, and then, Amy, you can add to this. In some sense, Ross, you're sort of trying to ask us to project forward and say what is the legitimate digital security and digital sovereignty needs of all the different types of businesses that we want to serve using the cloud all over the world. The position that we have taken is that we want to serve customers where they are and not assume some very simplistically that, that digital sovereignty needs of customers can be met out of a fewer data center approach because, right now, given the secular trend to move to the cloud across all of the regulated industries across the globe, we think it's wiser for us and our investors long-term to be able to meet them where they are. And that's what you see us. We were the only cloud that operates in China under Chinese law; the only cloud that operates in Germany under German law. And these are very critical competitive advantages to us. And so we will track that, and we will be very demand-driven. So there is -- in this case, we're not taking these positions of which regions to open and where to open them well in advance of our demand. If anything, I think our cycle times have significantly come down, so it will be demand-driven. But I don't want to essentially put a cap because if the opportunity arises, and for us it's a high ROI decision to open a new region, we will do so.

And I would add, in addition to the number of regions, which Satya is talking about, it's also the capacity inside a region. Much of our spend is, as you note, on some of the infrastructure to put in place when you pick a location. The rest of it is continuing to build out in that location the number of servers and networking equipment required. So there's really 2 components. And I think Satya talked about why you would enter a region, and it's ROI and there's also their correlation to how many servers and that spend and pace over time based on demand.

Maybe just one quick follow-up, the server products business that Karl talked about did rebound this quarter, and I think it was up about 4% constant currency for the year. I know you're not guiding to that number specifically, and you talked about potential volatility. But is there any sort of range of outcomes that you're thinking about for that business? Will it grow? Is it not clear that it will grow? I'd just love any additional color there.

In terms of server products and services, I tend to think of it as the all-up growth. It's really about growing the cloud, growing the hybrid and then whatever happens in the transactional business happens. And we -- I'm very proud, actually, of the growth this quarter. I think our guide for Q1, given some of the headwinds we expect in terms of support agreements that we talked about in enterprise services, continues to expect very healthy double-digit annuity growth, driven fundamentally by Azure in that segment.

Our next question comes from the line of Michael Turits with Raymond James.

Satya, around the LinkedIn announcement, there was a lot of discussion about some of the opportunities to use the assets and information there to help build your HCM and CRM capabilities. And then we fairly shortly afterwards got the announcement of Dynamics 365 and AppSource. So maybe given the amount of discussion here, you could comment on the evolution of the strategy and your thought process around broad enterprise application.

Thanks for that question. So I sort of look at what we are doing with Office 365, Dynamics 365, AppSource, LinkedIn as all being part of one strategy. So the move to the cloud for our customers and for us is not just about a new way of delivering the same value just to the service. It's really the transformation from having applications that are silos to becoming more services in the cloud where you can reason about the activity and the data underneath these services to benefit the customers who are using these services. So that's what this notion of a graph represents. So when somebody moves to Office 365, their graph, their people, their relationships with other people inside the organization, their work artifacts all move to the cloud. You can connect them with all the business process data that's in Dynamics 365. But not just in Dynamics 365, but all the applications in AppSource because business process will always be a much more fragmented market as opposed to just one market share leader by industry, by vertical, by country. And so that's our strategy there. And now the professional cloud or the professional network helps usage across all of that professional usage. Whether it's in Office 365 or whether you are a salesperson using any application related to sales, you want your professional network there. Of course, it's relevant in recruiting, it's relevant in training, it's relevant in marketing. So that's really our strategy with LinkedIn as the professional network meeting the professional cloud. And so you're right to point out that these are all part of one overarching strategy and, ultimately, it's about adding value to customers.

Thanks so much. We'll have time for one more question, please.

Our final question comes from the line of Mark Murphy with JPMorgan.

Yes. So Satya, we noticed Office 365 commercial seat growth of 45% produced Office 365 commercial revenue growth of 59% in constant currency, so a favorable spread of about 14 points, suggesting ASP growth. I'm wondering if you could help us understand the drivers, both now and into the future, particularly in terms of the initial response to the E5 plan and also, which products you think are driving the strength as you consider across Exchange, Skype for Business, Power BI, Yammer, SharePoint, et cetera.

Yes. Let me start. And, Amy, you can add to it. Overall, I would say, even in this last year, even just a broader spread of E3 has driven a lot of the growth. And then, of course, we are very excited about E5, but they're very, very early days of E5. And E5 value proposition across all 3 of the areas, whether it's cloud voice or analytics or security, are all 3 massive areas for us. And I would say, if anything, the initial data from customers around security is very -- is gaining a lot of traction. But we're -- at the same time, one of the things that customers are looking for is making an enterprise-wide architectural decision across all of the workloads. So E3, E5 and higher penetration of this is what's going to drive ASP growth. And you will look to -- you can see -- you'll see us add more value to these packages as time goes on as well because our R&D is focused on that, which is how do we take these buckets of value creation and reinforce them with all of the future R&D as well.

Thanks, Mark. So 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 be webcast, and you can follow our comments at the Microsoft Investor Relations website. Please contact us if you need any additional details, and thank you for joining us today.

Thanks, all.

Thank you.

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