Welcome to the Microsoft Fiscal Year 2019 Fourth Quarter 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. [Operator Instructions]. As a reminder, this conference is being recorded. I would like to turn the call over to Mike Spencer, General Manager of Investor Relations. Thank you. Please proceed.

Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chief Executive Officer; Amy Hood, Chief Financial Officer; Frank Brod, Chief Accounting Officer; and Keith Dolliver, Deputy General Counsel. On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call 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 will also provide growth rates in constant currency, when available, as a framework for assessing our underlying performance businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to growth rate only. We will post our prepared remarks to the 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. During this call, we will be making forward-looking statements which are predictions, projections, and 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 factor section of our Form 10-K, Forms 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, Mike, and thanks to everyone on the phone for joining. It was a strong finish to a record fiscal year. We delivered more than $125 billion in revenue for the full year with double-digit top line and bottom line growth. Our Commercial Cloud business is the largest in the world surpassing $38 billion in revenue for the year with gross margin expanding to 63%. I’m proud of what we've accomplished over the last 12 months, and I'm energized by the tremendous opportunity ahead. Every day, we work alongside our customers to help them build their own digital capability, creating new businesses with them, innovating with them, and earning their trust. This commitment to our customers’ success is resulting in deeper partnerships, larger multiyear cloud agreements, and growing momentum across every layer of our differentiated technology stack from application infrastructure to data and AI to business process to productivity and collaboration. Now, I will briefly highlight our innovation and momentum. In a world where every company is a software company, developers will play an increasingly vital role in value creation across every organization, and GitHub is their home. GitHub is used by more than 36 million developers as well as the largest enterprises, including the majority of the Fortune 50. And we’re investing to build the complete toolchain for developers, independent of language, framework, and cloud. Visual Studio and Visual Studio Code are the most popular code editing tools in the world. With Azure DevOps, you could build, test, and deploy code to any platform; and with Azure PlayFab, we have LiveOps, a complete backend platform to optimize engagement and interaction in real-time. We are building Azure as the world's computer addressing customers’ real world operational sovereignty and regulatory needs. We’ve 54 data Center regions, more than any other…

Thank you, Satya, and good afternoon everyone. Our fourth quarter revenue was $33.7 billion, up 12% and 14% in constant currency. Gross margin dollars increased 15% and 17% in constant currency. Operating income increased 20% and 24% in constant currency. This quarter we transferred intangible properties from our foreign subsidiaries to the United States and Ireland, which resulted in a net tax benefit of $2.6 billion. When adjusting for this and the net benefit related to the Tax Cuts and Jobs Act from the fourth quarter of FY18, earnings per share was $1.37, increasing 21% and 24% in constant currency. In our largest quarter of the year, our sales teams and partners delivered exceptional commercial results, which drove another quarter of double-digit top and bottom line growth. From a geographic perspective, we saw broad-based strength across markets of all sizes. Customer commitment to our cloud platform continues to grow. In FY19, we closed a record number of multi-million dollar commercial cloud agreements, with material growth in the number of $10 million plus Azure agreements. Commercial bookings growth was significantly ahead of expectations, increasing 22% and 25% in constant currency, driven by strong renewal execution and an increase in the number of larger, long-term Azure contracts. As a result, our contracted not recognized revenue was $91 billion, up 25% year-over-year, reflecting our continued momentum and growing long-term customer commitment. We expect to recognize approximately 50% of this revenue in the next 12 months. Even with the higher mix of larger, long-term Azure contracts with low upfront billings, commercial unearned revenue was in line with expectations at $34.1 billion, up 13% and 16% in constant currency. And this quarter, our annuity mix was again 90%. Commercial Cloud revenue was $11 billion, growing 39% and 42% in constant currency. Commercial cloud gross margin…

Thanks, Amy. We will now move over to Q&A. With respect for others on the call, we request the participants to please only ask one question. Operator, can you please repeat your instructions?

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

Excellent. Thank you guys for taking the question and very nice end to a really strong FY19. I wanted to focus on the Office 365. If I’m looking at this right, I think you guys saw acceleration in the Office 365 commercial business and in the kind of recipe to getting there seems to have changed a little bit of that as more sort of positive pricing versus just the seat growth. Is there a changing dynamic in kind of what’s pushing growth there, because we had seen the F1 SKU and the frontline workers bringing down the price point a little bit. It looks like the pricing actually improved this quarter. How should we think about sort of the dynamics, what’s going to be driving growth for Office 365 into FY20 and beyond?

Thanks, Keith. Let me walk through a little bit of this, because there are some new behaviors that I think are important this quarter, but the fundaments that you talked about are relatively unchanged. We continue to see and saw again installed base growth across all of our customer segments from the enterprise to small business. That’s happening not just because of frontline workers, but also continued expansion and continued movement in every segment where we see the opportunity to increase the installed base. We did see ARPU growth this quarter. It wasn’t as much different from the -- from past quarters. We continue to see improvement from E3 and E5 transitions, saw both again. And I think we were quite encouraged by E5 performance, particularly in Q4 as we ended the quarter, which was great to see. What you saw a little bit and I referred to it was some more in-quarter recognition, but let me talk about why that’s happening because it's got two important and positive trends that underlie it. The first thing is we're seeing longer commitments. When you see longer commitments under 606, you often have more recognition upfront. And so, we saw longer commitment and we’ve got a little bit more recognition in the quarter, and so you saw then revenue grow a little faster. The other thing that we saw is increasing focus as we were having more conversations across organizations around Azure and rethinking their digital transformation plans with us, it opens up a very large conversation around the value Microsoft 365 can bring as people go through and think about those transitions. And so, the fact that we then -- we’re often seeing extensions take place of prior commitments on Office 365 to again be longer and include the Azure contracts. When that happens, it's almost like you’re adding new products and new value and a lot of that gets recognized faster in-quarter when you see that happen. And so, when you have a dynamic where you’re seeing longer contracts plus you’re able to sell more and new things, and I think different conversations around Microsoft 365, it was a good execution by the team and I think a recognition of the value that we continue to put into that what we believe is our hero -- hero experience.

Excellent. Sounds great.

Thanks, Keith. Operator, we will move to next question, please.

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

Thank you very much and congratulations not only on the great end to the year, but confidence into next -- not next quarter and next year in terms of growth, investment, et cetera. We met recently at E3 with your gaming team and heard a lot about the steps that were being taken. Satya, can you give us more color, explanation -- excuse me, on how you see the gaming business fitting into the overall company's direction over next the few years, specifically how does gaming change? How does the synergy between gaming and the rest of the business change? How should we think about that overall mix and that whole [ph] morph that’s going to occur? Thanks.

Sure. First, I’d say we are in gaming because of what we believe are going to be the secular changes in the gaming addressable market for us. We’ve always had a gaming position with console as well as the PC, but going forward, we think that any endpoint can in fact be a great endpoint for high-end games, which is where our structural position is. And we now have a business model with Game Pass as well as all the supporting mechanisms for Game Pass like game streaming, we’ve a social network in Xbox Live that is the best in the business. So I feel we are well positioned to what is going to be a much larger market than what was traditionally gaming, in spite of all the success we’ve had over the years in gaming. Now the second point is that it builds on the rest of the cloud investment. So, if you think about what we are doing with xCloud, it's a hero workload on top of Azure. So when we think about capital allocation, what’s happening in the Cloud, what’s happening in the Edge, how we build the network to optimize for streaming the same infrastructure, for example, is what Sony has decided to use as well, and be on Azure as well as use our AI capability. So, you will see significant synergies in terms of the architectural platform underneath gaming, Microsoft 365, Dynamics 365, LinkedIn all being the same.

Thank you. I appreciate it and congrats.

Thanks, Mark. Operator, we will take the next question, please.

Thank you. Our next question comes from the line of Heather Bellini with Goldman Sachs. Please proceed.

Great. Thank you so much. I had a couple questions for Amy. Just thinking through with the Azure mix becoming an ever bigger portion of IC revenue and when you factor in continued gross margin expansion that you continue to show in Azure, how should we think about the gross margin potential of IC overall? And I guess, I also wanted to ask about the build out of data centers related to the cloud build out, how do we think about your points of presence today from a coverage perspective, if you will, versus the regional -- the revenue pockets that you’re targeting over the next few years? Thanks.

Great. Heather, let me -- on gross margin, over a long-term period and intelligent cloud, given the expansive TAM and the growth opportunity we see, it will create gross margin pressure over long-term. Now over the next period, especially in H1, we continue to see -- expect to see very good hybrid percentage and execution, which help to offset some of that. So even as we continue to see Azure gross margin improvement at the IaaS and PaaS layer, just given the TAM and our opportunities, it will create long-term pressure on that gross margin number. But of course a lot of opportunity in terms of gross margin dollar growth and of course operating margin dollar growth as we move forward. When it comes to our build out, Heather, I tend to think two components. The majority of our capital expenditures is actually in server equipment, it's new capacity. It's not necessarily in the overall geo footprint build out. We will of course continue to do that where it makes sense and where opportunity presents itself. We do a very good job in terms of supply chain and being able to -- be able to get those up and running quite quickly. But the majority of the investment today is continuing to build capacity inside existing incredibly large data centers.

Great. Thank you very much, Amy.

Thanks, Heather. Operator, next question please.

Thank you. Our next question comes from the line of Jennifer Lowe with UBS. Please proceed.

Great. Thank you. Satya, you mentioned the AT&T deal that was announced, I think earlier this week. IBM also had an announcement with AT&T. Oracle has been a long time partner with AT&T in the cloud as well. I don’t want to dwell on AT&T in particular, but I do think it's interesting that a few different large scale cloud players are around the table there. So as you see more of these very large deals out there and Amy mentioned the increase in $10 million deals. How often are those multi-cloud deals and companies taking that sort of approach versus once that are committing to Microsoft and how do you navigate that landscape?

Yes, when I think overall, you all I think do a good job of tracking what is the public cloud competition and that’s the competition we pay most attention to. And in this context I think we see a mix. There a few of us who are at scale in public cloud who are very competitive, and anybody who decides to be multi-cloud, public cloud, those are the winners. When someone thinks that only using one cloud, we're definitely one of the names. And in the case of AT&T we were the only public cloud in there. And so that’s why we highlighted -- they highlighted us and we highlighted that in our quarterly announcement.

And I will think general what we see, especially as contract gets larger, for us the opportunity under Tier 1 workloads for us to really see TAM growth. It's just expansive. And so, Jennifer, listen, I kind of think about this as we’ve a incredibly strong footprint inside existing enterprises today, that footprint and you can see it in our results. Customers are relying on us for not only that footprint, but as they continue to expand to sit under the Tier 1 opportunity we haven't seen before. And so we, of course, see multi-cloud in a lot of our larger accounts, but this type of significant commitments is an opportunity, I think, you will continue to see us execute well on.

Great. Thank you.

Thanks, Jen. Operator, we will take the next question, please.

Thank you. The next question comes from the line of Karl Keirstead with Deutsche Bank. Please proceed.

Thank you. Amy, I’ve got a question about the Windows business. A couple of the metrics, 18% Windows OEM Pro and 16% on the volume licensing side were extraordinary. I know you called out a couple of, call it, one-time issues around inventory levels and an uptick in in-quarter revs. But I wanted to ask you two questions. How much of a tail do you think we’ve left on the Win7 to Win10 migration? Is it too cautious to say that there's really just two quarters of that tailwind left? And, secondly, on the volume licensing or commercial and cloud services segment, do you think that can, in fiscal '20 contribute to your overall double-digit growth? Thanks a lot.

Thanks, Karl. And I will actually combine these, because really those are fundamental driver that sits underneath this and then we can get to the specifics of end of support. There's, I think a recognized momentum with Windows 10 if deployment inside of enterprises for its security and management value prop. We worked hard and I think Satya mentioned some of the new features as we continue to invest on security for all of our products. One of the places I think it often resonates the most is with Windows 10 and inside that value. The OEM Pro number as I talked about was impacted by a number of factors, but what we’ve seen is over the past three or four quarters, a pretty consistent sort of high single-digit performance once you take out various impacts and chip supply and inventory levels on the tariffs. That performance certainly has some end of support impact to it as we've talked about before. I think, in general, what we've seen in prior releases is, it does extend a bit past the deadline, especially in our small and mid-sized business customers, and it's really important for us to continue to work hard to have the small and medium businesses find a path forward to make sure they can experience the most secure computing environment we have. And so, we will see some extension pass the line, we certainly have seen three or four quarters of that and we certainly expect H1 to remain strong. The more important part around the security management value prop is in fact I'm going to pivot back again a little bit, because it's the same thing we saw in Office. The Microsoft 365 value prop to customers, especially in the second half of the year and particularly in Q4, has three components. It has Office 365, it has EMS, and it has its Windows 10 commercial component. The Windows 10 commercial component will look far more like our success and our motion and overall being able to sell the Microsoft 360 value prop. It was a good quarter for that. We’ve seen consistent double-digit billings in this segment and it speaks to that. I expect that to continue, although you will have volatility because what's interesting about that specific metric is, it has a little bit more 606 impact than we’ve felt it's an on-prem product. And so there will be volatility in this number, but the consistent theme of being double-digit billings that really match our strength in Office 365, I think -- and I do expect to continue.

Okay, terrific. Thanks, Amy.

Thanks, Karl. Operator, we will move to the next question, please.

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

Hey. Thanks, guys for taking my question and congrats on a great close to a great year. I just wanted to focus in on M 365, particularly Satya your comments on Microsoft Teams. Really kind of two components for this question. How do you think about sort of why customers are adopting Teams, especially the larger ones that you highlighted at Ignite Conference. Is it the fact, let's say, single app with those combined features you talked about or is it the broader, you call it, Office experience? And then, I guess a question for Amy then off of that. When you think about sort of the relevance of Teams on a going forward basis to keep this migration up, E1, E3, E5 and then plus those add-ons that are associated with Teams like Calling etcetera, how critical is Teams to this -- to the long-term, call it, like, price migration here at Office and M 365?

Yes. So, overall, I think there's no question this last fiscal year has been an absolute breakout year for Teams in terms of both the product innovation and most importantly at-scale deployment and usage that we’re seeing. And I think, in fact unlike any other time other than Windows, we've not had this kind of platform effect. Office has obviously had very, very successful individual products that have been deployed broadly, but each of them was a singular tool. Perhaps SharePoint was the last time we had a platform effect of this kind. But Teams is -- transcends all that. It's the communications tool, it's the collaboration tool, it's the line of business tool for meetings as well as business process. And so, the amount of value creation for the customer by deployment is something that we ourselves are sort of really learning a lot each deployment, whether it's on the first line. The other point about Teams is just not limited to knowledge workers, which has been really the only place traditionally we play. Even our licenses to the non-knowledge workers were just mostly licenses of the tools we built for knowledge workers. Whereas now, we actually have specific value, which is in fact very valuable to those first line workers. And the thing that we have realized is, that businesses are in fact looking to spend more for those first line worker productivity. So we’re in a very early innings of it, but we are pretty excited. The one other benefit, to sort of tease off with some of the comments Amy was making is that security compliance and governance is a huge issue for enterprise customers and commercial customers at scale. And Teams in some sense helps them a lot, because it builds on all the rest of the investment they’ve made already in Office 365. And so we see that benefit even on that front.

And I think it's an important component of our M 365 value, but it's really not outsized. I mean, we’ve all these components value, that's really that’s been the secret of what customers look and see. They see Teams that can not only change what Satya talked about, but also develop culture change in terms of employees being able to be involved and collaborate regardless of the org chart and that is what you're going to see. When we have 500 million new applications built in the next five years, you're going to see and I believe Teams to be one of the major interfaces through which that experience and business process reinvention will happen. Teams really expand multiple categories, so I wouldn't think of adjusted productivity or even just collab or meetings but as an interface. As you see business process reinvention occur, I do think of this as the surface through which many people will experience that. And so, I would ask to try to expand your thinking on this one, it's not just Office or needed to be an Office, it's really about having employees fundamentally experience Microsoft in a different way day-to-day.

Yes and I would point to the conference we just finished and some of the demos, and I think the customer demos, in particular, I would say, that will sort of probably give you the best feel for how people look at this in terms of the deployment characteristics.

Great. Thanks, guys.

Thanks, Phil. Operator, we will move to the next question, please.

Thank you. Our next question comes from the line of Mark Murphy with J.P. Morgan. Please proceed.

Thank you very much. Amy, you’re mentioning large and long-term Azure contracts. I'm wondering as we consider this robust 25% growth in your commercial bookings this quarter, roughly how many points are coming from that -- from any tailwind of the longer duration types of contracts? And then, Satya, I wanted to ask you regarding the recent partnership with AT&T. Some media report said it was worth over $2 billion. Wondering if there's some hyperbole there in the media, or is this an example of how Microsoft can play in every line of the company's OpEx budgets today?

I will just take the second one then you can go on. I mean I think it is a very significant deal. I’m not going to comment on any specific dollar terms, it is the largest commercial deal that we’ve signed of the size and we see -- we’ve line of sight to many more such deals.

When we think about bookings growth, I'm not sure -- for me -- break it down into two pieces, which is I think about bookings which were very good this quarter, has two fundamental motions. There's a motion around renewals and there's a motion around new. Both were very good this quarter and it wasn't while certainly long-term Azure contracts had a meaningful component of the new, they weren't alone and being the only component of the new. And renewals, as I mentioned earlier, we saw very good execution, not just on renewals in quarter, but really healthy behavior in terms of maybe expirations that we’ve seen happen earlier in the year getting renewed, because of the new value prop and the commitment of the sales team to make sure that we landed a really thoughtful high customer value transaction. So, while these long-term large contracts will add volatility to that number, if you look at our -- see in our balance of $91 billion and see that that also grew 25% year-over-year, you will get a sense that it certainly wasn't alone in its impact for the year.

Thank you.

Thanks, Mark. Operator, we will move to the next question, please.

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

Hey, thanks and congrats from me as well. I wanted to zone in on Dynamics. There, you obviously like, you’re playing in applications and we've seen other vendors kind of do SaaS applications. If you look at Dynamics Online, you now on my math kind of around $2 billion, but still growing at a clip that organically, not many others have achieved. It's now bigger than your on-premise business. Can you talk a little bit about the drivers there? And is there -- what are the ways to kind of keep in -- how did you achieve that over this scale and what are the drivers going forward? Thank you.

Yes, we’re very, very excited about the progress again in the last fiscal year around Dynamics 365. Both the traditional business process applications themselves have become much more modular and a much more modern and we’ve a very disruptive business model as well that goes with it. And so, therefore, we’re becoming much more competitive with very large customers deploying whether it's sales or operations. The other exciting thing is we’ve this entire new class of applications and I talked about this even into this week's conference, which is these AI-first modules, whether it's for sales, for marketing, for customer service or this Customer 360. And these are modules that there isn't an installed base of those anywhere, no competition even exist. So in other words, we can in fact have these modules get deployed in commercial customers even on top of existing business applications. And so we feel that we’ve plenty of opportunity ahead. Again, this is a place where we’re a very low share player. And so the fact that we will become a very competitive supplier of this technology at a time where the world needs more business process automation, we feel good about the opportunity ahead.

All right. Thank you.

Thanks, Raimo. Operator, we will take our last question now, please.

Thank you. Our final question comes from the line of Brent Bracelin with KeyBanc. Please proceed.

Thank you for taking question here. I wanted to drill down in the Commercial Cloud gross margins. They were up 200 basis points sequentially, 600 basis points year-over-year to 65%. I guess, my question here is how sustainable are the cloud gross margins now that you're at this $40 billion plus scale, or were there some kind of one-time benefits we should think about in the quarter that helped you there? Thanks.

There were not any one-time benefits in this quarter that helped us. This is really about seeing improvement in some of our largest services and continue to see improvement year-over-year in the largest services. What we said for FY20 and certainly in Q1 as we expected to be up sequentially in Q1 and we will continue to get some headwind because of the strong Azure IaaS and PaaS growth we expect through the year, but we certainly think that Azure fundamental gross margin improvement will help offset that next year.

Great. Thank you.

That wraps up the Q&A portion of today's earnings call. We appreciate you joining us, and look forward to speaking with all of you soon. Thanks.

Thanks, everyone.

Thank you, all. Thank you very much.

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