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Microsoft Corporation (NASDAQ:MSFT)

Cowen & Company Technology, Media & Telecommunications Conference

May 28, 2014 8:45 AM ET

Executives

Vikas Mehta - Director, IR

Analysts

Gregg Moskowitz - Cowen & Company

Gregg Moskowitz - Cowen & Company

Hey, we are going to get started. Thank you very much. I’m Greg Moskowitz. And I cover infrastructure software for Cowen. Thanks for coming out to the 42nd Annual TMT Conference for Cowen. With me here is Vikas Mehta. I’m very pleased to have Vikas here. Vikas, of course, is Director of IR for Microsoft. Vikas does spend most of the time in the corporate side of the house, and so we are going to be focusing the content on enterprise and that of course includes [that] [ph] as well.

So with that, I’m going to turn it over to Vikas for Safe Harbor.

Vikas Mehta

Yes. Good morning everyone. Thank you for this opportunity. We are very excited to be here. I’m very thrilled to represent Microsoft over here. I would like to remind everyone that we will be making forward-looking statements that will be predictions and projections about the future. Actual results could materially differ because of risks and uncertainties. Our regulatory filings describe these risks and uncertainties.

With that, we can get started.

Question-and-Answer Session

Gregg Moskowitz - Cowen & Company

Perfect. So it’s been a few months since Satya of course took over as CEO and certainly his first quarter in that capacity was a very solid one, your fiscal Q3. But really I'm curious given that you have been at the company for quite a while now actually just in terms of how you would sort of characterize the environment today within Microsoft physically inclusive of the morale just from your vantage point?

Vikas Mehta

Yes. I think that’s a good question. From day one as CEO, Satya has infused a ton of energy into the company. Microsoft is going through one of the most transformation phases of the company ever, and Satya is leading from the front. He is helping us focus on customers relentlessly, to be bold in our innovation, to embrace a challenging mindset. So I think Satya is a fantastic leader. He's driven, thoughtful and forward-looking and under his leadership we are focusing on things that we are uniquely differentiated, especially driving this mobile-first, cloud-first world. So overall, I would say that there is a lot of excitement and enthusiasm, as well as a renewed sense of purpose at the company.

Gregg Moskowitz - Cowen & Company

Perfect. And then one segment that I just wanted to touch on before we get into the business areas or business units. Commercial licensing did decelerate a little bit last quarter, although some of that was due to the shift to subscription and multiyear licensing. Just wondering if you just talk a bit more about that as well as what you expect going forward?

Vikas Mehta

Yes. I think the trends that you mentioned are really important to understand before you get into that specific question. The first trend is a move from on-premise to the cloud. And what this does to our P&L is that it moves revenue from our commercial licensing segment to our commercial other segment.

The second important trend is the mix shift from transactional licensing to annuity, which includes subscription. And what this does is that it essentially pushes out the revenue recognition into future time periods.

If you take these two trends into account, the correct way to look at the performance would be to look at the commercial revenue all up. And secondly, to triangulate this all up commercial revenue with our unearned revenue balance and our contracted not billed balances. So if you look from that particular lens, then you would see that commercial revenue all up grew 7%, pretty healthy. Our unearned revenue balances grew 14% year-over-year. So it's higher than what we had expected. And our contracted not billed balance is at a very strong $22 billion plus at this point of time. So I'd say that we are seeing a strong adoption from the enterprises and they are investing in our long-term road map.

Gregg Moskowitz - Cowen & Company

Perfect. So let's actually -- that's helpful. Let's actually turn to Azure, which has just been a tremendous success story for Microsoft. When you look at Azure, what services are most in demand today?

Vikas Mehta

Yes. I think as you pointed, Azure is growing at a very fast pace. Just the last quarter, Azure revenues grew over 150%. This growth is driven by both new customer adoption as well as increasing users from existing customers. And especially, if you see that, it's -- the growth is coming from enterprise and enterprise ISVs. This is across a couple of important pillars.

First of all, our infrastructure services and hybrid services are growing at a pretty fast pace. Within that we are seeing scenarios like test-and-dev, storage backup recoveries to some of the important hybrid scenarios. We are also seeing a good growth and a high level of interest for our premium offerings. We just announced our Enterprise Mobility Suite recently. And the other offering which has been doing well is the [so] [ph] simple storage appliance offering.

But if you look underneath, an important aspect is that we have a very strong structural advantage in the enterprise and hence we're seeing the success. And this is twofold. First of all, we are the only providers who can have a common management layer or common layer across both on-premise and the cloud with regards to identity, virtualization, management and application development. And secondly, if think about the comprehensive portfolio that we have Office 365 helps in extensibility scenarios for Azure, for IPs, and this essentially bootstraps Azure. I'd say its early days but we are really encouraged.

Gregg Moskowitz - Cowen & Company

Perfect. And I know I've asked you this before but just kind of curious if there is any additional things at this point, you mentioned new plus existing, but just roughly how should we think about the amount of workloads that are coming on to Azure being incremental versus cannibalistic I mean on-premise [at this point] [ph]?

Vikas Mehta

Yes, I think that's a great question, and even before I answer that if you take a quick history lesson it's interesting to know that if you look at last 30 years and all the technology revolutions that have happened think about the '80s the rise of the PC, or the '90s with explosion of Internet or the 2000s with the consolidation with virtualization, the low cost option always drove IT spending. And not only that, IT spending as a percentage of GDP has risen through this timeframe. And the reason is that the contraction that has happened because of these low cost options was more than offset by the newer scenarios. And if you look at the cloud, a similar phenomenon is happening.

Cloud accelerates innovation because of speed, scale, flexibility and cost advantages. And even from my personal experience, I used to run the Azure financing four years back. And if I look back, the long range planning that we had done we were really bullish at that time, but if I look back we had still not envisioned a number of things or scenarios that we are seeing right now. Azure increases our addressable opportunity 3x and there are number of places where we are getting an additional incremental benefit. We were earlier able to address only the software components, now we can address hardware as well as services. Now we can also address Linux and Open Source workload.

In markets like China, we are the first service which is a multinational public provider over there. There are newer scenarios like Internet of Things, media, mobility, big data that are really providing an incremental boost. So I'd say that it’s a boundaryless opportunity for us and with the growth of digitalization of data, explosion of devices, we feel a great opportunity ahead of us.

Gregg Moskowitz - Cowen & Company

Perfect. And just last month actually I think you announced a couple of new services at Azure, Express Route and Azure Files. Maybe just talk about that briefly and what that brings to the Azure platform?

Vikas Mehta

Yes, three things. We had a ton of important announcements recently at TechEd. But if you look at our business model it’s focused on three things, infrastructure services that drive adoption, hybrid services that help enterprises move to the cloud, and premium offerings that help us differentiate in the market.

The TechEd announcements a lot of them were emphasized on the hybrid services aspect. And if you look at the opportunity it is really massive. According to Gartner, nearly 50% of large enterprises will have hybrid deployment by 2017. So we are investing in the enterprise side and especially on the hybrid scenarios. So services like Express Route and Azure Files are great examples of that.

Express Route actually helps enterprise create a private connection between their data centers and Azure with providers like British Telecom, Verizon, AT&T, and it provides a fast, secure, and a reliable connection. It doesn't go through Internet and drive the number of hybrid scenarios.

Similarly, Azure Files is streamlined storage. Think about it as a shared drive where applications running on Azure can share files within multiple VMs. This just drives a number of hybrid scenarios like Test-and-Dev and Lift-and-Shift or diagnostics. And so overall, I would say that it’s very encouraging and pace of innovation has been very fast.

Gregg Moskowitz - Cowen & Company

Great. One other one I wanted to ask you about was actually a new site recovery which really is enhanced disaster recovery in the cloud through Azure. We've now seen recently actually some other players as well as including couple of competitors announced cloud-based DR. I just want to get a sense from you about how that competitive landscape is shaping up and really just how big an opportunity this may be for Microsoft going forward?

Vikas Mehta

I think business continuity and up-time are really critical for enterprises. And what we have seen traditionally is that these solution, the disaster recovery solutions, has been limited to mission critical applications and that is because it’s very expensive and, second, it’s very complex. And cloud provides the real disruptive and a value creation opportunity with regards to disaster recovery. So what we have done with Azure site recovery services is that we have given enterprises an option to recover and replicate their VM in case of an outage from their primary data center to Azure providing an automated [spill over] [ph].

There are three very important differentiators we have over here. The first is that automation tools are really good, which makes it easy for creating this solution. The second is that we took a lot of cost out and helped in sort of managing the infrastructure at our end and make it cheaper for the IT department. And finally, we have made the job that’s simple and reduced a lot of complexity. So our goal here is that we not only want enterprises to have disaster recovery for their mission critical applications, but we want them to have a comprehensive solution that they can extend to all the applications in their portfolio.

Gregg Moskowitz - Cowen & Company

Okay, great. One last one on Azure before I move on to another topic in that another service called RemoteApp just went into preview last month. So I know you have a really good partnership with Citrix. Just wondering if you can sort of talk to this product and to what extent I guess the question is, to what extent does this actually compete with their offerings?

Vikas Mehta

Yes. Desktop management strategy from our perspective is to help IT centrally manage their top environment where we provide security, reliability, and flexibility in a way that IT can be productive and can help its users to access data anywhere from any device at any particular time.

On the on-premise side, we have been very successful with our remote desktop server offering. In fact, it is over $1 billion business for us. And our customers have been consistently asking us to have a similar service in the cloud. So with Azure RemoteApp we provide this functionality where IT can manage all their windows based application centrally and enable the users to access it across their devices whether they are windows, iOS or Android based.

Now the two advantages that we provide here is, first of all, it helps IT reduce cost. They can scale it up or scale it down depending on the need and don’t need to invest in expensive infrastructure. And secondly, the users accessing the applications feel as if the applications are running on their machines itself rather than in the cloud. And considering this is a cloud service will be iterating very fast and essentially bringing innovation on a regular basis. But finally, I'd say that we will be partnering with Citrix in this area. They have been long-term partners with us and we will continue that.

Gregg Moskowitz - Cowen & Company

Okay. And let’s move actually to SQL and certainly it’s been a -- or just really -- I would just kind of call it [Teddy Eddie] [ph] here, it’s just frankly consistently put up healthy growth. You continue to sort of grow faster in the market there. More recently we've seen a part of SQL Server 2014, there are new in-memory and [good] [ph] capabilities. But maybe just sort of talk about what this means from a performance standpoint when you look at this product, as well as kind of where you potentially see new customer demand coming from as a result of those capabilities there?

Vikas Mehta

I think you're right. SQL Server 2012 has been a fantastic success for us. We have delivered higher than the market growth rate consistently and have been taking share from the key competitors in this area. SQL Server 2014 builds on the success of SQL Server 2012; it helps us extend into hybrid scenarios. But most importantly, it helps us in rounding out the in-memory capabilities.

And here we have three important differentiators. The first one is that the in-memory capabilities are build right in SQL Servers. There is no need to buy additional hardware or software. The second is there is no need to rewrite any application, which some of all competitors push you to do. And finally, the in-memory capabilities are such that they are compatible with the prior technologies as well. So I would say it's a leap shift in the industry and we are seeing very good initial customer feedback.

If you think from a performance standpoint, it depends on the workload that you’re running. But what we have seen from our customers is that for their OLTP workload they are seeing up to 30 times performance improvement. And if you think about data warehousing for their in-memory column store, they are seeing almost up to 100 times performance improvement versus their disc based traditional options they had.

I'd say from a pickup standpoint, especially Tier-1 and mission-critical customers are going to be -- find this a very useful service that we are providing and they will be the ones that will be the first movers in investing just because of the bigger bang for the buck for them.

Gregg Moskowitz - Cowen & Company

Okay, that's terrific. Let's actually turn maybe down to Office 365. And we have been really bullish on Office 365 for quite a while. Having said that, would not have thought that you would have been at 4.5 million subscribers this June. And so really just kind of love to hear you talk with us about how you've been able to amass so many subscribers in such a short period of time?

Vikas Mehta

Yes, certainly Office 365 has been off to a great start. Our consumer offering Office 365 Home Premium, which we launched over a year back has had a very big success. In just the first 100 days that it reached 1 million subscribers. And now that we have, had a year of the service it has already reached 4.4 million subscribers. I think that there are two important drivers to this fast adoption. The first is the value proposition of the service itself and the second is the ease of access or the go-to market strategies here.

In terms of the value proposition for Office 365 subscription, for starters, it is an always up-to-date offering, and we provide that the subscription offering as well. We pack in a lot of additional services like extra storage for one drive as well as site minutes. And in addition to that, recently we made Office on iPad available exclusively to Office 365 subscribers. So we keep adding more and more value to the Office 365 subscriptions to make it a compelling choice.

Secondly, if you think about ease of access, we have made it available worldwide. It is available in more than 141 markets and we have made it available through most of the retailers think about Best Buy, Staples, Amazon.com. We have been also aggressive with our cloud campaign and sort of cloud-first (inaudible) motion. Finally, we have made it available as second skew we released called Personal which is available for $70. So I'd say that it's early days, it has more than a billion users of Office but the transition is on its way and we feel really good about it.

Gregg Moskowitz - Cowen & Company

Great. And you mentioned Office on iPad; it's now been few months since that announcement that something that many people myself included have been hoping for quite for a while. But what has the uptake been and just wondering if you sort of characterize the uptake relative to what Microsoft internal expectations perhaps were when you needed the iPad?

Vikas Mehta

So the announcement of Office on iPad was a part of our mobile-first cloud-first vision. We have been shifting the view from sort of a device centric view to a user centric view where we want to delight our users wherever they are on whatever devices they have.

And so it was all about accelerating the adoption of Office 365 that drove this decision. If you think about Office on iPad specifically it has been off to a good start. Since launch just in the first week it had more than 12 million downloads and now we have over 27 million downloads. It has received really very favorable reviews and even on the App Store for iOS which is one if the top downloaded list.

So overall, we feel really encouraged, but I'd say that this reinforces our belief that Office 365 is an important vehicle for our customers to access our services and we will be pushing that over time.

Gregg Moskowitz - Cowen & Company

Okay. And then also if you look at Office more broadly, you mentioned about over 1 billion users. Obviously, that includes free and of course includes pirated versions unfortunately as well as skateboard version. But your total Office consumer revenues on-premise as you say perpetual actually did quite well last quarter. And it was interesting to me because we had three quarters in a row where Office consumer revenue was down 20% plus year-over-year. Last quarter, it was plus 15%. So maybe you can just kind of review the reasons for why there was a big turnaround last time, last quarter?

Vikas Mehta

Yes, I'd say that, first of all, Office innovation has been resonating with our customers and especially on the Office 365 site. If you look at the total revenue Office 365 and Office On-Prem, it grew over 28%. If you just look at the Office On-Prem side of it, it grew 15% and there were two important drivers here. The first one was we had great performance in our attach and the second one was there was higher sales in Japan. So for Japan, specifically you saw an increase in sales because people were accelerating their purchases ahead of an upcoming national sales tax increase. And even if you exclude that, the growth in Office revenue was better than the underlying PC market highlighting that we had a great attached motion going on. So I'd say innovation as well as our sales efforts are driving that.

Gregg Moskowitz - Cowen & Company

And as you look out and I know you don’t guide the line item specifically but just from a high level standpoint you think that you can directionally continue to sort of outgrow the PC market when you look at On-Prem Office or total Office revenues for that matter?

Vikas Mehta

I'd say that we have guided to the numbers. So I would not comment specifically on the numbers, but I'd say we feel really good about our Office 365 motion. That is where we will be focusing a lot in terms of innovation, in terms of our marketing campaign. And we feel really good about the early adoptions and early signs right now.

Gregg Moskowitz - Cowen & Company

Great. And then if you look at from a mix standpoint, the Office 365 is now over 15, and this is metric from one quarter prior, but now over 15% of total Office licenses sold, which again very impressive given the time span that we are looking at. Just kind of wondering from a longer-term perspective if we were to sort of look at three to five years for instance, how should we be kind of thinking about just from a mix standpoint?

Vikas Mehta

I would say, overall, including all the customer segments consumer, F&B, and enterprise, we have addressed all these, at a high level, we are seeing good signs right now in terms of the sort of mix shift. But these are early days, so it’s too early to comment on that. I'd say that our long-term vision would be to move all the customers to the cloud offering. But in the medium to short-term we'll be working with our customers in their journey to move to the cloud. And we'll help them move at their own pace on their own terms.

If you think about the consumer segment, as I mentioned earlier, we are making at a compelling option with all the additional services, the cross-functional aspects of the service. For the small and medium services or small and medium businesses we are providing enterprise grade services at low cost, again making it compelling. For the enterprises we are providing hybrid options, we are even structuring the enterprise agreement such that it’s easier for them to move the cloud. So I would say it again, it’s a journey with the customers and we will work with them in terms of the move.

Gregg Moskowitz - Cowen & Company

Okay. Perfect. One other question on Office 365 and I want to open it to the audience. You talked about, Vikas, earlier on go-to market and sort of the successful strategy there and how you have placing with most of the big retailers. From an OEM perspective you had a very good partnership with Dell now for quite a while although not, at least as of this date, not with HP and Lenovo, for instance. And I guess I’m kind of wondering why not because to me it seems almost unquestionably a win-win for both Microsoft and the big OEMs, and just kind of wondering why just Dell today and really, more importantly, how should we think about this going forward?

Vikas Mehta

Yes. I don’t have anything new to announce today from that perspective. But I'd say partnerships with OEMs are extremely important even for a new PC, we provide free trials for Office which helps tremendously. And in general, partnerships are extremely important to drive reach especially for small and medium businesses and consumers. We work with our telco partners, for example, and through syndication we provide a number of Office 365 offerings, for example, or we have partnerships recently announced with GoDaddy, which enables us to sort of reach a broader base of SMB customers. Similarly, we announced the partnership with DocuSign, helping customers get a richer experience in a comprehensive solution. So I'd say partnerships are extremely important, we'll keep working on those, and making the reach easier from that standpoint.

Gregg Moskowitz - Cowen & Company

Perfect. That's great. So with that, why don't I pause and take any questions.

Vikas Mehta

Yes.

Unidentified Analyst

[Question Inaudible]

Vikas Mehta

Yes. Let me take the first part of the question which is how does -- let me repeat the question. How does the move to the cloud change the company and how it is working? And second is what is the impact on the sort of the operating margin, if you may?

If you look at the first aspect, fundamentally moving to cloud means a shift in the DNA of the company; it is a different business model, it is a different way of working. There are a number of new skill sets that you need to build. You need to manage infrastructure at the scale, you need to be fast and iterative in terms of your product development. You need to be agile in terms of innovation.

For example, if you think about the earlier software world, we did not have to invest in datacenters. Our sales motion to a large degree was through channel partners. So now providing the services directly to a customer creates different dynamic. It creates dynamics where you need to be really focused on the customer experience. You need to be focused on the services aspect, the SLAs, uptime, et cetera become extremely critical. So with regards to that we have to learn a lot of the new capabilities like building a supply chain management process, building an agile development framework, building a team that can manage the datacenters that scale world class fashion.

It also changes the sales motions considerably because earlier the relationships were say a three year relationship with the customer, where every three years we would go and understand their needs and renew the deal. Whereas now, it is an ongoing relationship with the customer, where we have to be -- we have to stay in tune with their needs and keep innovating the product as well as offer the new services in the correct way. So it fundamentally shifts how we operate as a company for sure.

And if you look at the second part of your question how does this change the operating margin. I'd say an important way to look at this particular dynamic is to look at operating margin dollars rather than operating margin percentage. The reason is that it's a different business model. Earlier we were selling software which did not have any cost of goods sold, but now we operate datacenters which are capital intensive. But if you think from an operating margin dollar perspective, the move to the cloud offers a significant opportunity. Just for Azure, as I mentioned, it is a three times bigger addressable opportunity. Earlier we were able to only address software but now we are able to address hardware and services, and monetize that as well. It creates newer scenarios. There is a lot of innovation, new innovation that happens. So actually from an operating margin dollar perspective it is definitely accretive to us.

Gregg Moskowitz - Cowen & Company

Any question? Yes.

Unidentified Analyst

[Question Inaudible]

Vikas Mehta

So I would say that our initial success wave had been with enterprise predominantly, right, because enterprises already have these existing solutions so we saw great success in the first wave. But now we are seeing great success in the SMB side also. The SMB opportunity is very unique in the sense that over 85% of our customers from SMB are the ones who had never used our server offerings. Office software, productivity suite is very popular and it's used across the board. But when you think about our server offerings like Exchange, SharePoint, and Lync, these are pretty expensive solutions if you are a small or a midsized company.

But now with Office 365, it becomes extremely affordable with pricing ranging from anywhere between $4 per user per month to $22 per user per month. But it provides this opportunity for SMB. So we have seen a great adoption there and the most important stat I would share is that a lot of this is sort of next new opportunity 85% of these customers have never used server workloads before.

Unidentified Analyst

[Question Inaudible]

Vikas Mehta

Yes. That’s a good question. I'd say the SMB customers, as I said, Office is predominantly used across the board. But for an email solution they use hosted emails to some extent again which is on exchange servers mostly. So we were able to reach them through a service provider but now we can provide them a much better experience with exchange online.

Some of the other solutions but if you are a very small-sized company typically they end up using consumer offerings which are sort of don't offer the enterprise features. So I'd say from both those perspectives, being able to directly reach the customer with exchange online rather than through the hosted providers or sort of providing a much richer experience with an enterprise offering rather than pushing them to a consumer offering is definitely a great opportunity.

Gregg Moskowitz - Cowen & Company

Great. Other questions?

Unidentified Analyst

[Question Inaudible]

Gregg Moskowitz - Cowen & Company

Yes. Vikas, if you could repeat that question.

Vikas Mehta

Yes. The question is what are the parts around Nokia.

We acquired Nokia Devices and Services business and we are excited about the business. As a company our vision is around mobile-first and cloud-first. That is where we see a lot of opportunity. It’s about connected devices and continuous services, and in that framework we feel that Nokia fits in really well for Microsoft. It provides us with this rich set of capabilities around design of hardware; it provides us rich supply chain as well as go-to market functionalities and has an outstanding retail play also. So as we expand our hardware business across phones, tablets, and PCs and work with our providers and OEMs we feel that Nokia is a great opportunity for us.

Gregg Moskowitz - Cowen & Company

Are there questions? I was wondering if you could actually may be just sort of talk about the big data opportunity with Power, BI, et cetera and just how we might see that show up over time in Microsoft financials?

Vikas Mehta

Yes. I think one of the most important revolutions that we are seeing is with regards to data. In the prior world, we saw two important revolutions. One was improving productivity, which was through collaboration, communication, et cetera. And the second was with regards to automation tools and making it easier for IT. The third revolution that we see in the future is with regards to converting data into insight.

And if you think from a sort of macro prospective, just with number of devices increasing, the storage on them exploding, there is a ton of data out over there. But what is lacking is the ability to mine that data and create insight. So our strategy around big data has been two-fold. One is to help make big data accessible. And by that what I mean is create a platform where you can run the technologies like Hadoop and can process a huge scale of data inexpensively. We have made Hadoop available on Windows Azure or now we call it Microsoft Azure. And there is also tight integration with SQL server.

The second part of it is with regards to converting it into insight. And we have rich functionality with Power BI, which works very seamlessly with Excel and PowerPoint and creates solution on the top of that. It has the rich integration which SharePoint to create portals. It has very rich integration with SQL Server which provides enterprises the reliability and security they need. So from that prospective I would say that we have a twofold strategy to create a platform for big data and then help convert that data into insights with our Power BI tool.

In addition, we recently announced the SAP deal. In addition to sort of running SAP applications on Azure we also announced the integration of Business Objects with Power BI, further democratizing insight for our customers.

Gregg Moskowitz - Cowen & Company

Great. And that actually takes us a little bit of a segue. I wanted to just spend a minute or two, if you could on the dynamics business. The growth has been a bit slower over the past few quarters. From everything we hear Dynamic CRM online continues to do extremely well. But wondering if you could talk about that business, as well as Dynamics AX on the ERP side?

Vikas Mehta

Yes. Let’s say from a high level prospective, we feel that the move to the cloud is really important move which helps moves up a lot of our services in addition to Azure, CRM Dynamics online is also a definite beneficiary here. And if you think about the tight integration that we offer between Office 365, Dynamic CRM, Azure that's definitely positive for us. And you see that in terms of sort of attached to the Fortune 500 companies, you see all these cloud services being adopted at the same time rather than being one-off.

So I'd say from a CRM perspective it's definitely about pushing our cloud offering and being aggressive there.

From an ERP perspective, I would say here we focus on specific verticals. Dynamics AX is a classic example of that where we have focused on the retail opportunity and we are seeing good momentum over there. So I'd say from an overall perspective we feel enthused about the opportunity here.

Gregg Moskowitz - Cowen & Company

Perfect. Any other questions? Let's actually close at one last -- well, with a big -- we can take pictures, excuse me, question, if we could. And it's really something that you touched on very briefly, Vikas, to one of your earlier answers and that relates to the Internet of Things. And obviously we're starting to see really the sign of this opportunity beginning to explode and there is an open debate over obviously how fast it progresses. But when you think about Microsoft and their assets, I would love to hear from you just how big of a player in Internet of Things could Microsoft become over time?

Vikas Mehta

Yes. I'd say the opportunity is multifold for us. If you think from just a computing perspective, Azure is a platform which helps connect all these devices. So at the end of the day, as devices whether they are with screens or without screens, I'll call it Internet of Things, Azure is definitely a big beneficiary.

The second is around the operating system itself where the thing about Windows Embedded, we had a successful business in that side. And you us play in sort of -- think about the automobile market or the sort of the other terminals which don't have screens and we have been very successful in that side, so it's extending that. We talked a lot about that at well recently that Windows is the operating system that can cater to this Internet of Things revolution. And so we feel great across both on the devices side of this operating system and with regards to connecting them with Azure.

Gregg Moskowitz - Cowen & Company

That's terrific. Well, Vikas, with that I think we are out of time, but thank you very much.

Vikas Mehta

Thanks a lot.

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