Microsoft Corporation

Greetings. Welcome to the Microsoft fiscal year 2019 third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mike Spencer, General Manager of Investor Relations. Mr. Spencer, you may begin.

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 Broad, Chief Accounting Officer, and Keith Oliver, 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 third quarter performance in addition to the impact that 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 and constant currency when available as a framework for assessing how our underlying business is 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 our website immediately following the call until a 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 Industrial 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 another strong quarter with double-digit top line and bottom line growth, the result of picking the right secular trends, accelerating innovation, and most importantly, relentlessly focusing on our customers' success. Our trusted extensible cloud platform spanning application infrastructure, data and AI, productivity and collaboration, as well as business applications, enables every organization to create their own intelligent systems and experiences to compete and grow. Now I'll briefly highlight key areas of innovation and growth across our business. Microsoft 365 empowers everyone, from the largest multinationals to small businesses, from knowledge workers to first-line workers, with an integrated, secure, compliant experience on any device. It's the only comprehensive productivity, collaboration, and communication solutions that integrates with an organization's business process workflows. Microsoft Teams brings together everything a team needs, messaging, video conferencing, meetings, and collaboration into a single integrated user experience scaffolding, eliminating the need for discrete apps that only increase an organization's security and compliance exposure. 91 of the Fortune 100 use Teams, and more than 150 organizations have over 10,000 active users. And we are expanding Teams to new industries like healthcare with priority notifications for patient care and the ability to securely access patient records. Cybersecurity is a central challenge, and Microsoft is the clear leader in cloud security with our unparalleled operational security posture and and our growing portfolio of security and compliance solutions, spanning identity, device endpoints, email, information, cloud applications, as well as infrastructure. In financial services, National Bank of Canada, BNP Paribas, Refinitiv, a joint venture between Thomas Reuters and BlackRock, all chose Microsoft 365 for our advanced security and compliance. We expanded Microsoft Threat Protection to include the Mac and manage vulnerabilities in third-party applications, providing the best defense for customers' heterogeneous environments. And we introduced two first-of-their-kind services. Azure Sentinel analyzes security signals at massive scale across an entire organization, using AI to detect, investigate, and respond rapidly to threats. Microsoft Threat Experts is a new cyber threat hybrid hunting service that provides access to our security experts on demand. All this innovation is driving growth. Office 365 commercial now has 180 million users, our EMS install base reached 100 million, and the Outlook apps on iOS and Android surpassed more than 100 million users for the first time this quarter. We expanded our Surface family of devices with Surface Hub 2S, which brings together Teams, Windows, and our category-creating Surface hardware to power teamwork for organizations like Volvo, Domino's Pizza, Northwestern University, and NASA Jet Propulsion Labs. Finally, Windows 10 is now active on more than 800 million devices and continues to gain traction in the enterprise as the most secure and productive operating system. Moving to business applications. Today, traditional systems of record and engagement are often siloed, limiting the value of an organization's most important asset, its data. Dynamics 365 solves this challenge, connecting all their systems and creating digital feedback loops, enabling any organization to become a true AI-first company. The Open Data Initiative we announced last year with Adobe and SAP delivers on this promise and is already enabling customers like Unilever to to unify their business data across all their lines of business applications to unlock new AI-driven insights. Personalization is increasingly key to every organization's marketing strategy, enabling them to effectively engage customers, tailor their experiences, and increase return on investment. Tivoli is one of the world's oldest amusement parks. It's using AI and Dynamics 365 to help personalize marketing campaigns and transform how their first-line workers engage with guests reducing churn and increasing customer loyalty. And we're not stopping there. We're leading in two emerging categories, robotic process automation and mixed reality. Our power platform brings together robotic process automation with self-service, analytics, and no-code, low-code app development. Recent updates enable citizen developers to build higher quality power apps faster and easier, and along with new capabilities in Power BI, empower customers like SNCF, France's National Railway, to create a more data-centric culture. Our new HoloLens 2 is the most advanced intelligent edge device available, and in combination with Dynamics 365 and new Azure Mixed Reality services, enables organizations like PACCAR and Chevron to to digitize physical spaces and the interactions to empower their first line employees with the right information at the right time in the context of their business process work. All this innovation is driving growth. Revenue for our power platform grew triple digit year over year. And for the first time, more than 50% of our dynamics revenue was driven by the cloud. Moving to LinkedIn, LinkedIn again exceeded expectations across all lines of business driven by record levels of engagement in the feed, content shared across the platform, the messages sent this quarter. Marketing solutions was up 46% year over year and customers are relying on our new pages experience and audience targeting capabilities to connect with LinkedIn's nearly 630 million members. We saw record job postings again this quarter and are making it easier for job seekers to find more relevant and higher-paying jobs and get personalized salary insights. We have the most comprehensive solution for every organization to manage and engage their most important resource, their talent. New tools in Glint empower managers to quickly analyze and action feedback to have the greatest impact on team performance. And with our combination of LinkedIn Talent Solutions, Talent Insights, LinkedIn Learning, and Glint, we are helping employers access data-driven insights to attract, retain, and develop the best talent in an increasingly competitive jobs marketplace. Now let's talk about Azure. From the outset, we took a differentiated approach to the cloud to meet the real-world needs of customers. Our architectural advantage is a clear reason for our success. Azure is the only true hybrid, hyperscale cloud that extends to the edge. Operational sovereignty is increasingly critical to customers, and Azure uniquely provides consistency across development environments, operating models, and technology stacks, whether connected or disconnected to the public cloud. And we are accelerating our innovation. Azure Stack extends our hybrid differentiation, enabling customers like Airbus, Defense, and Space to build and run cloud applications at the edge. And now with our new Azure Stack HCI, customers can build and run virtualized applications on-premise in a consistent way. Azure Data Box Edge is a powerful new AI-enabled edge appliance that sits within a customer's environment and in their data center or on a factory floor so that they can use AI to reason over data at the edge. More than 95% of the Fortune 500 run their workloads on our cloud, including TD Bank and AT&T chose Azure to shape the future of 5G with computing at the edge. We are building Azure as the world's computer with more global data center regions and now two in South Africa and more compliance certifications than any other cloud provider. And just last week, we announced two new Azure government regions to meet the stringent requirements for maintaining the security and the integrity of classified US government workloads. Every organization needs an IoT strategy to manage the 20 billion connected devices coming online by 2020. Our comprehensive Azure IoT platform enables customers to build, manage, and secure their connected devices. And our recently announced acquisition of ExpressLogic furthers our goal, bringing our cloud to more than 6 billion MCU-powered endpoints. BMW Group is partnering with us to speed the adoption of industrial IoT, both in automotive and more broadly in manufacturing. And Renault-Nissan-Mitsubishi Alliance and Volkswagen both chose Azure to fuel their new connected car experiences. Data and analytics is the foundation for building an organization's AI capability, and we're investing to make Azure the best cloud for data estates from data warehousing to real-time stream analytics. Daimler chose Azure as its new platform for big data and advanced analytics, and third-party analysts affirm our price performance lead in this fast-growing space. And we're investing to make Azure the best place to build AI. This quarter, we introduced new Azure cognitive services for fraud detection and image identification. Telefonica is using Azure AI services to create new intelligent experiences for their customers around the world and transform customer engagement. Developers will play an increasingly vital role in value creation, and we are committed to giving them the tools they need to be productive on any platform. GitHub surpassed 36 million registered users, and free private repositories expanded the opportunities for all developers, with private repo creation more than doubling this quarter. The new Visual Studio 2019 optimizes developer productivity and team collaboration. And I'm excited to share more about how we're empowering developers at our Build Conference in two weeks. Now to gaming. We're investing in content, community, and cloud to capture our massive opportunity in gaming, delivering record user engagement again this quarter. Microsoft Game Stack brings together our tools and services to empower game developers from independent creators to the biggest game studios to build, operate, and scale cloud-first games across mobile, PC, and console. Our Xbox Live community, now 63 million strong, is key to our approach, and we are enabling developers to reach these highly engaged gamers on iOS and Android for the first time. Our fast-growing gaming subscription service, Game Pass, is expanding our reach, bolstered by a growing pipeline of first-party content. And Project xCloud, our new game streaming service, will be in public trials later this year. In closing, I'm energized by our progress and incredibly optimistic about our opportunity ahead. Across all of our businesses, we are delivering differentiated value for customers and creating new categories of growth that position us well for the future. With that, I'll now hand it over to Amy, who will cover the financial results in detail and share our outlook, and I look forward to rejoining for your questions.