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Financial Analyst Meeting 2006
July 27, 2006

ANNOUNCER: Please welcome co-President, Platforms and Services Division for Microsoft, Kevin Johnson.

KEVIN JOHNSON: Well, good morning. It's a pleasure to be here. We created the Platforms and Services Division about 10 months ago, and I stepped into this role with my colleague Jim Allchin. Jim has got some other commitments. He’s driving hard on Windows Vista, and he's got some other commitments here today that he's working hard to get done and be back here by the reception tonight. So, he wanted me to send his regards and let you know he's going to try very hard to be here for the reception, so you have an opportunity to interact with him, as well.

Over the next hour I wanted to really frame what we're doing in the Platforms and Services Division in four key areas. First, a little bit of background on the division, and some of the leadership priorities that we're driving. Then I want to go through each of the three business groups that make up platforms and services, starting with the Windows client, a little bit of perspective on FY '07, and some of the revenue drivers and actions related to Windows Vista launch for Windows client. Second, is our online services business, certainly the opportunity for Windows, Windows Live, MSN, and building out the business in the FY '07 outlook. Then for our Server and Tools business, we'll lay the foundation for the opportunities we have in fiscal year '07, and I'll ask Bob Muglia, who runs that Server and Tools business, to share his perspectives on that.

Later today you'll hear a little bit more from Ray Ozzie about our online business, but I'm going to really try to provide some of the foundational, fundamental building blocks related to that business this morning, and then Ray will complement that with a deeper discussion on some of the scenarios and the technologies behind it.

So with that, let me just frame: As we created the platforms and services division, really our focus is how we build out the set of service assets and software assets that enable Jeff Raikes in the Business Division to create the digital work-style scenarios and Robbie Bach and his team in the Entertainment and Devices Division to build out the digital lifestyle scenarios. Fundamentally, our platform has to be successful for these other two divisions to build out scenarios and for them to get critical mass and be successful.

There are some key things, as well. This Platform and Services Division is very, very focused on the principle of putting the customer first and thinking about three key things to make the platform successful. For users we have to provide compelling user experiences. Some of the things Shanen showed you with Windows Vista, the work we're doing in Windows Live, the work we do in Windows Server, the users of these technologies and products—from a platform standpoint, there's a base experience that it has to create for them.

Second is the platform as an environment for innovation—innovation for the thousands and millions, millions and millions of IT professionals and developers and third parties that build unique solutions on top of this platform. We continue to reach out and really drive hard on the value proposition, and how we can enable those third parties to innovate and create the environment for innovation.

Third is clear business value, super-clear return on investment, whether it's business decision makers making technology decisions in their business or advertisers making ROI decisions based on their ad dollars. So, from a platforms and services standpoint, these three things are important: Are we delivering compelling user experiences? Do we create the environment for third parties to innovate? And are we driving clear business value to the specific audiences that we have targeted?

Now, there are some leadership priorities that I'm personally driving with the leadership team that I thought I would share with you: innovation agility, online service, execution and growth, and people. In the area of innovation agility, it's really about how we harness the rich resources we have in the company, but that we move faster, in a more predictable way to deliver innovation and technology to our customers in a more agile fashion. Now, we've taken some actions to help drive that. In March I announced a new organizational structure in the Platforms and Services Division that really had us organized by function, by business function.

So, we have business leaders leading the business aspects and the content aspects of our business, and engineering leaders leading the engineering aspects and really bringing the engineering discipline that we need to really drive this agility. We've created this thing we call internally the engineering framework. We've fundamentally looked at the Platforms and Services Division and structured an engineering framework around what we call six product and service lines: Our Windows and Windows Live product and service line, our server, developer tools, MSN.com, our Windows Live platform. And we've focused on these product and service lines.

Within each one we have specific engineering areas, and within each engineering area we've defined the feature/scenario teams. When we get down to the feature/scenario teams, we've got clear accountability. We look at what we're asking our teams to innovate and drive, and this is creating the opportunity to be more transparent about the work that's going on in the division. It's enabling us to reduce errors where we had redundant R&D or conflicts in R&D, and it's helping us be more disciplined in terms of how we're allocating resources and how we're executing.

The third area around innovation agility is Steve Sinofsky. As he stepped into his leadership role running our Windows and Windows Live Engineering group, he has retooled the planning process and is driving on that planning process. As we get ready to release Windows Vista, Steven is driving on the planning process in a way that gives us more clarity, and we get the resources aligned behind the things that are in the plan.

And then, finally, some leadership assignments that we've made help us with innovation agility. Bob Muglia is stepping into the Server and Tools business. Bob is a seasoned veteran in the company. Steve Sinofsky comes over from the information worker group to lead the Windows and Windows Live engineering function. Steve Berkowitz, senior executive that joined us—he was CEO of Ask—is running our online services business. These are just a few of the examples of getting the leadership in place. But organizing by function, the engineering framework, the planning processes and the leadership aligned by these functions, really with a focus is how we're driving against this goal of innovation agility.

The second is the area of online services. We'll have an opportunity to talk more about that. But it's really an opportunity to create new customer experiences, an opportunity to really unleash new partner opportunity, and a great area for us to innovate and extend beyond software to software-plus services. We are integrating services into everything we do. This is not creating a platform for third parties to innovate; it's about creating a profitable service additive business model, a new business for the company.

In the area of execution and growth, I think about growth in terms of how we grow the core, the core businesses; how we then expand into adjacent markets that are complementary to our core; and how we then embrace services and really drive into these new business models and business opportunities. We'll talk about that.

We're working on the execution side to have much better transparency, trackable metrics, and a much better rhythm within the Platforms and Services Division in terms of how we are driving that innovation, so that the R&D agenda is aligned with the business agenda; so that we're agile not only in the engineering area, but the investments and the actions that we're taking accrue to business value that we're trying to drive in the marketplace.

And then finally, in the area of people: It's not only getting the leadership assignments and the right people in the right jobs, it's really around how we're shaping the culture to push decision-making out, empower people more, and continue to attract and bring the great talent that helps really drive this company. And we're going to continue to focus on that in a very, very strong way.

So that's a little bit of perspective on, as we look at the Platforms and Services Division, the leadership agenda. I want to transition now into the Windows client business and give you some perspective there.

Now, the first question many people ask is: How are we doing on Windows Vista? And in March, we announced Windows Vista—the target is availability in November for business customers and in January for our consumer launch. And we will ship Windows Vista when the product is ready. Product quality is job one. We go milestone by milestone. We had a great beta 2.0, as Shannon mentioned—two million downloads and users of beta 2.0. We are incorporating that feedback. The teams are working very hard on release candidate 1.0 builds. We're working to drive towards release candidate 1.0, which is our next milestone. And at this point in time, there is no data or information that says we are not going to make the November business availability or the January consumer availability. However, we're going to ship the product when it's ready, and we're just going to take it milestone by milestone. So, right now, release candidate 1.0 is the next milestone, and we should expect release candidate 1.0 this quarter.

Now, if you look at FY '06 performance, PC marketplace grew 13 to 14 percent. Our Windows client revenue grew about nine percent. And there are some fundamentals that I wanted to just frame for you as we look to FY '07. I want to frame the fundamentals around the PC market and what we think will happen there. Then certainly as we launch Windows Vista, it's not just about generating the broad user excitement, it's about amplifying value that we've put into some premium SKUs. Third, then, is looking at the value proposition for genuine Windows—I’ll talk a bit about that. And then finally, some of the things that we're doing in emerging markets that may not drive a tremendous amount of revenue in fiscal year '07, but they lay the foundation where I think we're going to see continued growth going forward.

So, let me take you to the PC market. PC shipments next year: In our forecast here we think would be between eight and nine percent. So, we see PC shipments slowing, PC shipment growth slowing. And if you take the midpoint of that growth, that means there will be about 225 million PCs, roughly, shipped in fiscal year '07. Now, what I've done here is broken the world down into fundamentally U.S.-Canada, Western Europe, Australia, Japan—which were categorized as developed markets in this particular analysis—and "rest of world," which were categorized as "emerging markets." And I show where we think the mix of both PCs in developed versus emerging, and I show the mix of consumer versus business PCs.

Two important trends to note here are: Number one, the mix is shifting to emerging markets. You see that emerging markets growth will be 13 to 16 percent of PC growth in fiscal year '07, and developed markets will be about half that. And so you see about one point of mix shift going into emerging markets, and we anticipate that that mix shift will continue as you look beyond fiscal year '07.

Now, what are the implications to the Windows client business? Well, there's a higher level of genuine Windows attached to PC shipments in developed markets than emerging markets, which means, if we want to continue to drive growth of Windows client OEM units faster than PC shipments, we've got to have a great compelling value proposition for the user for genuine Windows software and for the channel.

The second trend to look at here is consumer growing mix. In fiscal year '07 we see basically a fundamental point of one point of mix shifting from business PCs to consumer PCs. And so what are the implications there? Well, certainly in business we have a higher mix of premium SKUs than we do in consumer. And so this is an opportunity to look—as that mix shifts—how we have a compelling value proposition both for business as well as consumer on the premium mix standpoint.

So that gives you a little bit of perspective on PC shipment overview, which frames some of the key things that we've got to go drive in fiscal year '07 for the financial plan.

Now, as we launch Windows Vista, look, job one, is: We're going to shop a quality product, and when we market and launch this, it's about generating the excitement and the momentum and the enthusiasm around the world for Windows Vista. There is something for everyone in this product. If you're a user, if you're an IT professional, a developer, an information worker—there is something for everyone in this product. But, as we go generate that excitement, we want to ensure that we also communicate and market the compelling value proposition around our premium SKU mix.

And in fiscal year '06, if I look at the total premium SKU mix of business and consumer all up on PCs, we were about 52 percent. So the question is: How can we drive that even further? On the consumer side, with our SKU of Windows Vista Home Basic—Home Basic is the easy-to-use, reliable and secure version of Windows for households with basic PC needs. It's a great product; it's a great foundation. We then look at Home Premium, where we add additional experiences and value. The arrow user experience with the glass, Media Center, pen-and-ink computing, Windows Meeting space, and better back-up and restore. So we've got a differentiated value proposition going to Home Premium.

Then from Home Premium to Windows Vista Ultimate we have additional value. Think of it as combining the best of business with the best of home. So, we now layer in a few things such as remote desktop, group policy, domain join as well as some nice extra surprises that you will see when we launch Windows Vista. So, having that compelling value proposition and being able to drive mix shift to higher premium SKUs is one of the key aspects of our execution plan in the next fiscal year.

On the business side, Windows Vista Business is designed for the needs of all businesses. Now, we do have an opportunity today in small businesses—oftentimes our Windows Professional mix in small business is not as strong as it is in enterprises. So with Windows Vista Business, we've got some very specific value that we focused on to help small businesses start, grow, and thrive. And so that's an opportunity for us to grow premium mix.

But you build on top of that. You build on top of Windows Vista Business with Windows Vista Enterprise. Now, Windows Vista Enterprise is really optimized to address the deployment, the management and security needs of large global, complex organizations. It includes additional features, such as multi-language support from a single image; BitLocker that was shown here to help secure data, whether it's mobile PCs or data on drives within the firewall; and we provide virtualization support—up to four virtualized licenses on single PC. Now, I will note Windows Vista Enterprise SKU is available exclusively as part of Software Assurance. And we have seen Software Assurance renewals fundamentally are tracking at some of the highest levels that we have seen in several years. And we're seeing also lots of new Software Assurance customers leading up to Windows Vista launch. So, we feel like we have a compelling value proposition, and we have to continue to execute in our outreach to customers to articulate that value proposition and ensure that we are helping them take advantage of that through their Software Assurance agreements and adding the Windows client component.

Now, as far as pricing, we will announce pricing for Windows Vista as we get closer to availability. We don't expect significant changes in our pricing strategy. However, Windows Vista Ultimate is a new SKU, and we will sell that at a modest premium versus today's offerings.

So that gives you a fundamental perspective on the value propositions of what we're trying to drive in the SKUs.

Let me now transition to genuine Windows. A key focus here is ensuring that we have a great value proposition for customers who are genuine Windows. So we built a set of features and a set of functionality that is only available to genuine Windows customers. Windows Defender, for example, the anti-spyware for Windows XP and Windows Vista, is available to genuine Windows customers. Windows Media Player 11.0, Internet Explorer 7.0, will be available for download for Windows XP customers who are genuine, and of course those are built into Windows Vista. Future updates to Internet Explorer and Windows Media Player for Windows Vista will require them to be genuine. And certainly there's some premium features built into the Windows Vista operating system that will require genuine validation as well. So we're really trying to amplify the fact that being genuine enables the set of benefits and value to access these types of features and capabilities.

Now, in the last 18 months we have validated over 300 million PCs. And one of the interesting things, of the users who went to validate that they were genuine and found that they were non-genuine, fundamentally a third of those thought that they were genuine. They didn't recognize that they were non-genuine. And so the key is we've got to make a very simple, easy process for them not only to get validated, but also a very simple on-ramp for them to become genuine.

So in the validation area we've built into Windows Vista an automated process to really help them do that genuine validation. And if they find out that they are not genuine Windows, we have a very simple, easy on-ramp for them to get genuine. They basically can go through an online process, and just click that they want to purchase a special Windows Genuine Advantage SKU for this purpose. We provide them then the product key, and they basically turn that license into a genuine Windows license.

So really focusing on this is a way to help drive a value proposition, make it easy for people to find out if they are genuine, and a very easy on-ramp for them to get genuine, if they're not.

The other part of Windows Genuine Advantage is really focusing on the channel, and helping our channel partners sell Genuine.

Now, we've done three things here. We've put more feet on the street in terms of our OEM sales force reaching out to system builders, and we've really focused on sales training for these partners.

In China alone, for example, we have trained approximately 8,700 OEM channel partners on how to market and sell the value proposition of Genuine Windows. If you look at the individual sales representatives that have been trained in China alone—it was about 130,000 OEM sales representatives—includes retail, reseller, and distributors that were trained on how to sell the value of Genuine Windows and how to really articulate the value proposition to users, and help make sure that they have a great experience.

So this is really about not only having a value proposition to the user, but a great value proposition to the channel.

Now, if we execute well on this, we should be able to see Windows units grow slightly faster than PC shipment. In fiscal year '07 we saw Windows OEM units grow a point, point and a half faster than PC shipments, and I think we've got to continue to focus on this through these actions as we go into fiscal year '07.

The third area on the Windows business is some work we're doing in emerging markets. And these may not have dramatic revenue contributions in fiscal year '07, but if you look at, fundamentally, at this continued mixed shift towards emerging markets, the fact that there's roughly 850 million PCs in the installed base, and more and more of those PCs and new Internet users will come in these emerging markets—we think it's important that we're laying the foundation for how we're continuing to innovate and provide value there.

There's two shared-use scenarios I'll highlight for you. In India, our Microsoft Research organization in Bangalore is really partnering with some other organizations on a project that is focused on deploying 50,000 kiosks through partners to rural India. And they've experimented on this in a variety of ways: the information kiosks with fixed wireless connections, and some microfinancing systems so they build a little bit of a business model around this in the village, and today we've rolled out 1,500 of these kiosks. And so we're bringing technology to new users in India and rural villages.

In China, we partnered with Internet cafe owners and we created a shared computer toolkit to really help these Internet cafe operators not only use genuine software but help them do it in a way that lowers their costs of operating these shared computers and provides value to their users by having a more safe, consistent, and rich computing experience based on Genuine Windows.

These two actions on shared use are scenarios that then create more users and more opportunity to reach out and deliver those experiences.

The third one is of innovation not only in the technology but in the business model. And we looked in emerging markets and saw that in many cases, people were acquiring things through points cards—cell phones, for example—they get their cell phone and they'll buy a points card to have so many minutes on their cell phone. When they run out of minutes, they buy another card.

So we adopted that model and said, how would we apply that with the personal computing experience to create a pay-as-you-go model that's very similar to the way that people buy cell phones there? So the concept was this: Suppose there's a personal computer that's $700 to $725, and instead of selling it for that price, it's sold at retail for, let's say, $350, $360, half-price. But that in order to use that, the customer has to buy points cards, prepaid cards that give them minutes. And that as a PC operates, as they start to run low on minutes, it flags for them, they're able to go down and buy another points card as they have the income and as they have the need, and then they continue to buy those points cards until—and they replenish minutes—until they've fundamentally paid for that particular machine with the interest. And so we've partnered with PC manufacturers, with the chip manufacturers, with retail, and with the bank.

Now we piloted this, we did a market trial of this in Brazil in April of 2005. We partnered with HSBC on the financing side, and Magazine Luiza is a PC manufacturer, retailer side, and we found that they were able to sell 1,000 of these PCs very rapidly. It exceeded their same-door sales at this retailer. And that shows that there was demand here and we've been tuning that particular model, and we're now planning to expand this to some new countries—Mexico, India, Russia, and China—in the next few months.

So this model not only reinforces Genuine Windows, but it's got a new value proposition in terms of a payment model and a business model with partners that can help really expand the sales of first-time PC usage to this growing middle class in these emerging markets.

Now how does all this roll together to build the financial view for the Windows Client business? In fiscal year '07, we projected revenue in the range of $14.3 to $14.5 billion. This represents an 8 to 10 percent growth. I mentioned worldwide PC shipments—growth in the range of 8 to 10 percent—and you can see the consumer PC mix growing faster than business PC mix, and that the OEM Windows units growth will grow slightly faster than PC shipments, assuming we do a great job executing on Windows Genuine Advantage.

Our opportunity in launching in Windows Vista is to generate significant excitement and enthusiasm and to articulate compelling value in the premium mix of higher-end SKUs. And if we do that well, hopefully we would see an increase in premium SKU mix; and some of the business markers I show you here, which show us having premium mix for business and consumer together in the range of 52 to 54 percent.

So that's a little bit of perspective on the Windows Client revenue. There are some investments and some things we've got to do there. The financial plan this year—we should see some increases, we will see some increases in cost of goods sold, driven by a couple of things. Building the full-package product for Windows Vista—there are some costs associated with building the FTP products and shipping those out to the channel, and we will have some increased product support services costs to fulfill our obligations of support for those customers upgrading.

We will have some Windows Vista launch-related expenses that will hit the Windows Client P&L this year, and we're going to have continued focus on the Genuine Windows push, which includes our sales and program coverage that we have reaching out to channel and training the channel, the marketing work we do to really amplify the Genuine Windows experience, and that will show up relative to the set of investments that we're layering into fiscal year '07.

Let me now transition from the Windows Client business to the online services business. And let me just start—that the online services business really is this foundation to go beyond just software to software plus services. Now what do I mean by this?

Look, I believe the software industry will continue to grow. It will continue to grow because there's so much more that software can do, so many more devices out there that depend on great software. So the software industry will grow. What will happen is this new opportunity in the services industry will complement that growth in the software industry. So it's not about all software, it's not about all services—it's about software plus services, and how we complement the user experience, how we create a broader audience and we embrace new business models.

So I frame right here, number one, it's about audience. Can we expand the reach? There are over a billion Internet users on the planet today—is there an opportunity to really continue to grow that and expand as we get more people using services and more people experiencing not only the products we have, the software products we have on the platform, but those software products plus services?

Number two, it's about having personalized user experiences, very deep, rich experiences, so that the broad audience utilizes a broad range of services in a very deep, impactful way.

And the third is about the business model and the monetization. So certainly, if you look at the online services area, there's online advertising—I'll spend some time talking about that; subscriptions—I think in Jeff's, when he talks about Office Live, he'll talk a little bit about the online advertising and how that then transitions to subscription value; and then transactions—when Robbie, I think, goes through Xbox Live, he'll have a view on how the transactions system.

So those are three important business models. But it's really about embracing this in a way to capture new opportunity for the company. Now what could that opportunity look like?

Well, I show here an industry assessment of the worldwide advertising industry in fiscal year 2006. Estimated at $580 billion worldwide, $27 billion of that going to online. And that $27 billion that goes online represents about 5 percent of the total advertising industry.

Now if you look at various industry studies, they estimate between 15 and 20 percent of all media is consumed online. And it's even higher in countries like Korea. There's a trend of more and more media consumption being done online, and if you look—for example, in the U.S., they say 18- to 24-year-old males spend 30 to 40 percent of their media consumption online. So there's this growing trend.

Now if you look at say, 15 to 20 percent of media is consumed online, yet 5 percent of ad dollars are going online, what do you think is going to happen? Well, analysts—and we agree—predict that this online advertising market will double in the next three years to be greater than $50 billion.

And so you look at that and you say, that's a big opportunity. But then you look and say, why is Microsoft uniquely positioned for this opportunity? Well, we are making a broad set of investments. And let me tell you why I think we're uniquely positioned. Number one, we have a software platform on a broad range of devices—850 million PCs in the installed base; next year, another 225 million PCs will ship. There are over 14 million Media Center Editions in that PC installed base, and growing. Sold over 6 million Windows Mobile phones in the last year. We got 24 million Xbox in the installed base before we get Xbox 360, and we look to have another 10 million units by the end of 2006. So let's say there's 24 million units of game consoles. IPTV is coming—we've got many pilots under way. And this is going to affect millions and millions of people.

So we've got a software platform on a broad range of devices—phones, game consoles, PCs, televisions, servers. That's number one.

Number two: We are in the business of creating experiences—user experiences that come with Windows, the user experiences that come with Windows Mobile, with Office. Developer experiences—the way we reach out to developers with Visual Studio and our toolset—we create experiences for those developers. Business users, whether they're using Office or the Microsoft Dynamics suite—we are in the business of creating users.

Now what this does is, it creates multiple entry points, lots of users and rich experiences. So the set of investments then, say, how do we extend those experiences from software to software plus services? So it's a combination of breadth, millions and millions of users and then depths of experience, how do we reach out and really create seamless integrated rich experiences that complement the experiences that these users have on these devices and with our software today, and how do we really reach out to them?

Now we are working from a large user base of services today. We are uniquely positioned with over 320 million Live IDs—unduplicated accounts, these are Live IDs, people that they sign in and they've used at least one of our services in the last 30 days. We are uniquely positioned.

Our communication services: Messenger is now over 240 million users, Mail over 260 million users, Spaces over 120 million users. In our program content area in MSN we've seen page views grow over 32 percent. We've got new categories of Live services, and we're complementing that with some subscription services such as OneCare.

Now, as Ray comes up later today, he's going to frame a taxonomy for these services, and how we're going to go very deep on complementing not only the broad range of devices and these entry points to the Internet, but the set of experiences that we create on software that runs on those devices, and how we extend that to experiences that we now complement through services.

Now, the third area is looking at search. We've got the multiple device platform, a broad set of experiences. We're going to extend and enhance those with Windows Live and the Live experiences. This creates more entry points for search.

Search is not just a destination, search will become a utility, a programmable utility. Search will be woven into the fabric of these user experiences.

Now, what have we seen in this area? At our MIX06 conference in March we had a simple thing. We announced something called search macros, programmable search, very simple thing, we weren't sure what the reaction from developers would be, but since that conference there have been over 1,500 custom search macros, basically search utilities that have been written and posted to us. So we really believe in this concept of search becomes a utility, a programmable utility woven into the fabric of these experiences.

Another example: Enterprise search. It's not—you know, within a business it's not just about search, it's about being able to find, use, share and use the information that you have, not only within your company but over the Internet. That information may be in structured data, like databases. It might be in a SQL Server database. It might be in your SAP data, your Siebel data. It might be unstructured data. It might be on your SharePoint. It might be on your PC. It might be on your colleague's PC. It might be on the Web. But providing a single entry point through our Windows Live Search Center that helps search structured data, unstructured data, your desktop, your servers, your SharePoint, your SQL Server databases, your applications and the Web. It's an example of search becoming utility and woven into the fabric of these experiences.

Now, to give you a little flavor of what we're doing around the Live experiences, I'm going to introduce Darryn Dieken to give you a little demo and show you a little bit of the work that we're doing in this area. So, Darryn.

DARRYN DIEKEN: Thanks, Kevin.

Good morning. This morning I want to spend a few minutes and really show two things. Number one is how Windows Live helps people organize, personalize and share information with their friends and family. And number two is how the Windows Live platform enables what we believe is significant technical and business value and opportunity for the developer community.

So let's get started. What I have up here is the Windows Live home page. Now, I've personalized this with the information that's relevant to me, and it's one of the key entry points that I have into the Windows Live services. So you'll see on here that I've customized it with information of the local news from MSNBC, my weather forecast—and I just love this, because it's nicer today in Seattle than it is in Orlando, where I was last week—stock quotes, all kinds of different information.

I've also embedded my Windows Live Mail, so you're able to take other services around Windows Live and embed that directly into my home page. So now I have one snapshot of the information that's pertinent to me on a daily basis.

So one of the things I like here is in the stock quotes—I'm a GM shareholder; I love GM cars—so what I'm able to do here is, I see GM's up a little bit. I know they've just announced earnings. So I'm going to go into the Windows Live search and type in GM, and it will return a lot of different information, ranging from what are the cars, what are the cars—let's see, I got ahead of myself here a little bit—a lot of information.

Well, what I've done here is I've run one of the search macros that Kevin talked about. And what a macro did in this case is, I asked it, because we're with the financial analysts meeting, to only filter my search results based on financial data on the Web. So here you'll see it return data from Yahoo Finance, from CNN Money. There's some data down here from Morningstar, from a bunch of different services.

Now, today, as Kevin mentioned, there's over 1,500 of these. In the future we'll make it easy for even general consumers to create these, to be able to filter search results based on your site, based on the content on the page, based on the document type, a lot of different information.

If I go to the Windows Live Gallery, it has a listing of all the different macros that are available. And you'll see here there's macros for shopping for books, for classical guitar music, MSDN for developers to find technical documentation on Microsoft APIs and things like that. So it's a great way for users to really have programmable search and to control the results that come out of search using Windows Live.

You'll also notice here there's a concept called gadgets, which we also talked about at the MIX conference. Gadgets are a way for developers to create mini-applications and use those within the Web pages. So you'll see back here on my Windows Live page, I have the MSNBC gadget here, and these are all gadgets, where MSNBC in this case created this, and I was able as a general user to drag it onto my page and get access to that within that integrated environment. There's over 350 gadgets that the developer community have already created, and those are up on the Windows Live Gallery.

The other nice thing that we've done is, not only can you use the gadgets and enable developers to create them on Windows Live, but I'm also able to use them on Windows Vista. We have unified the gadget framework between Windows Live and Windows Vista, so you see now where I took that MSNBC gadget, clicked on it, and it installed it locally on my Windows Vista desktop. So now I can have that information available to me not only within the context of Windows Live, but also within the context of my Windows Vista desktop.

And we're taking it even farther. In August we'll release a new version of Windows Live Spaces. The Spaces will also support the gadget framework. So gadgets really give users the ability to personalize the content that's relevant for them, whether it's on Windows Live, whether it's on Spaces, or whether it's on any other site, Windows Live site. And we're even taking that to developers so they can create the gadgets, but they can also host the gadget framework within their sites and have access to all the gadgets the developer community creates and really create an ecosystem around these things.

So here you see the new redesign of Windows Live Spaces. There's quite a bit that we've changed on here. You'll notice a new redesign, all these different gadgets here. I have a profile of myself, information that's relevant. Here you'll see over here a book list. Now, that book list is coming from Amazon. So I've gone to Amazon, created my favorite book list up there, but on my personal space I'm now able to share that with my friends and family on my page.

Now, using the gadget framework, Amazon could take this a lot farther. These are mini-applications. So, for example, if they wanted to create a buy button and put it next to that book, when my friends and family came to my site, if they wanted to buy that book, they could simply push the button and have it added to their shopping cart at Amazon. So it gives a lot of flexibility to developers.

I've integrated my blog into my Web site. Spaces is the number one blog site on the Internet, with over 120 million unique users every month, which is pretty big considering how long it's been out. Now, we're extending that in the new version of Spaces to add more social networking features. Here you'll notice that I have a Friends gadget. Well, this allows me to take my friends, who have allowed me, entrusted me to publish their contact information on my site, to list it on my site. This opens up the 12 billion contacts in the Windows Live platform to the broad community and allows more social networking features within this site.

So here you'll see, if I click on one of these, I can get access to more information about those contacts. So if I'm accessing my friend's site here, I could view their contact cards, I can view their friends list, I can view their Space, their profile. If I click on their Space, it opens up their Space and there's even more information, and I can see their friends, et cetera. So this really allows me to expand my trusted circle of friends and improve my network.

So next what I want to do is, I've spent a few minutes talking about Windows Live and the platform around consumer services. Let me spend just a minute on what we're doing in the enterprise. As Kevin talked, we think there's multiple entry points for search. One of those is Windows Vista that you saw earlier. Another is within Office. But one of the scenarios for enterprises is they have a lot of different data in a lot of different places. So with Windows Live Search Center that we announced a few weeks ago, I'm able to not only use the data on my desktop, but I'm also—I'll type in—I'll search for some data and it automatically filters that data. In this case I'm searching my desktop, so you'll see here I have a contact that deals with fitness bikes.

Here I'm able to see a PowerPoint presentation. I'm able to see items out of my mailbox. So I get one unified view. But not only that; I can go out and search my team's SharePoint sites and pull data off of my intranet on SharePoint sites and have access to that, or I could use the Internet. I can also get information from different—I can limit it based on file types. So if I only want to see PowerPoint presentation or e-mail message, things like that, I can have separate views per SharePoint. I can unify all those views together. So it gives a great, rich experience. And you notice here, as in Office and as in Windows Vista, we gave great previews so that I don't have to click on each of the links and then go back to find the information. I can do live previews directly within the Windows Live search center.

So that's a quick glance at Windows Live and the Windows Live platform. Over the last year we've released over 20 Windows Live services in beta. By the end of this summer, over half of those will ship to the public. And we have several more in the development pipeline that will be coming in the following months.

So just to wrap up, Kevin, what I've showed is how Windows Live helps people organize, personalize and share information with their friends and family and how the Windows Live platform enables both technical and business opportunity for the developer community.

Thank you. (Applause.)

KEVIN JOHNSON: Thanks, Darryn.

So it gives you a little flavor of the experiences and how we look at this as being a broad set of investments to create the experiences that make this a programmable experience for developers as well as users.

Ray's going to talk a little bit more about the taxonomy for these experiences. But just keep in mind, Windows Live is not only a set of experiences. It is also a platform for Microsoft and third parties to build upon. Our heritage is about the platform and our ecosystem is focused on how we build that platform. We're very good at that. We intend to continue to do the same with our focus on these Live services.

As we look at what we're doing with the Windows Live platform, certainly extending the experiences and being able to run on that platform, the authentication, the storage, the messaging, creates a programmable environment, looking at how our developer tools can now enable developers to build on that. And that is an area of investment.

But there's a final fifth piece that I really want to highlight here, and that is our work in adCenter and creating the advertising platform. Two years ago we made a strategic decision to build this platform. Certainly it was a hard decision. We took the decision to move off of Overture and get on our own ad platform. But we took a long-term view in R&D. Now, we're further along at this point than we thought we would be. Last quarter we achieved 100 percent of our U.S. paid search traffic on adCenter, and we continue to grow the advertiser base.

The great thing about having this implemented now is that every day we can get the flash, coverage, click-thru rate, price per click, revenue per search. And every day our developers are tuning. They're tuning the algorithms. They're watching how this works. And every day our business people are bringing more and more advertisers to this network.

We're going to continue to grow this advertiser base. We're going to continue to get feedback and we're going to continue to enhance our advertising platform in unique ways that we think differentiate us from our competitors and from others in the marketplace.

And to give you a little flavor of what we're doing in adCenter, I'm going to ask Yusuf Mehdi, our chief advertising strategist, to come out here and give you a demo and show you some of the unique things we're doing in adCenter.

Yusuf.

YUSUF MEHDI: Thank you, Kevin.

We're investing over hundreds of millions of dollars to build Microsoft adCenter, which is our next-generation online ad platform. And we launched two months ago, and the success so far with the early version is pretty fantastic. In fact, we passed our first million-dollar day on adCenter ahead of schedule from what we'd expected. And while there's still a lot of work to do, we're seeing the RPS gap closing from what we needed, going pretty fantastic.

Now, as we go forward on adCenter, we have a couple of major goals. The first is, of course, to continue to innovate on the technology and provide superior ROI to advertisers on the core system. So we have a huge amount of engineering investment to grow, perfect the models, do better matching, provide better advertisements.

The second goal is to broaden the overall inventory that we put into the system, going across all efforts that we have at the company that make sense: Office Live, Xbox Live, Windows Live.

The third area is to bring on advertisers, to make it simpler and easier for people to buy online, and to tap new opportunities within the marketplace.

And so, I'm going to show you four things today to give you a sense of how we're going to go tackle those things. The first thing I'm going to show you Microsoft adCenter, and show you some of the things that we're doing there that are technically advanced and not found on any other system on the Internet, and why it's driving the success with RPS the way it is so far.

Second, I'm going to show you a prototype of what we're going to do within the next 12 to 18 months to go off the Microsoft network, and go out to publishers, and bring those folks on to the adCenter system to grow the inventory, and to grow the advertiser base.

The third thing I'll show you is how we're going to take advantage of the opportunity and the software and devices Kevin talked about to go to new things like phones, TVs, and in this case in particular Xbox to take a leadership position in the area of online gaming.

And last thing I'm going to show you how I'm going to open up new markets like video and TV with some of the investments.

So, let me start first by showing you here Microsoft adCenter. And I'm just going to show you a couple things. Here I'm within a campaign for a doctor, we'll call him Doc Bren and I'm partway through the workflow here. I have all my keywords that I'm buying, just like most systems that are available today, you can see the bid, spend, impression, click-through rate. But one of the things that is pretty unique with our system is, we bring two very big differentiators relative to any other system out there. The first is the ability to have better and superior audience intelligence about the keywords you buy. So, in this case, Doc Bren is, let's say, a specialist in the heart area. He's going to buy some keywords. He's going to buy cardiologist, he's going to buy, let's say, heart attack, heart disease, American Heart Association, and we can maybe add one more just to get some volume here, we'll add, say, top doctors. And what we can do now, and you can't do this on any of the other systems is, when we click show charts, it will use that Live ID that we have that Kevin talked about, hundreds of millions of those in some of the registration data, plus some additional data, to come in and get a few pieces of information.

The first thing we can see just from the historical context is the number of search and the traffic pattern. And you can see here there's a dip on the weekends for these particular keywords. So, as a doctor, he's trying to get traffic to his local practice, he says, well, maybe the weekends are not a high time to advertise, because I get a low response rate. When he clicks age and gender, here you get very unique data. We actually get insight into who it is that's actually typing these keywords in, at least not by individual name, but by an aggregate, what are their demographics, how old are they, are they female, are they men. As you can see here, we've got the peak spot at 26 to 35 men and female roughly equally split. I can look at sort of geographical, and say where in particular is this coming from around the country. And so if I can come in and take a look, there's a lot of searches coming from San Jose, a lot from Atlanta, and this is basically data that's happened over the last 60 days. I can look at things like wealth index, where it's a wealth index of people searching for that. I can look at lifestyle information, you know, is it white collar income, is it retired.

And the thing that we can do with that that's amazing is, then, let's say that you're buying your campaign, and say, well, gee, I need some more volume in my campaign, because I need more than just 1,500 searches a week. So, I'm going to add the word health, because I know health is just a generic and gets a lot of traffic. You can buy that. The problem is, you don't know what is the value of that demographic, how good is that. So, when I come in and take a look now, you see the traffic basically doubles. But when I click age and gender, what you'll see is, it starts to SKU much younger. So, you start to get better advice about what's going on with your campaign. This delivers better ROI. You can do this individually as an advertiser, or you can let our technology and systems just take over, and as we're running your campaign, we will smartly tune to get you better results. That is something that you can't do on other systems, and that's part of why we're driving success with RPS.

The other part of that that is also unique is that you can do time and daypart targeting. So, for example, I can come down here, and I can say, I want to price more for those cities that are really searching, for San Jose, I can pick particular age groups, and I can say boost my bid I pay for those. I can boost more for male, if I think that's a particular problem. And I can do days of the week or targeted hours. So, I can say, for example, in this case, I'll pay more, I'll pay double for a man between the ages of 25 and 50 during the work week who lives in these cities, and then optimize your campaign in that way. That's a unique feature. That's part of what we're doing in adCenter. How we'll go forward is we'll invest more and more in those areas to drive superior ROI.

The second thing I was going to show you is sort of the next steps of where we go beyond, and how we go off network. There's a prototype of the next generation of our system, contextual and syndication, and I just want to show you really briefly here how we use the system to do some additional things. So, first, I can come in and I can actually select parts of the network. So, instead of advertising across all the networks, we'll give you much better control to say, hey, I want to advertise on MSNBC or MSN Shopping because it's a higher quality audience. I can come in here, and in addition to the text ad that you can see here now, I can add image ads. An important thing to take away here is, it's just so simple that it's built right within the existing system. This is part of how we architected the system to work easily. And then I can come in and do matching. I can match by keywords, and then we'll do some things that you can't get in other systems, again, these are things that you don't see in other systems today. We can match not just by keyword but by category, and in particular by Web site. So, if I'm looking for luxury cars in this case, I can just check one box and then we'll do all of the work to find appropriate keywords and to match them. And, in fact, I can actually choose Web sites, and I can say, well, I want to really have my ads show up on LuxuryCars.com, or SportCars.com.

And, finally, when I come into pricing, we separate sort of the search marketplace from the context marketplace. One of the things we've heard from advertisers, they say contextual doesn't perform as well as paid search within that search context. We've separated that out and made that simple for people.

So, those are a couple of things we're doing there to really show you how we're going to advance and move beyond the basic search. Now I want to show you the third part, which is how we're going to go on into new areas. And, in particular, I want to show you the Xbox system and what we do there. A couple of points about why we think this is a pretty hot space. Today, there are roughly 120 million gamers in the United States over the age of 13, and 70 percent of all males between 18 and 35 are gamers. This is an incredibly hard audience to find if you're an advertiser. You almost can't find them on traditional media in any way, on TV or any of these other vehicles. In gaming, they're there, and they're proficient with the time they spend.

Xbox Live, which has been a big success, and Robbie will talk to you about the number of hours that are being spent on there, has today already now gaming within it. What you can see here is within the Xbox Live tab, I can come in and we have Tom Cruise MI:3 promotion. If I click the marketplace where I go to a place to buy games, you can see a sponsorship from Verizon, and these are live ads that are in the system today. And, in fact, if I want to download a game, like a race car game, Cadillac is in there for the PG3 Car download. So, within the current system of how you use it, we're already downloading advertisements and providing some capabilities for this very rare audience.

Now, to take that to the next level, we recently bought Massive, which is the leading online ad game player on the marketplace. They actually have almost no peer out there. And we're bringing their technology, and our adCenter system to take advertising to the next level. I'm going to show you a video of what is going on today with some very popular games in terms of advertisement. Let's go ahead and roll that video and take a quick look at that.

(Video segment.)

So, here you can see the ads. There's an ad there for Surface. Here's the Honda Element. And this is in the Tom Clancy's Splinter Cell. There's Coca-Cola. And one of the things that we found is that consumers actually say that they prefer to have real ads in the games — there's Castrol Synthetic — because it gives them a better sense of realism of the ad. So, consumers are happier in these cases. Here's Tokyo Race Driver 3. This is obviously a great place to advertise what, car insurance. Progressive. So, you get a sense of how it goes there. So, we can stop the video there. But what you get a sense for is the ability to drive better consumer excitement, because they get more realism. You can drive rich, immersive advertising. In fact, just this week we announced an interactive unit that lets game player actually interact with the advertising, a 2-D form, full-motion video and audio.

If you think about the world between TV and PC, on PC they're very bland text ads, but you interact. On TV, you're in the 10-foot, and you're sitting back and you're watching, but you don't interact. Here you get the best of both. Online gaming is a very hot area; between Xbox and the acquisition of Massive we really are the leader in this space, and they're going to drive very strongly.

The last thing I want to show you is in the area of video. One of the things that's exciting for us is that when Kevin showed you some of those numbers about the online business, we didn't even talk a lot about how we're going to open up the area of brand advertising and video advertising. This is a huge thing that could further grow the $50 billion to drive things like perception change.

When you think of Volvo you think of safe; what kind of advertisement do you need to drive to do that? Video is a big part of that, and video advertising is a big part of that. Our vision is to go beyond just running standard TV clips, or standard video ads in stream; we want to provide the same degree of interactivity and richness to take advantage of our IPTV platform, our Media Center Edition, our client software to bring interactivity even to the TV advertisements so they're more engaging.

So this is a prototype of a set of code that our Microsoft Research Labs has built. We have a whole research lab called Ad Labs that is doing innovations in the future of advertising, and this is a prototype they've built to take advantage and make some interactive advertisements. So here, for example, is something here, the scenario of course you've seen before is you're watching James Bond drive that car, or Tiger Woods swing that club and you say, hey, what is that product he's using. In this case I'm trying to find something about fashion, which I'm not that up on. I can come in and I can take a look and say, what is that suit. And by hovering over you can program the interactivity.

For example, if I'm going to say, let's take a look at this guy running, this is a pretty cool coat, I can see that, click on it, and while I'm watching the video we can pause the video, we can pull it to the right and I can go out and see that's a Vintage coat, and if I want I can go out and actually buy that coat online. So the idea there is to make the thing more interactive, and more immersive for people, so it's actually adding value to them, so it's not this Tivo thing where you're skipping ads, it's where you want to interact and get value when you need it, in a subtle and direct way.

Those are the couple of things I wanted to show you. In summary, we're investing very hard on adCenter. Our progress is going extremely well, and we're excited. We are going to do a lot of work to go beyond and take leadership in these new areas that Kevin talked about. And finally, there's a lot of work to do, but we're very excited about the opportunity as an overall business for Microsoft.

Thank you.

KEVIN JOHNSON: Great, thanks, Yusuf.

So I've outlined some of the investments that we're making, whether it's in the work we're doing to extend the experience from devices to live experiences, building out search as a programmable utility, the Live platform, adCenter, content in MSN. You look at this and you say, hey, why, Microsoft, will you win? Well, there are some key reasons. If we look at our commitment here, this really is about a disruptive business and technical platform. We know about that, whether it was the PC disruption, the graphical user interface disruption, the Internet tidal wave, .NET, and XML Web services, and now this whole way to complement software plus services in the era of live software.

We are a company with thousands, and thousands, and thousands of partners. We know how to work with partners, and we're going to reach out whether we continue in our focus, as we're working to continue to work with hosters, systems integrators, publishers, developers. We are a company that is about creating experiences, superior end user capability and breadth. We are driving the richest client platform on the planet, and for all Microsoft customers using those experiences, these Live experiences should be the simplest, most logical landing path for them.

We have a relentless focus on advertisers, we're listening, we're reaching out, we're hearing their feedback, we're innovating and delivering unique, compelling return on investment value propositions to them, and we've got a list of ideas and things that we're going to build into adCenter, and continue to really advance that platform that is at the heart and soul of unleashing this disruptive business model.

Then finally, we are really focused at not only scenarios for users at home, but winning at work, whether it's weaving search as a programmable utility into the fabric of how people work to find, use, and share information, and how we make a compelling value proposition for people at work. We see a future where search becomes a utility, a programmable utility. People ask me about game changers, the next wave of innovation in services and search will be around the developer and advertising platforms. And we are very good at building platforms.

How do we translate this investment into disciplined execution? Steve Berkowitz is driving this framework for us, and he brings a great deal of experience and operational discipline to how we run this business. When we look at the user experiences, we look at things that we invest in around content, we expect return and we look at core metrics, whether it's unique users on the portal, page views, revenue per 1,000 page views.

For our communications and our Live services, we look at the total number of Live accounts unduplicated, how many are active, how many are using our services. We look at service usage by each of those services. It's not just about having a Live idea that uses one of our services, we want to build out the rich set of services, and get them to use multiple services, add more value, enhance their experience. It's about the page views it generates, the revenue per 1,000 page views.

In the area of search, it's the search query volume, and total search queries worldwide, how our adCenter is really driving on coverage, click-through rate, price per click, revenue per search, the relevance that we're delivering on that search experience. In the area of other Live services, Xbox Live, Office Live, CRM Live, all the third-party Live services, we focus on the usage of those, as well, page views, revenue per 1,000 page views, are we creating opportunity in this ecosystem.

In the platforms area, adCenter and Ad Expert, we look at those metrics that help lead to driving better monetization, whether it's revenue per search, whether it's the number of advertisers we're bringing to the platform, coverage, click-through rates, cost per click. In the Live platform, we're focused on how we're reaching out to developers, the number of new developers that are building applications, building services on top of this platform, the number of ISV applications and gadgets.

Then finally in the infrastructure, are we being efficient at how we scale out this massive infrastructure, are we delivering the lowest cost per 1,000 minutes of usage, are we driving the lowest cost of this infrastructure as a percentage of revenue. This really creates a framework for how we're weaving in the execution model and the discipline throughout the organization, not just to help us with Windows Live, but we look at the other areas that we're innovating, whether it's Office Live, Xbox Live, CRM Live, we're building a framework for the company to go beyond software to software plus services in the era of Live software.

Now, the teams are focused on these levers. How do I think of return on investment? There are some investments here that I look and say these are short-term returns. If we invest in content on MSN, for example, I would expect that we're going to see it scale, in terms of page views and revenue per 1,000 page views, and we should see those short-term returns in kind of the 90 to 120 to 180-day perspective, we really should have that clear line of sight.

When we scale sales expense, we've got to have immediate return in terms of productivity and efficiency. There are some investments that are medium-term, let's say six to 18 months. Communications, Windows Live, when we bring those services out, we've got to give time for users to adopt them, to embrace them, but they've got to start driving usage and page views, they've got to start driving the monetization.

There are certain things then that are longer term. You look at the work that we're doing in search and adCenter and AdExpert, and you look and say, hey, these are things that over the next 12 to 24 months, as we continue to move countries onto adCenter, we've got to build the infrastructure and we've got to see that return. But every day we're looking at the operational metrics. There's an operational flash every single day that comes out to the entire leadership team. And we get visibility to these operational metrics so we know when we're doing well, we know when we're not. And our R&D teams every single day are innovating, tuning the algorithms, adjusting and responding to that real-time feedback.

Now, how does this translate to the FY '07 P&L? From a revenue perspective, we project revenue growth in the range of 7 to 11 percent. This will take us to $2.5 to $2.6 billion. We're going to see growth in our display and search ad revenue. We will expect to continue to see a decline in our Internet access revenue as customers continue to switch to broadband.

From an expense standpoint we would expect to see R&D costs for FY '07 increase between $300 and $400 million. Those R&D expenses are going to fuel the R&D we're doing on search, live experiences, Live Platform, adCenter and content investments for MSN portal. We should expect to see our costs of goods sold in FY '07 increase between $300 and $400 million. Part of that is increased customer support costs as we continue to scale up advertisers on adCenter. There's some costs of goods that go along with scaling adCenter, as well as investments in infrastructure and data centers to support the growth in usage and the depth of services that we are delivering.

Sales and marketing expenses in fiscal year '07. We expect to see those grow in line roughly with revenue growth with a continued focus on productivity: How do we get more output for dollar of investment in sales and marketing expense? The one caveat is if we look at customer acquisition we are constantly evaluating new ideas and new opportunities. And so as a real-time basis as we go throughout the fiscal year, if there's a smart opportunity we see for investment in customer acquisition, we will evaluate that at that time.

And certainly fueling this, capital expenses are increasing ahead of revenue, and a combination of fueling not only the server infrastructure and the services to help support these new experiences and the increased usage, but the data centers and assets to come together to provide the foundation for us moving forward—not just for Windows Live, but for the Live experiences that we are doing across the company.

So that gives you a perspective. Now, I listed some business markers here. You might say, okay, how can we assess progress in how we're doing? Number one, I think it's breadth of usage. And I looked at this and just said, Let me tell you the number of unduplicated Live IDs—these are people that sign in, we know who they are, they used at least one of the services within the last 30 days. And that number from '05 to '06 has grown between 40 and 45 percent. We are getting more breadth. The fact that we have 320 million Live IDs now and people using this, that means we have breadth.

The second is depth of usage. And as a proxy for depth of usage, I just said, here's display page views. And I took out the MSN Messenger—that's measured more in minutes and connections than page views—but you look at what we do in page views and usage of the services, that grew 30 to 35 percent '05 to '06. Now, you may be saying, Well, Kevin, it looks like your breadth is growing faster than the depth. These metrics would support that. That supports opportunity for us to enhance the set of services, get this breadth of user to use more services and the opportunity to monetize those.

And then finally I just took the monetization. I took our non-access revenue—so I took revenue from FY '05 to FY '06, and just backed out the access revenue which we disclose in our quarterly statements—and that grew 9 percent. That was in the years we're making the changes, to switch off of Overture onto adCenter, as we're laying the foundation for what we're doing. But those are three business markers that say, Are you getting breadth of usage? Are you getting depth with rich experiences? Are users using more of those experiences? And are you converting that depth of usage and breadth of usage into revenue and monetizing?

So that's a framework for online services business, and it is the opportunity to grow another core business for the company. But growing that core business will not come without investment, good management, discipline and focus, as well as innovation. And we've got our development teams focused on this, we've got Microsoft Research partnering. We are bringing our talent to bear on this particular opportunity. It is significant, and we are going to be relentless in our pursuit of that opportunity.

Let me now transition to the third business group that's part of Platforms and Services. And to do that I'm going to have Bob Muglia, who is the senior vice president and leads that particular business for me—I'm going to introduce Bob and let him take you through the Server and Tools business. So, Bob.

BOB MUGLIA: Thanks, Kevin. (Applause.)

Well, good morning. It's certainly true that the Server and Tools business here at Microsoft is one of the great businesses in the industry as a whole. We have a fantastic track record. And when we look forward into the future we can see really great things. And certainly you can dimensionalize that amongst revenue and operating income growth, but really broader than that, the opportunity for us to really reshape the way IT uses software and moves to services in their business. So we're pretty excited.