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Wells Fargo Tech Summit
Who: Amy Hood, EVP & CFO, Microsoft
When: Tuesday, December 5, 2017
Where: Wells Fargo Tech Summit
PHILLIP WINSLOW: All right. I'm glad we've got the heaters on here.
AMY HOOD: Me, too. Turn it up.
PHILLIP WINSLOW: When we planned this conference, the goal was to have two forces of nature come and it was winter and Amy Hood. So I'm glad they both made it. So, Amy, thank you for taking the time. It really means a lot to us that you agreed to keynote our inaugural conference, and came out here and are sitting up here freezing with me. And just think I almost turned the heat down.
But just to get things started, it's a shocker, but I want to talk about Azure and Commercial Cloud and Office 365 just to start with. And obviously you guys just hit your goal of $20 billion in ARR in Commercial Cloud. You said that two years ago, and you actually hit that target early, faster than you had anticipated. And I guess the question to kind of start things out here is like, how do you see that growth trending in the coming years, because obviously it's been growing faster than you expected.
AMY HOOD: Yeah, I think a couple of things when we set the target. April or May, two years ago, I think we had certainly an understanding of what the TAM expansion opportunity was, and we knew with a good amount of confidence what Office 365 transition would look like. You saw that when we talked to people. We were very close on what we thought the install base would move, where we thought the percent within the install base that would transition to the cloud over two years. So I would say that portion was not as unknown.
I think in many ways for us the bigger question was how quickly the transition on the customer side would happen. We felt pretty confident we could execute for Azure and be competitive and have an interesting story, a differentiated one, including the fact that we were committed to hybrid from the beginning in our architecture.
So for us I think it was more a pacing of the market, and I do think things have gone pretty quickly on the customer side in terms of, even, you heard John talk about how important this is at Wells Fargo. There's hundreds and hundreds of those stories, and I think the pacing has probably been the bigger surprise. And I feel very good about our execution, obviously. But it's as much about a market opportunity as it is about our execution.
PHILLIP WINSLOW: Let's break it down into sort of the two buckets of Commercial Cloud, and we'll start first with Office. You talked about it from the call, I guess, almost two years ago, now I think about it, of just Office 365 subscription growth more than outpacing sort of the authentic kinds on the license side. And this is the question I get a lot, but what about like Azure, because there was Office license, Office 365. Azure there is some replacement, but there is also a lot of net expansion. So how do you think through this in terms of sort of like the forward growth here and where we are in that process?
AMY HOOD: Yeah, I've always explained these as being just fundamentally different transitions. Office 365, even when we designed the pricing model seven or eight years ago, when I had a different job as the Office CFO. This is a very long worldview in terms of Office. Office was really about the opportunity. It's a seat business. When you sell something by the seat, the opportunity to say, you're going to have a transition from a license to a subscription is pretty clear. You have a certain number of information workers in the world. You know which ones you meet today with a license. You know which ones you don't. That's new seats. And you knew which ones you transitioned, and that's the transitioning seats.
And so we could very easily say there were going to be two drivers. There was going to be install base growth by new seats that we weren't able to reach in a paid model before, and then there was going to be the transition of customers, both of which ultimately would lead to having RPU expansion possibilities. So that one I think the transition was quite clear, you take one seat, you move it. If it happened to be paid up-front, then they've got to pay me over three or four years. The math was pretty clean in terms of being able to predict what that looked like.
The distinction with Azure is that I actually think what you're seeing is for us and for others you're seeing on-prem growth and the cloud growth as people decide how they want to run their infrastructure, including the investments they've made over the past. That's to us looks like, particularly for SQL and even for Windows, continued license growth. Even through this "transition" because it's not a transition. This is really just people continuing to add investment to their technology bucket of spend to digitize whatever process that is, whether it's a business process, a marketing environment, you can kind of go on down the list.
For me, we bring people back to that singular KPI because I really am indifferent as long as it meets the customer need for their infrastructure and platform if they buy on-prem licenses or buy Azure stuff. The one thing I care differently about this year than I think in the past is, we're really focused on Azure consumption as opposed to just the billing cycle, which is an important distinction. You always recognize revenue based on consumption. You don't get to recognize revenue just for selling something. And so really focusing on that motion with customers to make sure they're successful is a really important pivot that we've taken.
PHILLIP WINSLOW: Yeah. Actually maybe just to double click on that for a second, obviously you've made some changes to the sales force. You've incentivized that focus on consumption and you talked about on the earnings call to drive deeper customer relationships you have to know your customer more.
How do you think about the process of, it's almost like a bit of a culture change, from pushing products, not that a sales team would ever do that, but push your products actually focusing on consumption? So how do you put that into the sales force, into the model?
AMY HOOD: I think, let me break it down. There's a couple of things that we've done with the sales force for this year. We started really in July with the largest sales force change we've had in certainly as long as I've been at the company, which in a few weeks will be 15 years, which is just shocking. Time flies when you're having fun, I guess.
And what we did was really fundamentally change how we go to market for all customer types. At the high end that's meant adding a lot of resources that are technical. And when I say technical I mean you would probably not see the distinction between them and someone that works in Redmond writing lines of code that's shippable. They are fully capability of implementing and doing most project startup costs, costs meaning effort. They're capable of getting projects off the ground. They're capable of demoing all deep Azure functionality.
That type of person was not someone that we, frankly, had at Microsoft and used in that way. We tended to use that type of person, like that type of talent, in either our service business, our consulting arm, or obviously in one of our engineering teams. So that large investment is meant fundamentally to be about consumption and that's how people are paid. They're not paid on selling a contract of Azure, so not on bookings. But they're paid as customers are successful, meaning they get projects up and running, the meter starts spinning on Azure and that's when they get rewarded.
And so if you think about the lifecycle of making a customer successful you absolutely start there. You'd invest with technology expertise to help them on their journey. You'd pick the right projects that matter to them, you'd show ROI through hands-on effort to get projects up to speed, then you see our person and them be rewarded with a successful outcome. So that's why I'm pretty wedded to the concept that this is a different way that we should be rewarding our people, because it's more cleanly aligned structurally to customer success, which is ultimately in a consumption based business customer success is all that matters, because it builds on itself over time.
PHILLIP WINSLOW: It makes sense. Let's focus back on Office for a second here. I'm going to make a statement. I'm going to read a statement here and I want you to tell me where sort of I'm right or where I'm wrong. And so Office 365 might be halfway past the point in terms of adoption, that 50 percent in the install base. But Microsoft is still in the early stages of migration to premium SKUs, E1 to E2 ‑‑ sorry, E3, E3 to E5 and maybe even E7 one day. And that's going to last for the next 5, 10 years. So where am I right and where am I wrong in that statement?
AMY HOOD: You're right in that that's structurally true. What we would say is the model we have in seat businesses, in particular, like this one, is you move a customer then once Active Directory is deployed and they have the most recent services in general, churn goes down, which ultimately raises effective pricing and you have SKU transitions as people ‑‑ as we continue to build high value products and as customers see the benefit of that product they move, tend to move up the SKU tiering, not all.
You'll have tons of customers that don't need the functionality at the top, tons that are finding their just right place. But the logic is correct, that stuff builds on itself. The reason it tends to have a longer tail is simply accounting, because we tend to sign three-year agreements. So by the time you actually get everybody through a three-year cycle of a new SKU you finally have the ASP list fully implemented across the sector. So it tends to come and it comes slowly, but tends to have a pretty consistent trajectory.
PHILLIP WINSLOW: Got it. And then let's segue to the Office ecosystem and talk about LinkedIn, the acquisition. They're obviously a very big deal for Microsoft. How are you thinking about folding LinkedIn into your go to market strategy this year and sort of going forward?
AMY HOOD: I think you've ‑‑ number one, let me start with I'm incredibly pleased with how it's gone. It's been a year, it will be a year next week or the week after since we closed the transaction and we're ahead of every financial target that we set for ourselves. And so that feels good. Their employees are pleased, meaning they're happier than they used to be. That's actually a terrific thing in terms of retention of employees. So we're thrilled with that. And we've seen a bit of a revenue reacceleration, which we talked about last quarter in the results.
When you see those things you feel very good about the strong start of what is an incredibly important decision that we all made and then what is a very important financial investment we've made. The way that you'll start to see it, you're already seen it, and there are little things. And, frankly, I think that's what you'll have to get used to a little bit on this one is you'll start to see integrations in the experiences themselves, whether it's going into Word and seeing LinkedIn integration on resume building, whether it's Sales Navigator integration with CRM solutions for more social selling, whether it's maybe incremental HR efforts by LinkedIn to sell more to their existing customer base. I think you'll see it as we both have really functioning, thoughtful sales teams that I'm really fine bumping into each other a little bit, because they work actually just fine that way.
So instead of trying to jam two sales forces together and let them ‑‑ and disrupt basically customer momentum, we've made an active choice to not do that in this situation. There are tons of examples where we buy companies to integrate sales forces. This is not one of them, certainly not given the momentum and I think really some of the unique attributes of each. So you'll see it show up across Office, across Dynamics and within LinkedIn, it will be the most tangible side. But you won't probably see large, big bang moments. It's not really LinkedIn's culture nor is it ours, as much anymore, you'll just see thoughtful integrations that customers will care about show up in products every few months.
PHILLIP WINSLOW: Yeah, it makes sense. Okay. We spent a fair amount of time on the revenue side of commercial cloud and Office. One thing that jumped out at me last quarter, outside of hitting the $20 billion in ARR, was the jump in commercial cloud gross margin. It would be up 500 bps quarter to quarter, 800 bps year-over-year and one of the questions I got is how much of that is related to, let's say, the mix between Office 365 and Azure or just the mix shift between call it the standard services and the premium services within there.
AMY HOOD: This is actually pretty clean. It's mostly Azure, because while Office continues to have gross margin improvement, in fact, all the services did last quarter that are in, whether it's Dynamics or any of the underlying. The mix shift which we've seen to Azure is the highest grower. We've seen a mix shift to Azure and yet you're still seeing gross margins get better. So this one is ‑‑ the math is pretty clean. It's Azure gross margin improvement.
Now, part of that is a premium services mix, but part of it also is just the cost of the infrastructure improvements across both hardware and the software work. So I feel very good about that team's efforts. They were very proud last quarter I think for many reasons. I think it felt like on every earnings call I would get asked pejoratively about their margin structure and so when we said kind of six quarters ago that we expected material gross margin through all of last year and then did it again in Q1, I think they feel like, hey, when are they going to stop asking? I said, well, keep going up I'll let you know.
PHILLIP WINSLOW: Great. Okay. So scale is an important part, obviously, of Azure. So when you think about scrolling this board here, obviously you've got premium SKUs and 365. You've got premium services in Azure. You have scale in Azure. How do you think about just the gross margin of commercial cloud going forward? What are the puts and takes really of getting continued improvement there?
AMY HOOD: This was one where I spent a lot of time on the components, because while we talk about commercial cloud gross margin all-up, which is the cleanest way with our revenue, just I think I have one big cloud business and what should it look like at scale, that's a management technique that's quite different. The teams work quite differently. So you want to focus on where can Office 365 margins get to, where can Dynamics margins get to as a service. Where can LinkedIn, ultimately, LinkedIn when you clean out amorts, 82, 83, 84, I mean it's a pretty structurally high gross margin business. And then you go look at Azure's premium services and then there are more IaaS type layers.
And we managed each towards its best in class goals. The outcome will only be a matter of the mix of the revenue that ultimately exists. So while I continue to believe we have room for it to grow, it's really more about what the makeup of the revenue looks like. And so what you'll see going forward is Azure will continue to grow as a piece of that, which will put some structural downward pressure on it. But you'll see all of them probably continue to increase which is what you want to see from a pricing and competitiveness standpoint.
PHILLIP WINSLOW: We spent a lot of time talking about Office and Azure, but I want to switch gears to this other little business called Windows. I think Microsoft might be known for that. But one of the things that really struck me over the past several quarters here is if you look at the growth of Windows' revenue versus just the PC market, Microsoft has clearly been out-punching the PC market. And I get a similar thing, I get the question from clients saying, okay, is this attach, is this piracy, is this ASP, mix shift towards the premium SKUs, and then is this sustainable? So maybe if you could walk us through what's been going on that's driven that out-performance and how we should think about it going forward?
AMY HOOD: Let me split up our Windows business into two things. We have funny names for it, Pro and then non-Pro. Let's call that Commercial and Consumer, effectively for this moment. Our Commercial PC business, otherwise known as Pro, in general has out-performed the market by a bit. That tends to be a little bit of attach of Pro, doing a little bit better. But that one doesn't vary terribly far from the market. And if it does, we usually comment that it could be some inventory related stuff, like this quarter we had a bit of pre-buy, the Pro number was a little high, a couple points. They'll come back, people would ask how do you know? There aren't that many buyers of PC license in the world. So when you see them move a little bit in a funny pattern, you can kind of guess you've got a couple weeks of inventory at a specific OEM.
So when you see it move very far from Commercial PCs, which over a long period of time have kind of been single digit growers -- I mean, with the exception of a couple years back when we had that end of XP, get a new computer moment, outside of that it has bene very steady. Steady through some of the macro changes. Steady even when the different regions, it's kind of low single digits.
The Consumer side is far more volatile. This quarter was the first time they'd actually been more in-line. The Consumer business itself tends to have a bigger ASP difference. There are more SKUs in our Consumer business than there are on the Commercial business. Commercial business, we've got about two, and they're not that different. And so you don't tend to have a ton of ASP movement on Commercial. So on Consumer is where you tend to see the big ASP differences.
So devices have been pretty healthy at the higher end of the market. When you see that happen, it tends to mean there's higher ASPs associated, and you'll see a big delta between what units look like and what our revenue looks like.
I'll give you the opposite, if low end units were strong, which happened a couple years ago, the opposite will be true. You'll see the revenue be far below unit growth. And it tends to be about pricing tiers more than anything else where we have a wide difference in pricing based on them. You can think of it based on the price of the device. The devices are by spec. So you could think low end chips, low end devices, you think low price and if you think a lot of power you think a higher one in Consumer.
PHILLIP WINSLOW: Got it. Now, obviously, Office 365 has been a phenomenal success. I think everybody would agree with that. Walk us through, what is Microsoft 365 and what is the opportunity there?
AMY HOOD: Microsoft 365, I think, is our realization that from a customer perspective what they want is a modern experience on a machine, just for a second, whatever machine that is. And that modern experience will be defined by a few characteristics. It would, most importantly for many CIOs or CTOs, it would have a modern security frame and modern management tools.
I can hear, I'm sorry, I couldn't hear you before very well. That's nice.
And so if you think about modern security and modern management, people tend to think about Office and Windows quite separately as well as EMS, products actually that were built out of our Cloud and Enterprise Division. Really the experience of a modern workplace or a modern desktop or a modern even phone experience for Office is foundationally about capabilities that don't just come from Office 365. And so we finally said, well, why don't we sell the thing that customers actually ask us about, which is, wait, what's the most secure environment to have, and we would say, well, that's Windows 10 and Office 365, and that combination when deployed together is more secure than any component. And so we've started to call that thing Microsoft 365.
You would also, in our and in my world, refer to the devices as being modern or not. So does it have natural language ability understanding, does it have natural input like gesture or gaze? Does it take ten inputs? So think about it in the broadest sense of the word, as if you wanted a modern computing experience and wanted to interact with a device through either your normal keyboarding, touch, fine, but whether it's gaze, whether it's voice, or whether it's ink, it should have all those attributes, as should all the applications that sit on a modern device.
And what you find historically is we have certain apps that are optimized for ink, certain apps that have not been. If you want to have a terrific modern experience, you have to have all the apps and the OS, and the device optimized for that to have it really make a meaningful difference to you and how you think about computing.
And so when you think about Microsoft 365, think about the broadest, most inclusive, consistent experience between application and the OS and that they build on each other, including the device and its specs.
PHILLIP WINSLOW: Now you made a comment there about device sort of whatever you think of that being, and I flash back to Build, through the keynote being the intelligent edge that it would talk about containerization, micro services on these devices, it can be a car, it can be a thermostat. It links back into Azure, IoT Edge. What is the opportunity there, because obviously we hear about IoT, we hear about intelligent devices, where does Microsoft see a play into this and what do you sort of bring to the table that let's say maybe some of your competitors don't?
AMY HOOD: Well, you say on most of the end points what people still want is a secure, manageable end point, especially if it's going to collect any amount of sensing data. Do you want to be able to update it? How secure do you want it to be? That story for us is both a Windows 10 story as well as an Azure IoT story around the connectivity of those devices back to a data source.
And so I feel actually quite good about the investments we've made. When I think about IoT or any endpoint, and when you say edge, think about it in the broadest term, whether it's a PC, which is the right way to interpret it, whether it's a phone, whether it's a sensor, or frankly whether it's the edge of your network, it would say that compute needs to reside where it needs to reside for the application to work its best. Even Azure Stack has it right. Azure Stack is another way of talking about having an edge.
And so for us I think it's a pretty -- it's a worldview more than I think it's any specific product, it's that all products should make it possible for you to run compute and assess data and capture data and then analyze data no matter the environment. You just need it to be -- for gaming it may need to be close, although latency times are getting good enough that we may not need to. For Azure Stack it's the realization that we always use cruise ships, it was the best visualization for people to understand, it's clearly not connected. So it's a good way to think about what's important about having compute where it needs to be.
PHILLIP WINSLOW: Got it. I've got a bunch more questions. I'm going to ask one more and then open us to the audience.
Richard, I was hoping you could, my associate, could grab the mic and then as people raise their hand walk around to them.
But one of the questions that I've been thinking about and I've asked you over the years has been just sort of the lifecycle of just operational efficiency at Microsoft. I think everybody in this room agrees that over the past I guess four-plus years now, I guess 18 quarters I think as CFO.
AMY HOOD: I know I shouldn't count.
PHILLIP WINSLOW: You just finished 18 I think. You're going on 19. So let's keep the streak alive. But when I think about the operational efficiencies, I kind of thought about the lifecycle of it being the first part was just focusing on just the cost structure, where are we spending too much, where are somethings that need to be divested. And then there was a period of allocation, we'll call it that. Let there be more in other sort of higher return areas. And then we hit a point where that started to fade and we kind of inched back towards more call it normalized investment growth.
How do you think about where we are in that lifecycle and the process of just call it operational efficiency at Microsoft?
AMY HOOD: I tend to think of it slightly ‑‑ it's something like that. But I tend to think it's not as much of a lifecycle as a constant effort on all fronts, which is the first thing you said, is really about picking the businesses we're in. That's the first one, which businesses should you be in, why, how. That can change. Markets change because of landscape change and suddenly maybe something doesn't make as much sense as it used to. We still watch for that, still make sure that makes sense. But you're right, a lot of that I would say is are we in the right businesses I feel like it's behind us.
The next piece, which is really continuing to focus on being more efficient in how and what we do. We've done a ton of that work. I think that was maybe easier to approach. But I would say that was one we're pretty focused on still.
We, like every company on Earth, have an opportunity to reinvent many of our processes, do them digitally, be more efficient in how we build software, how we ship software, how we sell software, or hardware. So I feel like I still have opportunities there to run a more efficient operation, but fundamentally it's more than about efficiency. It's about the customer experience being better.
I tell people all the time most of the efficiency work we do now is focused on making a better customer outcome, whether it's how many commerce systems do you need in a company so that it does recognize you when you call. How many different customer interfaces? You want to have it, or how modern should your build environment be for engineers. All of those things matter, because the customer, whether it's an internal employee or whether it's an external customer who makes us money, benefits when we do thoughtful, efficient work, as opposed to saying, oh, I see costs to cut. It's just not a good frame for a successful company.
And then I tend to also think we've been a bit more of an investor this year in key places. That was two years before taking a look at Intelligent Cloud and we did some search investments there and I feel great about how that's paying off at the top line. As long as we see things pay off at the top line I really don't feel constrained in terms of investing to do that, because if we invest operating expense we see it land as very strong revenue growth, including share growth at the top, we know we've got structural gross margin improvement coming. That's a good leverage model for us, especially in a subscription business where the gift that keeps sort of on giving is the top line.
And that model I feel like ‑‑ I don't feel constrained in any way, as long as we continue to execute, to spend thoughtfully. We have to. The industry is aggressive. We need to be aggressive. We've got a good world view. We're executing well. The team is good. And when you feel all those things the last thing you want to be is not aggressive.
PHILLIP WINSLOW: Yeah.
AMY HOOD: So I don't feel terribly worried about it. And I think whatever hope people have inside the company that my willingness to be aggressive on that front will be coupled with stopping the former two items. They know me now well enough that's not how I work, because that's simply not how excellent companies work. I remind them, there's sort of ‑‑ I am a deep believer in strategic patience, but execution urgency. So if you believe in those two things you can both understand where you're going, invest patiently, invest in the right things, watch them pay off, but if you're not doing well let's fix it. I mean that's not hard. And that's just fun stuff for me.
PHILLIP WINSLOW: I'm going to totally steal that line, by the way.
AMY HOOD: It's a good way to think about in general, because confusing the two is super-important. If you actually have a really thoughtful, strategic plan and you're executing poorly, that can be interpreted inside the company as a bad strategy. Then you change course, it's a really ‑‑ and it wastes time, it wastes cycles, and more importantly it wastes the energy of your people.
And the opposite could also be true. You could have a bad strategy and bad execution, and then you just say, oh, oh no, I'm right; just let me fix this thing. That takes too much time. You're very far away from where you need to be positioned as a company. And they both really can be damaging. And so I spend a lot of time with teams thinking about making sure we're distinguishing between the two. It ultimately makes you much faster and much better positioned for customer success. So it's kind of ‑‑ it's an important frame as we think about expense.
PHILLIP WINSLOW: Great, awesome. Well, I'll take the last 10 minutes here for some questions from the audience. So raise your hand if you have one and Rachel will walk over with the mic. Otherwise I'll continue.
Alex, in the front?
QUESTION: Maybe, Amy, if you can go into the competitive dynamics and public cloud obviously Amazon was first. They're larger, you've come up and done a great job and you've got good enterprise and on-prem, as well, is a big advantage. And then maybe talk about where Google may or may not be and pricing and stuff like that.
AMY HOOD: Thanks, Alex. I get asked that question a lot. Let me talk about sort of what I've seen. I think I feel very good about how we've executed, given I think where we were a few years ago with AWS. I think structurally we've done a very good job being aggressive on the investment. We've done a very good job finding our differentiation through hybrid from the beginning and, frankly, using some of our strengths in the enterprise to focus there and try to be successful with many of the sales investments we already have.
I think this past year has been a trajectory changer for us on that front with Amazon. That being said, trust me, if you live in Seattle you feel the energy of two successful companies being there. If you're looking for core systems engineers, we have most of them, I mean, in the Seattle region, it is a hot bed of the worldview of where the public cloud is going, where private cloud is going. It's just a fun place to be, frankly, to feel that.
So take my comments about our progress in the spirit of an incredibly successful pairing of companies executing incredibly well, executing with I do think a mutual focus on customer success, and quite frankly a not terribly different view of where the world is going. So let me start by saying that, and you see it at most customers, I see it in most partners, ISVs. I feel like we've even made progress in the startup community, which we knew would be a harder one for us. And that's been a bit of a new cycle, and I feel great.
Then let's talk about Google, who I think we've been talking about seeing them in this market for years, but I would say we've seen more of them in the past few quarters than we've seen before. That's not surprising. I think they're making a good effort. I think Diane Greene is an excellent leader and an established enterprise CEO. I know that's probably not her title in the job she has, but that is who she is. She's always been a winner. She's always been successful. So I kind of look and say, I absolutely expect them to continue to be aggressive. I absolutely expect to see them at customers. I do think they -- we may not see them in the same way, in the level or the same way that we see Amazon at customer presence. It's very different. But I would say we certainly see them more than we used to.
I would also say those comments are pretty U.S. and Europe centric. So I think if you were to maybe go to the APAC region you'd probably say, instead of probably putting Google in that third slot, you'd probably aggressively be asking me about Ali. This is a different worldview, I think, when we sit in this half of the world, we tend to think of the three companies I just named being the most successful in this region, and that's certainly true. In Europe you see a very similar frame. If you went to Africa, certainly in China, increasingly in India, and across Asia, you'd probably see Alibaba have a different view of moving outside of China, well-funded, well-capitalized, certainly aggressive, many of the same attributes, understanding of the cloud, understanding that they'd like to take things outside of their home region. But I would say that's the only thing I would add competitively to the landscape on a global basis.
PHILLIP WINSLOW: Got it. All right, I think we have time for one more question before we have to get Amy away from the wind here in front.
AMY HOOD: It's not that, it's actually just the humming. It's just a hard, white noise I'm hearing. I'm just making up whatever question you asked me.
PHILLIP WINSLOW: It's like I think I heard this.
AMY HOOD: Like you said something about Office.
PHILLIP WINSLOW: So one more from the audience, otherwise -- there we go.
QUESTION: Thanks for being here. With the topic of tax reform looming, I would be curious about the prospect of cash repatriation, what that would mean for Microsoft, and specifically could it change how you think about your M&A strategy?
AMY HOOD: Let me be clear, it won't change how we think about our M&A strategy. When we see assets that make sense to us, when we feel they're fundamental to growing our business, when we feel we're a better owner than someone else because of where they sit and how they sit, that is what will dictate whether a deal makes sense to us. That's always been true. A bit like we didn't want to wait for tax reform to return capital, I don't want to wait for tax reform to buy smart assets. And many assets won't make any more sense or any less sense in a new environment. It's just not, I think, how we are structured to think about the world.
When it comes to how we would think about spending, I think in general our biggest capital spend is data centers. Data centers need to be built where they need to be built. So it's less about is there an incentive to build one place versus another, data centers need to be built where customers or data privacy, data residency, where maybe national boundaries need to be respected. So think of it less about wow, I'm going to spend a lot more capital because of tax reform, or I had to borrow before, our borrowing cost is not a big hindrance to us as a large cap with our credit rating. So I've never really thought of it in those regards more than anything. It's fundamentally about strategy for us and where our customers need us to be.
PHILLIP WINSLOW: All right. Well, we're five minutes out form the one-on-ones, and the two tracks starting. So, Amy, thank you for sitting up here in the cold with me. The good news is, there's a fireplace in your one-on-one suite.
END
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