Microsoft Corporation (MSFT)
September 03, 2013 8:45 am ET
Chris Suh - General Manager of Investor Relations
Steven A. Ballmer - Chief Executive Officer and Executive Director
Terry Myerson - Head of Operating Systems and Engineering Group
Amy E. Hood - Chief Financial Officer and Executive Vice President
Bradford L. Smith - Chief Compliance Officer, Executive Vice President, General Counsel and Secretary
Stephen A. Elop - Executive Vice President of Devices & Services
Walter H. Pritchard - Citigroup Inc, Research Division
Mark L. Moerdler - Sanford C. Bernstein & Co., LLC., Research Division
Brent Thill - UBS Investment Bank, Research Division
Keith Weiss - Morgan Stanley, Research Division
Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division
Welcome to the Microsoft Conference Call. [Operator Instructions] Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn today's call over to Mr. Chris Suh, General Manager, Investor Relations. Chris, you may begin.
Thank you, operator. Good morning, and thank you for joining. With me today are Steve Ballmer, Chief Executive Officer; Stephen Elop, Executive Vice President, Devices & Services of Nokia; Brad Smith, Executive Vice President and General Counsel; Terry Myerson, Executive Vice President, Operating Systems; and Amy Hood, Executive Vice President and Chief Financial Officer. On our website, microsoft.com/investor, is a slide deck which is intended to follow today's presentation. As a reminder, today's call is being webcast live and recorded. If you ask a question, it will be included in our live transition in the transcript and any future use of the recording. You can replay the call and view the transcript at the Microsoft Investor Relations website.
During this call, we will be making forward-looking statements, which are any predictions, projections or other statements about future events based on current expectations and assumptions that are subject to risks and uncertainties. The potential risks and uncertainties include, among others, that the expected financial and other benefits of the Nokia transaction may not be realized, including because of factors discussed in yesterday's press release. Actual results could materially differ because of these factors, comments made during this conference call and the risk factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement.
And with that, I'll now turn the call over to Steve.
Steven A. Ballmer
Thanks, Chris, and thanks, everybody, for joining us on this call today. I say hello from Salo, Finland, which is the -- one of the heart and soul development facilities for the Nokia Lumia Windows Phone, and I'm excited to have a chance to talk to you about the very bold and exciting deal, transaction that we announced today.
On Slide 4. I just want to make sure everybody has the key elements of the deal in mind. I know it's all in the press materials, but let's make sure everybody is clear. Number one, Microsoft is acquiring Nokia's phone business -- well, these are called Mobile Phone business, as well as its Smart Device business. Number two, along with the acquisition of Nokia's phone business, we are also being assigned right to Nokia's license, IP license with Qualcomm and other key IP licenses. Number three, we are licensing not 9 -- we are licensing Nokia's patent to be able to use them not only with our Windows Phone and other phone product lines, but across the Microsoft product set. Number four, we're licensing the ability to use Nokia's HERE mapping geospatial location -- we'll use those words interchangeably today, service to use that and modify it broadly in our products. Nokia is a company that will continue under the Nokia name. It retains the NSN business, which is a network infrastructure business; its location in mapping business, HERE; its CTO Office; and the patent licensing business that goes along with the advanced technology work they're doing. With this announcement, we also cement the original partnership that we put in place 2.5 years ago to focus together on Nokia phones that are Windows Phones. There was a date in 2014. We call it the recommitment date in which we would each add some options on how to move forward, quite complicated, but we've been talking for a while about where we wanted to go. We think we've made excellent progress with the partnership, and yet we also know we have a long way to go. And so, in balance, together, this is the best approach for both companies' shareholders.
On Slide 5, I show you a sampling of some of the beautiful Nokia phones. Nokia ships well over 200 million phones a year. The vast majority of those are mobile or feature phones that get sold for prices as low as, say, $25 and are often the first connection with technology that people in many places in the world have with any kind of communications or information technology device. We look at that as an excellent feeder system into the smartphone world and a way to touch people with our services even on much lower-end devices in many parts of the world. And so we're pleased to be acquiring the full capability of Nokia in phones, from Mobile Phones, the Smart Devices, from engineering to marketing, manufacturing, supply chain management and the like. Nokia is a phenomenal company that we really had a chance to work with and get to know over the last 2.5 years. We knew the company earlier, but the working partnership is phenomenal.
On Slide 6, I just want to highlight the sort of 4 key rationales for the deal. We're going to walk through each one of these. Number one, and most importantly, we are trying to accelerate our phone market share. As good as the work is that we've done together, and Terry Myerson will have a chance to talk about it, we know we need to accelerate. We're not confused about that. We see opportunities to do so, and Terry will discuss that. Number two, we want to strengthen the overall opportunity for Microsoft from a Devices & Services perspective and that opportunity for our partners as well. I'll speak about that later. We're going to talk about why this is a smart acquisition from a financial and assets perspective. Amy Hood and Brad Smith will do that. And last but not least, we'll talk about our execution plan, and Stephen Elop from Nokia will have a chance to join Brad and I in that part of the discussion.
So with that, I'll turn things over to Terry Myerson. Terry has run our Windows Phone business. He now runs all of our operating systems work. He's been on the front edge of the partnership with Nokia and in championing inside this path forward, and I'm going to let Terry talk about our plans to accelerate culture.
Thanks, Steve. Hello, everyone. This is the single most exciting deal in my 17 years at Microsoft, unlocking our potential to win in mobile devices.
If we can go to Slide 8. This all started in fall 2010 when the Nokia and Microsoft teams began talking about partnership. We asked ourselves, "With 2 great brands, Microsoft software and Nokia hardware, what could we create?" In Nokia, we found great leadership, innovative concepts and incredible engineering capability, not to mention a flare for original and world-inspiring hardware design. In February 2011, we signed our strategic partnership. Nokia would invest exclusively in Windows Phone, and Microsoft would bet on Nokia's HERE mapping technology. We shipped our first phone together 9 months later, the Lumia 800. Last fall, we shipped Windows Phone 8, which enabled Nokia to create a full portfolio of Windows Phones that spanned a broad array of price points in over 100 countries. Today, we have the best-selling Lumia 520 at an entry-level price point, the 620, the 720, the 820, the 920, which was voted smartphone of the year by Engadget's readers, the same year the iPhone 5 and Galaxy S3 launched. And now, the best camera phone in the world, the Lumia 1020.
In just over 2 years, Nokia has gone from shipping no Windows Phones to shipping 7.4 million last quarter. As the result of our Windows Phone innovations, combined with Nokia's amazing device portfolio, their capability and distribution and retail promotion, Windows Phone has reached over 10% share in 9 markets. And in 34 markets, Windows Phones are outselling BlackBerry from Australia to China to Brazil, Italy, Mexico, Russia and the United States. The Nokia Windows Phone momentum has made Windows Phone the fastest-growing mobile platform, with 78% year-over-year growth. Every quarter for the past 8 quarters, more customers have activated Windows Phones than in the prior quarter.
So we are building momentum, but we still have low share today. Last decade, with Xbox and Exchange, we were in this same position, starting small. Here, we aspire the same trajectory. We need to make the market for Windows Phone. We have to go to the customer with a clear message that highlights Windows Phone differentiation. The marketing approaches we have used in the past are insufficient. This deal enables us to invest in a single marketing campaign, which allows us to efficiently communicate the Windows Phone value proposition to consumers with one brand and the united voice, making the market for the entire Windows Phone ecosystem.
But the thing I'm most excited about with this deal is how our innovation will accelerate. Our teams have a proven ability to work together, and this deal removes the seams in our collaboration. Nokia's Mobile Phones division reaches a whole new customer segment for Microsoft, shipping over 53 million phones last quarter. We are excited to partner with this team to bring the next billion people onto the Internet. In the area of imaging, the Lumia 1020 has no equal. We are excited to bring this technology together with our breakthrough Kinect camera technology to delight our customers. Our phones have evolved into our personal assistants, helping us navigate our day. This deal brings us a new HERE data license, which when combined with our Bing information platform, will enable us to create a more immersive experience for our customers. From the Skype and Lync experience to next-generation centers to how our devices connect to cloud services, to interactive entertainment, to device categories not yet on the charts, the Nokia and Microsoft teams share a common vision for innovation at the hardware-software boundary. Together, we will now explore this boundary together, ultimately creating opportunities for all Windows OEMs. Together, Nokia and Microsoft have the scale to combat Galaxy, the design to combat iPhone and the innovation capability to lead it all.
Steven A. Ballmer
Great. Thanks, Terry. I want to talk a little bit about the totality of Microsoft and how this deal strengthened us as a company in so many ways.
So on Slide 13, if you will. I want to hearken back to themes we've been striking over the past months, past couple of years of the transformation of Microsoft. The company I joined 33 years ago was a company focused in on software for personal computers, and software is a great skill and will always be a core strength of Microsoft. The PC is an important device, the most productive device on the planet and will continue to be so. And yet for us to -- not only to grow, but for us to really fulfill the vision of what we can do for our customers, we've evolved our thinking. We need to be a company that provides a family of devices. In some cases, we'll build the devices. In many cases, third parties, our OEMs, can build the devices, but a family of devices with integrated services that best empower people and businesses for the activities that they value the most. The core deliverable for us has been software and yet the core way in which people will consume that is through hardware experiences, as well as cloud services, which is a fundamental transformation for our company and which is very, very important. We started the cloud transformation 5 or 6 years ago. We've made great progress. We certainly have been working hard on devices and yet the Nokia acquisition, the deal that we're talking about today, is transformational in terms of giving us the capability to do physical devices in addition to the work we do with our OEM partners on virtual devices for us that is on Windows PC.
I do think and we want to touch on why we believe that a greater smartphone success is good for Microsoft and our shareholders, as well as our partners. And I do want to talk about geospatial services and the work we're doing with the Nokia HERE division because when you think about the high-value services of the future, these mapping and location services are essential, and we think we've made a smart win-win deal in that area.
If you go to Slide 14, the first thing I want to talk a little bit about is essentially, why phones? There are many theories of Microsoft and where we should go that I get a chance to read and hear from investors and from journalists. And in a simple way, I would say, much as apps help operating systems and operating systems help apps, devices help services and services help devices.
Being successful with end users -- I'd use the word consumer, but it implies that people don't have a work life and a personal life, a professional or productive life and a fun life. But being successful with users is absolutely vital to succeed both at work and at home. When people talk about the consumerization of IT, that's a phenomenon that we grew up with. The PC represented the first consumerization of IT. If you want to -- as we do then, to capture a large user base, real people who use our products in many aspects of their life who much focus either on consumer services, devices or some combination. And I would say that in many ways, we're coming at both of these, but devices are particularly important as the place to capture and really involve the end user. And frankly, the device -- while we continue to pursue service opportunity and we see great opportunities particularly for revenue upside in our Bing service, the device opportunity is perhaps the best opportunity for pursuing users in very, very large numbers.
The phone is a device that is, of course, obvious. It is the most popular device, intelligent device now on the planet, and it's important for us to really make sure we have that innovative, high-quality experience that lights up on great devices. We do think that there will be innovation in hardware and in software, and that will give opportunities for us to build market share in the phone as a device and that brings with it appropriate opportunities. I continue to believe that there's enough innovation in devices, unlike some of our investors, that it will be a growth opportunity in terms of the financial rewards to the bold, to the innovative who pursue it. We will -- as we do today, we will support both iPhone and Android/Galaxy phones with our services. We're not holding back services from other phone vendors, platforms in any way. On the other hand, we cannot do a full and first-class experience on those platforms. The level of integration, the level of device support, the level of economic tack taken by the platform vendor, all of those things, we run the risk that Google or Apple will foreclose our ability to innovate, to integrate our applications the way we have in Office, to do distribution or to impose that economic terms. And for all of those reasons, not only in an offensive aspect but in a defensive aspect, we think it's very important to have an absolutely first-rate Microsoft own experience with integrated software and services.
We're not new to devices. There will be over 300 million Windows devices sold this year. Certainly, as I talked to our hardware partners in PCs and tablets, they agree with me passionately that success in phone is important to success in tablets. And I've already had a chance to talk to a number of our big OEMs who are excited about the transaction that we're announcing today with Nokia. We also know that there's a relationship between tablets and PC, so in some senses and in successful investment in Windows Phone and the Windows ecosystem should help raise the tide of everything that we do. And we know that, that rising tide attracts application developers, and we recognize the gaps we have in application ecosystem today, particularly on Windows Phone.
On Slide 15. I want to talk a little bit about why we think we need to do our own phone hardware and what the ongoing opportunity is for our OEM partners. As we discussed, Windows Phone has achieved the #3 position in smartphones globally. Some of you say 3. It's not 2 and not 1. I will tell you, you cannot get to be 2 until you are 3, and we will work very hard on the opportunity that are in front of us. But what it means is we have a smaller share of the real contenders. And today, a very high concentration, over 80% of the Windows Phone business is already with Nokia. And so in terms of evaluating paths that would ensure that we continue to see great Windows Phone devices from the Nokia team and in an attempt to really ask what's the most sensible economic model, it made sense for us to go first party, have our own phones, to ensure Windows Phone presence. We looked at various OEM alternatives, continuing an OEM-only model. Those actually looked prohibitively expensive from a marketing standpoint, and this actually looks to us to be the best risk return and upside opportunity for our shareholders.
Terry talked about why an acquisition is better than continuing from an innovation and marketing standpoint in an arm's length relationship with Nokia, and so we think that combination gives us the maximum opportunities, and Amy will talk some about that from a financial perspective.
We absolutely believe this acquisition grows our OEM opportunity. More success with phone helps our OEMs and tablets and PCs. I talked to a number of OEMs who are more enthusiastic today than they were yesterday about pursuing Windows Phone because they know we have a flagship product with which to blaze trails in this market, and there is plenty of opportunity for OEMs to address the diversity of markets that are out there. And I'm pretty excited. It's a different model than the PC model, but I'm pretty excited about the way in which we can balance our own first party hardware and get support and help that's important from our OEMs.
On Slide 16. In some senses, the question is, why Nokia? We're going to do phone hardware. There is absolutely no question in my mind that Nokia is a first-rate company when it comes to device design and engineering. We know that from working with their teams and seeing their products, device distribution and sales, supply chain, operational processes, hardware distribution, and they can do that today all with Windows Phone. I think there is no question that if we're going to need to be and want to be a scale player in hardware, having a culture, a set of processes, a set of talent and people who really know how to run a first-rate hardware business, is essential. We certainly think we have many talented hardware engineers, but we have a very, very capable team, a team that chips as many smart -- or as many electronic devices as almost any company on the planet now becomes part of Microsoft, and I'm very excited to welcome the Nokia team. I'm traveling in Finland for the next few days, meeting people beyond the leadership team, and I think it's really exciting to see the team that's here.
Finally, I want to talk a little bit about high-value services. Nobody buys hardware for hardware, and it's sometimes hard to get real end users to buy services without buying hardware. So we think about, as I said, devices with services and with Office, with Skype, with Xbox entertainment services, SkyDrive, Bing, we have a powerful lineup of first-rate services to deliver on high-value experiences. But in the mobile world, mapping is essential, and we need a very effective alternative for mapping to Google. It is important to many players, including Microsoft, that there'll be more than one digital map of the world. What we're doing in the partnership today, what we'll do -- I'm sorry, with this transaction, Microsoft will get flexibility to integrate Nokia's HERE geospatial assets into all of our experience. We have great freedom to innovate around the HERE location platform, and yet Nokia can maximize the use of the HERE asset by other industry player. Like every other aspect of the deal being announced today, we examined many possibilities and collectively decided that this new partnership is simpler, more effective and more likely to lead to economic success for both entities and a real second digital map of the world. We will become -- with the conclusion of this transaction, we will become a top 3 customer for Nokia. Those economics are outside the acquisition economics that we summarized in the sheet, but they're in the analysis that Amy Hood will now share with you.
Amy, do you want to talk some about the smartness, so to speak, of this acquisition?
Amy E. Hood
Absolutely, and hello, everyone. As Steve and Terry have both mentioned, today is a very exciting day for Microsoft, and we feel great about the opportunity that this deal represents to drive long-term shareholder value with both top and bottom line growth.
As we turn to Slide 19, let me get into a few specifics of the deal. There are really 2 primary components: First, we are paying EUR 3.79 billion for Nokia's Devices and Services business, which includes thousands of design patents, key brands and the benefit that we receive from Nokia, assigning its patent licenses with third parties to Microsoft. Additionally, EUR 1.65 billion is being paid to license Nokia's broad intellectual property portfolio for 10 years with an option to convert for a perpetual license. We can serve this portfolio to be among the best in the mobile industry, and we will be able to leverage it across Microsoft's entire portfolio of products. Brad will cover the details on these key assets in a few minutes. The combined purchase price will be paid using offshore cash. We do not believe that this transaction will impact our ability to continue to return cash to shareholders. In addition to the Lumia brand of products, an important component of Nokia's Devices & Services business is the scale and breadth of their Asha branded phones and other phones developed by the Mobile Phones business unit. Nokia sold over 53 million mobile phone units in the second quarter, and their strength in gross markets creates a unique opportunity for Microsoft to reach these users as they transition to smartphones. And many of Nokia's strongest smartphone markets are places where the Mobile Phone business was the key part of that foundation.
Now to Slide 20. Earlier, Terry walked through some of the benefits that we'll gain from this deal, particularly from an engineering and go-to-market perspective. Additionally, this deal affords us greater economic opportunity. Under the commercial deal that was in place, we were capturing less than $10 per device in software royalty gross profit in making platform payments to Nokia and investing in sales and marketing support to grow the business. By owning the Devices & Services business, Microsoft will now be able to capture and utilize the entire gross profit of the device, which for Lumia was about $40 per unit in Nokia's most recent quarter. Using assumptions that are in line with industry forecast and current performance and trajectory, after it is integrated into Microsoft, we estimate that we will achieve operating income breakeven for this business when we sell approximately 50 million smart devices a year. For reference, Nokia sold over 7 million Lumia units last quarter, up 32% sequentially. As we continue to drive further scale, the per unit profitability is significantly better for us with this acquisition.
Now to Slide 21. We expect this deal to have a negative $0.08 impact on adjusted basis and a $0.12 impact GAAP earnings per share in fiscal 2014 based on a close date in early calendar 2014. Adjusting for acquisition-related amortization and integration expenses, we expect the deal will be accretive on a non-GAAP basis in fiscal year '15 driven by both increased smart device unit volumes and cost synergies. Cost synergies are expected to occur across both companies over a wide variety of functions. We are committed to operating this business efficiently. As Steve mentioned, Nokia brings significant expertise in areas, such as supply chain and demand planning, and has mature operational systems in place that will be a key asset for the combined entity.
On Slide 22. With this deal, we have a real opportunity to materially drive long-term shareholder value. The smartphone market is expected to reach over 1.7 billion units a year, and as Steve and Terry discussed, this acquisition better positions our company to compete in that market. The directional values presented here are those directly related to the acquired Devices & Services business. In addition, we believe there are opportunities to create additional value with the positive impact on our family of devices, particularly tablets, but also PCs, along with our portfolio of business and consumer services. Those impacts are not included in these numbers.
Before I hand it off to Brad, let me leave you with this. With this acquisition, we have an opportunity to fundamentally change the economic structure of our mobile business. It is a change that, as the business grows, presents an opportunity to deliver enhanced economics with significant additional benefits to other businesses across the company. With the commercial deal showing positive early momentum and both companies assessing their strategic positions, this was the right time to make this deal. And with strong execution is an acquisition that can deliver a significant economic return.
Now let me hand it off to Brad, who is going to talk through some of the details regarding the patents and the intellectual property.
Bradford L. Smith
Thanks, Amy, and hello, everyone. Let me turn to Slide 23 and talk a little bit about the IP aspects of this. If you step back and think about it, it's pretty self-evident that an important part of managing a smart devices business well involves the management of intellectual property rights. Anybody who reads the news will see that if you don't do a good job, you run the risk that you infringe other people's patents, your shipments can be enjoined. Even if you are able to secure licenses, if you're not creative in the way you put all of this together, you can drive up your cost. And indeed -- for some companies, the patent cost amount to 10% or more of their bill of materials. For other companies, that's substantially lower. We put a lot of thought as we've structured this transaction and considered the company's strategic opportunities at addressing the patent issues.
If you look at what we're getting in this agreement, it really breaks down into a few pieces: Number one, there are some IP assets that are being transferred from Nokia to Microsoft. This includes about 8,500 design patents. These are the patents that distinguish the physical features of a product from another product. It includes the transfer of 2 important brands, the Asha brand and the Lumia brand, and we secured a 10-year license to use the Nokia brand on feature phones. So that's what is being moved over in terms of ownership.
Second, there's a patent license for which Microsoft is paying EUR 1.65 billion. This involves the right to, in effect, make use of Nokia's inventions. It doesn't involve the transfer or ownership of the patents itself, but what it does give is it gives Microsoft a license for all of Nokia's patents except for the NSN patents. It gives us the option, which we'll exercise, to convert those license from a 10-year license to a perpetual license, meaning we'll have patent coverage for the life of all those patents. And it also has a broad, 5-year, two-way standstill between both companies, including the NSN patents.
One of the reasons we focus so much on securing this license, one of the reasons it has a high price tag, is because of the very substantial value of Nokia's patent portfolio. When we look at the industry and, in particular, when we look at patents that are relevant to wireless connectivity using the CDMA standard or the GSM standard or 3G or 4G technologies, we really believe that Nokia has 1 of the 2 most valuable portfolios in the industry. The other is Qualcomm's. So we secure the right to use those patents as we produce and innovate in this device space going forward. There is also some significant value for our existing business. We've been making annual patent royalty payments already to Nokia for our existing businesses, and we assign roughly 1/4 of the value of the EUR 1.65 billion patent license to these existing businesses.
If you go to Slide 24, you see the other part of what is a very significant aspect of this transaction. In our view, Nokia has been one of the smartest -- I go as far as to say, the most sophisticated and smartest device company in securing the patent rights it has needed to produce smart devices, smartphones. And under this agreement, the benefits of over 60 patent licenses that Nokia has negotiated with third parties are assigned to Microsoft. The most important of these is with Qualcomm. Nokia reported publicly that it negotiated a 15-year license that went into effect in 2008 with Qualcomm. It paid Qualcomm EUR 1.7 billion. It also transferred to Qualcomm a number of Nokia patents. And as a result, Nokia has, what we regard as, an important and attractive patent arrangement in place with Qualcomm. We now benefit from that arrangement.
But it's not Qualcomm alone. There are a number of other important third parties as well from which we'll now get the benefit of the existing licenses. We get to combine that with the license agreements we've been putting in place over the last few years. And typically, over the last few years, as we've negotiated patent agreements with other companies, we bargained for the right to produce devices if we wanted to go that route. So our existing agreement with Samsung gives us coverage under Samsung's patents without paying additional money. The same is true for a number of other patent agreements that we have in place. When you put all of this together, the IP assets that are transferred, the Nokia patent license, the patent license that are transferred from Nokia to Microsoft, we believe it puts us in the position to have the most cost-effective patent arrangements for any company in the smart devices space.
Steven A. Ballmer
Great. Thanks very much, Brad. I'm going to turn to Slide 26 and talk some about the execution plan. One of the things, which I think we're most sort of acutely focused in on, is how do companies really make big acquisitions work. In this case, we have 2.5 years now of experience in making many aspects of this acquisition work. Our partnership provides us with great confidence. We know the people. We can produce products together. We know how to go to market together. We can do it all more efficiently. We understand that more effectively. We understand that, but -- and I have to say I don't know whether we would be here if we hadn't already operated under our current collaborative agreement to do so much great work.
So building on the existing partnership and the structure of the deal, I've spent time with Nokia's senior team on the Devices & Services side, as did Terry Myerson and others, as part of the transaction -- associated with the transaction, Stephen Elop, and, frankly, most of the leadership team from Nokia on the Devices & Services side is signed up, excited moving over to Microsoft so that we have the opportunity to execute on this without missing a beat; the leader of the Smart Devices side, the Mobile Phone side; the talent and expertise that Juha brings in operations, Chris Weber, who runs the field, all intact. Stefan Pannenbecker, doing some of the most important design on Lumia, joins as part of this deal. We'll hear from Stephen Elop in just a moment. We have a structure for the integration that makes sense to us. Stephen will run our integrated devices organization, and his team on the engineering and supply chain side will come with him and will be kind of the center under which we integrate devices and supply chain. They will be with Stephen. Our phone device R&D will be centered here in Finland. We will consolidate marketing, as well as the development of software services. The Nokia sales team, importantly, will stay intact. We need that team out there everyday, not only just to close, but post close, really generating the sales through the relationships with the operators, and we think we've got a good plan there. We have integration executives mobilized on both sides. Tom Gibbons, who's been with Microsoft over 20 years in a variety of hardware and software aspects of our business, will lead, as will Juha Putkiranta, on the Nokia side. And as I said, we have working rhythms between the 2 companies that are intact.
I'd like to turn things over to Stephen Elop, who will lead the Microsoft devices effort post closing, and is currently -- well, as of yesterday, the CEO of Nokia now is EVP of the devices division of Nokia. Stephen?
Stephen A. Elop
Thank you, Steve, and I'm glad to be able to join you on the call today. At Nokia, we've been building momentum around our Lumia products steadily over the past 4 quarters. We've continued to connect the next billion people with new advancements in our Mobile Phones business. We've been going faster than Nokia has ever gone before. And as other manufacturers have fallen by the wayside or gone sideways, achieving our goal of becoming the third ecosystem is becoming very real. And that is one of the reasons Nokia and Microsoft have entered into this transaction. We believe this transaction will accelerate the momentum of the Devices & Services business. By bringing our teams together, we can increase our share in smart devices through faster innovation, through better products and through unified branding and marketing. In short, we can reduce the natural frictions in the system between our 2 companies. We can invest more resources into the effort, and we can build on the momentum that has already been established. As well, the potential for what we can do with Mobile Phones goes up as we are presented with the opportunity to bring a rich array of Microsoft services to first-time smartphone users and as we create an on-ramp to Windows Phone for people that are having their first smart experiences. Our likelihood of success with Devices & Services goes up as a result of this transaction.
When Steve and I first discussed the original partnership between Nokia and Microsoft in early 2011, we spent a lot of time focused on designing how our companies would actually work together. We put in place the organizational structures and management rhythm necessary for our teams to jointly design and engineer the award-winning products that we have since delivered. Our collective teams have now had 2.5 years of experience with working together side by side every single day. This represented a huge advantage as we entered this transaction because we already know each other. We have learned how to solve problems together, and we continue to share the same rather goals.
That experience with Microsoft, combined with our passion to win with our strategy, has allowed us to confirm that we will be bringing a very talented and motivated team across to Microsoft. For example, Jo Harlow will join Microsoft and will continue to lead Smart Devices. Timo Toikkanen will join Microsoft and will continue to lead mobile devices. Juha Putkiranta will join Microsoft and will lead the integration effort between our companies on behalf of Nokia while continuing to lead operations for us. Stefan Pannenbecker will join Microsoft and will lead design. Chris Weber will join Microsoft and will lead the devices sales team, with the Nokia sales team being the nexus for Microsoft's devices sales team going forward. And as we speak, dozens of other leaders at Microsoft have already confirmed their commitment to the success of this next chapter and are, as we speak, helping everyone else at Nokia through what is an emotional period of time. I'll be focused on leading the talented and passionate teams of Nokia through this transition. I'll concentrate my efforts in the months immediately ahead on the Devices & Services business within Nokia, and when the transaction with Microsoft closes, I, too, will transfer to Microsoft and become EVP of Devices.
We have exciting innovation across Nokia's Smart Devices and Mobile Phones, and with a strong plan for execution, we can accelerate the current momentum to be a more successful leader in the mobile market.
Thank you, Steve.
Steven A. Ballmer
Thanks, Stephen. I just want to underscore one point before I pass things to Brad to talk about regulatory, which is the next step.
I am incredibly proud of the products that we have produced with Nokia. The Lumia Windows Phones in market are some of the best products Microsoft has ever built in terms of capability, design, quality. We're very, very firm in our commitment and belief. We have work to do to establish even greater differentiation. We have work to do on the so-called application gap. We have work to do for market success, but we have created absolutely first rate products of which we are all, at Nokia and Microsoft, incredibly proud, and we will continue that as we move into this new space.
Brad, why don't you talk a little bit about regulatory approval?
Bradford L. Smith
Sure. Thanks, Steve. As an acquisition involving 2 global companies, not surprisingly, this involves merger review by a number governments and regulatory authorities around the world. So we'll be moving quickly to submit this for the requisite approval in the European Union, United States, in China, in countries such as India, Brazil, Russia, Canada, many others.
We're confident that we'll secure regulatory approval in the first calendar quarter of 2014. And I think the basis for our confidence is pretty clear: Number one, this is an instance where you really see complementary assets coming together. Microsoft and Nokia are not competing in this space today. In fact, we're already partners that are collaborating.
And the essence of the rationale for regulators is clear as well. We will be more effective as a competitor in the market by bringing all of these strengths together than by operating separately or through this partnership in 2 different companies. We get to bring together the new capabilities to Microsoft that Nokia has really excelled at over the years. That includes everything from design and manufacturing and inventory and supply chain management to the other aspects that are critical to being in the devices business. That will make us more effective. As Amy pointed out, the economics will enable us to be more effective. In short, we will be a stronger #3, and regulators like it when the #3 competitor in a market has a better opportunity to challenge the 2 market leaders. And at the same time, as Steve has highlighted, we're committed to continuing to work with our partners in the Windows and Windows Phone ecosystems. Indeed, we believe our success in phones will help our partners when it comes to other areas, especially tablets and PCs.
Ultimately, as we all know, regulators quite rightly look first and foremost at what a deal will mean for consumers. In this instance, we believe emphatically that this is good news for consumers. By brining together hardware, software and IP licenses, we're in a position to drive down our cost. We're in a position to accelerate innovation. We're in a position to offer consumers more choice, better innovation and stronger products. That, in short, is what regulators look to approve. That's why we're confident we'll secure approval for this.
Steve, back to you.
Steven A. Ballmer
Chris, I think that pretty much wraps up, and we would love that you have fixed some questions.
Great. Thanks, Steve.
Earnings Call Part 2: