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Skype for Business and Skype also compete with a variety of instant messaging, voice, and video communication providers, ranging from start-ups to established enterprises. Web-based offerings competing with individual applications have also positioned themselves as alternatives to our products. We believe our products compete effectively based on our strategy of providing powerful, flexible, secure, and easy-to-use solutions that work well with technologies our customers already have and are available on a device or via the cloud.
Our Dynamics products compete with vendors such as Oracle and SAP in the market for large organizations and divisions of global enterprises. In the market focused on providing solutions for small and mid-sized businesses, our Dynamics products compete with vendors such as Infor, The Sage Group, and NetSuite.
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business. Our server products are designed to make IT professionals, developers, and their systems more productive and efficient. Server software is integrated server infrastructure and middleware designed to support software applications built on the Windows Server operating system.
This includes the server platform, database, business intelligence, storage, management and operations, virtualization, service-oriented architecture platform, security, and identity software. We also license standalone and software development lifecycle tools for software architects, developers, testers, and project managers.
Server products and cloud services revenue is mainly affected by purchases through volume licensing programs, licenses sold to OEMs, and retail packaged products. CALs provide access rights to certain server products, including SQL Server and Windows Server, and revenue is reported along with the associated server product. Azure is a scalable cloud platform with computing, networking, storage, database, and management, along with advanced services such as analytics, and comprehensive solutions such as Enterprise Mobility Suite.
Azure includes a flexible platform that helps developers build, deploy, and manage enterprise, mobile, web, and Internet of Things applications, for any platform or device without having to worry about the underlying infrastructure. Azure enables customers to devote more resources to development and use of applications that benefit their organizations, rather than managing on-premises hardware and software.
Enterprise Services, including Premier Support Services and Microsoft Consulting Services, assist customers in developing, deploying, and managing Microsoft server and desktop solutions and provide training and certification to developers and IT professionals on various Microsoft products.
Our server products face competition from a wide variety of server operating systems and applications offered by companies with a range of market approaches. Vertically integrated computer manufacturers such as Hewlett-Packard, IBM, and Oracle offer their own versions of the Unix operating system preinstalled on server hardware. Nearly all computer manufacturers offer server hardware for the Linux operating system and many contribute to Linux operating system development.
The competitive position of Linux has also benefited from the large number of compatible applications now produced by many commercial and non-commercial software developers. A number of companies, such as Red Hat, supply versions of Linux. We compete to provide enterprise-wide computing solutions and point solutions with numerous commercial software vendors that offer solutions and middleware technology platforms, software applications for connectivity both Internet and intranet , security, hosting, database, and e-business servers.
IBM and Oracle lead a group of companies focused on the Java Platform Enterprise Edition that competes with our enterprise-wide computing solutions. In middleware, we compete against Java vendors. Our database, business intelligence, and data warehousing solutions offerings compete with products from IBM, Oracle, SAP, and other companies. We believe our server products provide customers with advantages in performance, total costs of ownership, and productivity by delivering superior applications, development tools, compatibility with a broad base of hardware and software applications, security, and manageability.
Our Enterprise Services business competes with a wide range of companies that provide strategy and business planning, application development, and infrastructure services, including multinational consulting firms and small niche businesses focused on specific technologies.
Our More Personal Computing segment consists of products and services geared towards harmonizing the interests of end users, developers, and IT professionals across screens of all sizes. The Windows operating system is designed to deliver a more personal computing experience for users by enabling consistency of experience, applications, and information across their devices. Windows revenue is impacted significantly by the number of Windows operating system licenses purchased by OEMs, which they pre-install on the devices they sell.
In addition to computing device market volume, Windows revenue is impacted by:. Volume licensing of the Windows operating system is affected mainly by the demand from commercial customers for volume licensing and Software Assurance, often reflecting the number of information workers in a licensed enterprise, and is therefore relatively independent of the number of PCs sold in a given year. Patent licensing includes our programs to license patents across a broad array of technology areas, including mobile devices and cloud offerings.
Windows Embedded extends the power of Windows and the cloud to intelligent systems by delivering specialized operating systems, tools, and services.
Display advertising primarily includes MSN ads. The Windows Phone operating system is designed to bring users closer to the people, applications, and content they need. We design, manufacture, and sell devices such as Surface, phones, and other intelligent devices, as well as PC accessories.
Our devices are designed to enable people and organizations to connect to the people and content that matter most using integrated Microsoft services and Windows.
Surface is designed to help organizations, students, and consumers to be more productive. In July , we announced a plan to restructure our phone business to better focus and align resources. In May , we announced plans to further streamline our smartphone hardware business. We also recently announced the sale of our entry-level feature phone business in May The transaction is expected to close in the second half of , subject to regulatory approvals and other closing conditions.
Our gaming platform is designed to provide a unique variety of entertainment through the use of our devices, peripherals, applications, online services, and content. We also launched our Windows 10 Xbox app in July Xbox Live enables people to connect and share online gaming experiences and is accessible on Xbox consoles, Windows-enabled devices, and other devices. Xbox Live services consist of subscriptions and sales of Xbox Live enabled content, as well as advertising, and are designed to benefit users by providing access to a network of certified applications and services and to benefit our developer and partner ecosystems by providing access to a large customer base.
We also design and sell gaming content to showcase our unique platform capabilities for Xbox consoles, Windows-enabled devices, and other devices. The addition of Minecraft and its community enhances our gaming portfolio across Windows, Xbox, and other ecosystems besides our own. We believe the success of our gaming business is determined by the overall active user base through Xbox Live enabled content, availability of games, providing exclusive game content that gamers seek, the computational power and reliability of the devices used to access our content and services, and the ability to create new experiences via online services, downloadable content, and peripherals.
Search advertising, including Bing and Bing Ads, is designed to deliver relevant online advertising to a global audience. We have several partnerships with other companies, including Yahoo! Growth depends on our ability to attract new users, understand intent, and match intent with relevant content and advertiser offerings.
The Windows operating system faces competition from various software products and from alternative platforms and devices, mainly from Apple and Google.
We believe Windows competes effectively by giving customers choice, value, flexibility, security, an easy-to-use interface, and compatibility with a broad range of hardware and software applications, including those that enable productivity. Our devices face competition from various computer, tablet, hardware, and phone manufacturers, and offer a unique combination of high-quality industrial design and innovative technologies across various price points, many of which are also current or potential partners and customers.
Our gaming platform competes with console platforms from Sony and Nintendo, both of which have a large, established base of customers. The lifecycle for gaming and entertainment consoles averages five to ten years. Nintendo released their latest generation console in November Sony released their latest generation console in November In addition to Sony and Nintendo, we compete with other providers of entertainment services through online marketplaces.
We believe our gaming platform is effectively positioned against competitive products and services based on significant innovation in hardware architecture, user interface, developer tools, online gaming and entertainment services, and continued strong exclusive content from our own game franchises as well as other digital content offerings.
Our video games competitors include Electronic Arts and Activision Blizzard. Xbox Live faces competition from various online marketplaces, including those operated by Amazon, Apple, and Google. Our search advertising business competes with Google and a wide array of websites, social platforms like Facebook, and portals that provide content and online offerings to end users.
We have operations centers that support all operations in their regions, including customer contract and order processing, credit and collections, information processing, and vendor management and logistics. In addition to the operations centers, we also operate datacenters throughout the Americas, Australia, Europe, and Asia. To serve the needs of customers around the world and to improve the quality and usability of products in international markets, we localize many of our products to reflect local languages and conventions.
Localizing a product may require modifying the user interface, altering dialog boxes, and translating text. We operate manufacturing facilities for the production and customization of phones, predominantly in Vietnam. We announced the sale of our entry-level feature phone business in May , which includes the sale of our phone manufacturing facility in Vietnam. Our devices, other than phones, are primarily manufactured by third-party contract manufacturers.
We generally have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements. We plan to continue to make significant investments in a broad range of research and development efforts. Internal development allows us to maintain competitive advantages that come from product differentiation and closer technical control over our products and services.
It also gives us the freedom to decide which modifications and enhancements are most important and when they should be implemented. We strive to obtain information as early as possible about changing usage patterns and hardware advances that may affect software design.
Before releasing new software platforms, we provide application vendors with a range of resources and guidelines for development, training, and testing. Generally, we also create product documentation internally. We protect our intellectual property investments in a variety of ways. We work actively in the U. We are a leader among technology companies in pursuing patents and currently have a portfolio of over 61, U. From time to time, we enter into broader cross-license agreements with other technology companies covering entire groups of patents.
We also purchase or license technology that we incorporate into our products or services. At times, we make select intellectual property broadly available at no or low cost to achieve a strategic objective, such as promoting industry standards, advancing interoperability, or attracting and enabling our external development community.
While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and business methods, we believe, based upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms. We believe our continuing research and product development are not materially dependent on any single license or other agreement with a third party relating to the development of our products.
We invest in a range of emerging technology trends and breakthroughs that we believe offer significant opportunities to deliver value to our customers and growth for the company. Based on our assessment of key technology trends, we maintain our long-term commitment to research and development across a wide spectrum of technologies, tools, and platforms spanning digital work and life experiences, cloud computing, and devices operating systems and hardware.
While our main research and development facilities are located in Redmond, Washington, we also operate research and development facilities in other parts of the U. This global approach helps us remain competitive in local markets and enables us to continue to attract top talent from across the world. We generally fund research at the corporate level to ensure that we are looking beyond immediate product considerations to opportunities further in the future. We also fund research and development activities at the business segment level.
Much of our business segment level research and development is coordinated with other segments and leveraged across the company. In addition to our main research and development operations, we also operate Microsoft Research.
We market and distribute our products and services through the following channels: OEMs, distributors and resellers, online, and Microsoft retail stores. Our sales force performs a variety of functions, including working directly with enterprises and public sector organizations worldwide to identify and meet their software requirements; managing OEM relationships; and supporting solution integrators, independent software vendors, and other partners who engage directly with our customers to perform sales, consulting, and fulfillment functions for our products.
We distribute software through OEMs that pre-install our software on new devices and servers they sell. The largest component of the OEM business is the Windows operating system pre-installed on computing devices. OEMs also sell hardware pre-installed with other Microsoft products, including server and embedded operating systems and applications such as our Microsoft Office suite.
In addition to these products, we also market our services through OEMs and service bundles such as Windows with Bing or Windows with Office subscription. There are two broad categories of OEMs.
Although each type of reselling partner reaches organizations of all sizes, LSPs are primarily engaged with large organizations, distributors resell primarily to VARs, and VARs typically reach small- and medium-sized organizations. Our Dynamics software offerings are also licensed to enterprises through a global network of channel partners providing vertical solutions and specialized services.
We distribute our retail packaged products primarily through independent non-exclusive distributors, authorized replicators, resellers, and retail outlets. Individual consumers obtain these products primarily through retail outlets, including Microsoft retail stores. We distribute our devices through third-party retailers and Microsoft retail stores.
Our phones are also distributed through global wireless communications carriers. We have a network of field sales representatives and field support personnel that solicit orders from distributors and resellers, and provide product training and sales support. Although on-premises software continues to be an important part of our business, increasingly we are delivering additional value to customers through cloud-based services.
Other services delivered online include our online advertising platform with offerings for advertisers and publishers, as well as Microsoft Developer Network subscription content and updates, periodic product updates, and online technical and practice readiness resources to support our partners in developing and selling our products and solutions. As we increasingly deliver online services, we sell many of these cloud-based services through our enterprise agreements and have also enabled new sales programs to reach small and medium-sized businesses.
These programs include direct sales, direct sales supported by a large network of partner advisors, and resale of services through operator channels, such as telephone, cell, and cable providers. We license software to organizations under agreements that allow the customer to acquire multiple licenses of products and services.
Our agreements for organizations to acquire multiple licenses of products and services are designed to provide them with a means of doing so without having to acquire separate licenses through retail channels. In delivering organizational licensing agreements to the market, we use different programs designed to provide flexibility for organizations of various sizes. While these programs may differ in various parts of the world, generally they include those discussed below. Designed primarily for medium- and large-sized organizations that want to obtain the best value by standardizing on a common IT platform across their organization.
Software Assurance also provides support, tools, and training to help customers deploy and use software efficiently. Enterprises can elect to acquire perpetual licenses or, under the Enterprise Subscription option, can acquire non-perpetual, subscription licenses for a specified period generally three years. Online services are also available, and subscriptions are generally structured with three-year terms.
Software Assurance and online services subscriptions are generally available for a term of up to three years. We plan on expanding the offers under the MPSA in fiscal year to better enable organizations to obtain the best value by standardizing on a common IT platform across their organization. Similar to Open programs, the Select Plus program allows customers to acquire licenses only, acquire licenses with Software Assurance, or renew Software Assurance upon the expiration of existing volume licensing agreements.
A subset of online services is also available for purchase through the Select Plus program, and subscriptions are generally structured with terms between one and three years. In July , we announced the retirement over a two-year period of Select Plus agreements for commercial customers, in favor of modern licensing options. Beginning July , no new Select Plus agreements were signed with commercial organizations, and customers who want to purchase licenses were encouraged to transition to the MPSA.
Starting in July , we will no longer be accepting orders from commercial organizations for Select Plus after their next agreement anniversary. Under the Open Value and Open Value Subscription programs, customers can acquire perpetual or subscription licenses, respectively, over a three-year period.
Online services are available in each of the Open programs. Microsoft Online Subscription Agreement is designed to enable small and medium-sized businesses to easily purchase Microsoft Online Services. The program allows customers to acquire monthly or annual subscriptions for cloud-based services. The Microsoft Cloud Solution Provider program enables partners to directly manage their entire Microsoft cloud customer lifecycle.
Partners in this program use dedicated tools to directly provision, manage, and support their customer subscriptions. Partners can easily package their own tools, products, and services, and combine them into one monthly or annual customer bill. The Microsoft Services Provider License Agreement is a program targeted at service providers and independent software vendors allowing these partners to provide software services and hosted applications to their end customers.
Agreements are generally structured with a three-year term, and partners are billed monthly based upon consumption. The Independent Software Vendor Royalty program enables partners to use Microsoft software in their own software programs. Our customers include individual consumers, small- and medium-sized organizations, large global enterprises, public sector institutions, Internet service providers, application developers, and OEMs.
Our practice is to ship our products promptly upon receipt of purchase orders from customers; consequently, backlog is not significant. As of June 30, , we employed approximately , people on a full-time basis, 63, in the U.
Of the total employed people, 38, were in operations, including manufacturing, distribution, product support, and consulting services; 37, in product research and development; 29, in sales and marketing; and 10, in general and administration. Certain employees are subject to collective bargaining agreements.
In June , management approved a restructuring plan that eliminated approximately 7, positions in fiscal year , primarily in our phone hardware business. In the fourth quarter of , management approved restructuring plans that would result in job eliminations, primarily across our smartphone hardware business and global sales.
In addition to the elimination of 1, positions that were announced in May , approximately 2, roles globally will be reduced during the year as an extension of the earlier plan, and these actions are expected to be completed by the end of fiscal year Our Internet address is www.
At our Investor Relations website, www. Our goal is to maintain the Investor Relations website as a portal through which investors can easily find or navigate to pertinent information about us, including:. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC.
In addition to these channels, we use social media to communicate to the public. It is possible that the information we post on social media could be deemed to be material to investors. We encourage investors, the media, and others interested in Microsoft to review the information we post on the social media channels listed on our Investor Relations website.
We generate revenue by licensing and supporting an array of software products, by offering a wide range of services, including cloud-based services to consumers and businesses, by designing, manufacturing, and selling devices that integrate with our cloud-based services, and by delivering relevant online advertising to a global audience.
Our most significant expenses are related to compensating employees; designing, manufacturing, marketing, and selling our products and services; datacenter costs in support of our cloud-based services; and income taxes. Much of our focus in fiscal year was toward transforming our organization to support our strategy of building best-in-class platforms and productivity services for a mobile-first, cloud-first world. We achieved product development milestones, implemented organizational changes, and made strategic and tactical moves to support the three central ambitions that support our strategy: reinventing productivity and business processes; building the intelligent cloud platform; and creating more personal computing.
We will finance the transaction primarily through the issuance of new indebtedness. The acquisition is anticipated to accelerate the growth of LinkedIn, as well as Office and Dynamics. Part of this strategy involves focusing our phone devices on a narrower range of customer categories and differentiating through the combination of hardware and software we are uniquely positioned to offer.
As anticipated, our change in phone strategy resulted in a reduction in units sold and associated expenses in fiscal year , and this trend is expected to continue in fiscal year Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces.
The market for software, devices, and cloud-based services is dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. We must continue to evolve and adapt over an extended time in pace with this changing environment. The investments we are making in devices and infrastructure will continue to increase our operating costs and may decrease our operating margins.
Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. Aggregate demand for our software, services, and devices is correlated to global macroeconomic and geopolitical factors, which remain dynamic.
Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. The strengthening of the U. See a discussion of these factors and other risks under Risk Factors in our fiscal year Form K.
Our revenue historically has fluctuated quarterly and has generally been highest in the second quarter of our fiscal year due to corporate calendar year-end spending trends in our major markets and holiday season spending by consumers. If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable.
As a result, we have separately disclosed product revenue and service and other revenue on our consolidated income statements. Product revenue includes sales from operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games; hardware such as PCs, tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories; and training and certification of computer system integrators and developers.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office , Azure, Dynamics CRM Online, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising. Segment information appearing in Note 21 — Segment Information and Geographic Data of the Notes to Financial Statements is also presented on this basis. As a result, beginning in fiscal year , we report our financial performance based on our new segments, Productivity and Business Processes, Intelligent Cloud, and More Personal Computing, and analyze operating income as the measure of segment profitability.
We have recast certain previously reported amounts to conform to the way we internally manage and monitor segment performance. We expect to report the financial performance of LinkedIn as part of our Productivity and Business Processes segment. Additional information on our reportable segments is contained in Note 21 — Segment Information and Geographic Data of the Notes to Financial Statements. Windows 10 revenue is primarily recognized at the time of billing in the More Personal Computing segment, and the deferral and subsequent recognition of revenue is reflected in Corporate and Other.
More Personal Computing revenue decreased, mainly due to lower revenue from Devices and Windows, offset in part by higher revenue from search advertising and Gaming. Intelligent Cloud revenue increased, primarily due to higher revenue from server products and cloud services and Enterprise Services. Productivity and Business Processes revenue increased slightly, driven by an increase in Office and Dynamics revenue. Productivity and Business Processes and More Personal Computing gross margin decreased, offset in part by higher gross margin from Intelligent Cloud.
More Personal Computing revenue increased, primarily due to higher revenue from Devices, search advertising and Gaming, offset in part by a decline in Windows revenue. Intelligent Cloud revenue increased, primarily due to higher revenue from server products and cloud services. Key changes in expenses were:. Productivity and Business Processes revenue increased slightly, primarily due to an increase in Office and Dynamics revenue.
Corporate and Other revenue primarily comprises certain revenue deferrals, including those related to Windows 10, Bundled Offerings, and video games. Corporate and Other operating income loss primarily comprises revenue deferrals and corporate-level activity not specifically allocated to a segment, including impairment, integration, and restructuring expenses.
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code.
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel and the costs of advertising, promotions, trade shows, seminars, and other programs.
General and administrative expenses include payroll, employee benefits, stock-based compensation expense, severance expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees.
Impairment, integration, and restructuring expenses include costs associated with the impairment of goodwill and intangible assets related to our phone business, employee severance expenses and costs associated with the consolidation of facilities and manufacturing operations related to restructuring activities, and systems consolidation and other business integration expenses associated with our acquisition of NDS.
Our annual goodwill impairment test as of May 1, indicated that the carrying value of our previous Phone Hardware reporting unit goodwill exceeded its estimated fair value. All remaining goodwill and intangible assets are included in our Devices reporting unit, within More Personal Computing under our current segment structure.
We use derivative instruments to: manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification.
Gains and losses from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other income expense , net. Other than those derivatives entered into for investment purposes, such as commodity contracts, the gains losses are generally economically offset by unrealized gains losses in the underlying available-for-sale securities and gains losses on certain balance sheet amounts from foreign exchange rate changes.
Dividends and interest income increased due to higher portfolio balances and slightly higher yields on fixed-income securities. Interest expense increased due to higher outstanding long-term debt. Net recognized gains on investments decreased primarily due to higher other-than-temporary impairments and lower gains on sales of fixed-income securities, offset in part by higher gains on sales of equity securities. Net losses on derivatives increased due to higher losses on currency and equity contracts and lower gains on interest rate contracts in the current period as compared to the prior period, offset in part by lower losses on commodity contracts.
For fiscal year , other reflects recognized losses from divestitures and certain joint ventures. Dividends and interest income decreased due to lower yields on fixed-income securities, offset in part by higher portfolio balances. Net recognized gains on investments increased primarily due to higher gains on sales of equity securities, offset in part by higher other-than-temporary impairments. Net losses on derivatives increased due to losses on commodity contracts in fiscal year as compared to gains in fiscal year , offset in part by lower losses on currency and equity contracts.
For fiscal year , other reflects recognized losses from certain joint ventures and divestitures. Our effective tax rate was lower than the U. The decrease in our effective tax rate for fiscal year compared to fiscal year was primarily due to changes in the mix of our income before income taxes between the U.
The fiscal year effective tax rate included the tax impact of losses in foreign jurisdictions for which we may not realize a tax benefit, primarily as a result of impairment and restructuring charges. Your support requests will not be processed via this form. To do this, please use the "Create a ticket" form.
Access your community space. Ask questions, search for information, post content, and interact with other OVHcloud Community members. Share Twitter Facebook LinkedIn. Changing a Windows Server product key Objective Requirements Instructions Uninstall the default product key Install the new product key Associate your product key Activate the system Go further. Did you find this guide useful? Yes No. Thank you. Your feedback has been received. Dedicated servers Changing the admin password on a Windows dedicated server.
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