Analyst Conference Summary

conference date: April 24, 2008 @ 2:30 PM Pacific Time
for quarter ending: March 31, 2008 (Q3 fiscal 2008)

as of the date this page was created
Forward-looking statements

Overview: Not a good quarter, as growth stalled and earnings sank due to the European fine.

Basic data:

Revenues were $14.45 billion, flat from $14.40 billion year-earlier.

Net income was $4.39 billion, down 11% from $4.93 billion year-earlier

EPS (earnings per share) were $0.47, down 8% from $0.51 year earlier.

Guidance:

Fiscal Q4, ending June 30th, revenues expected between $15.5 and $15.8 billion. Operating income $5.8 to $6.2 billion. EPS $0.45 to $0.48.

Full fiscal year ending June 30th, 2009 preliminary guidance: revenues $66.9 to $68 billion. EPS $2.13 to $2.19.

Conference Highlights:

Revenue growth was led by 68% y/y growth in Entertainment and Devices revenue, including Xbox 360. Also 18% y/y growth in Server and Tools segment.

Claims revenue and other numbers actually grew from year-earlier if you subtract out $1.7 billion of Q3 fiscal 2007 revenue from the Technology Guarantee and Pre Shipment deferals resulting from the earlier introduction of Vista. Claims normalized y/y EPS growth was 27%.

GAAP numbers include a charge of $1.42 billion, or $0.15 per share, for the European Commission fine. There was an Income taxe benefit of $0.15 per share for the resolution of a tax audit.

Operating expenses were $10.05 billion. Operating income was $4.41 billion. Income tax provision $0.42 billion.

8 to 10% y/y growth in PC market.

$11.5 billion contracted-not-built balance. Total bookings grew 14% y/y.

Client segment $4 billion revenue, down 24%, or up just 2% adjusted for tech guarantee. 76% of mix was premium.

Server and Tools segment had $3.3 billion revenue, up 18% y/y.

Online Services segment $843 million revenue, up 43%, advertising grew 39%, both partly due to acquisitions.

Business division revenues were $4.7 billion, down 2% y/y, affected by tech guarantee.

Entertainment and Devices segment was $1.6 billion up 68%. In lead over PS3.

9 to 11% PC hardware global growth (y/y) expected for Q4. 11% to 13% for full year.

Tax rate expected to decline in fiscal 2009 due to shift of revenue to lower rate jurisdictions.

Yahoo: Microsoft can do its online advertising strategy alone if necessary. Given our offer premium, we expected a speedy agreement, but Yahoo has delayed. Microsoft is not in favor of raising its offer.

Q&A:

Macroeconomic impact? We are diverse and global. Could be impacted if a downturn gets worse than it is. 2/3rds of our business is outside U.S., and a weak dollar helps us.

Robust 2009 guidance? Does included expected online growth. 20 to 25% of expense growth will be to drive online division. Yahoo would be an overlay.

Currency impact in quarter? Around a 3% impact for both revenue and expenses.

Piracy? We did good in fiscal Q1 and Q2, not so good in Q3. We still believe we can drive unit growth about 1% faster than market growth as we reduce piracy. It is lumpy from quarter to quarter; needs to be looked at on a long term basis.

PC demand? Started fical year believing 9 to 11%, and Q3 was 8 to 10%. Ending year at 11 to 13% despite macroeconomic backdrop. Q4 expects 9 to 11% (over prior year) We are seeing nothing unusual so far this quarter.

Vista v. XP? No Vista issues in Q3. We are happy to sell a unit of XP instead of a unit of Vista.

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