Analyst Conference Summary

conference date: July 17, 2008 2:30 PM Pacific Time
for quarter ending: June 30, 2008 (Q4 fiscal 2008)

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

Overview: Pretty rocking quarter for a company that was supposed to be destroyed by Google, Linux and Open Source; but missed Street estimates.

Basic data:

Revenues were $15.84 billion, up 10% sequentially from $14.45 billion, and up 18% from $13.37 billion year-earlier.

Net income was $4.30 billion, down 2% sequentially from $4.39 billion, and up 41% from $3.04 billion year-earlier.

EPS (earnings per share) was $0.46, down 2% sequentially from $0.47, and up 48% from $0.31 year-earlier.

Guidance:

For fiscal Q1 2009 ending September 30, 2008, revenue $14.7 billion to $14.9 billion; operating income $5.9 billion to $6.0 billion; EPS $0.47 or $0.48.

For full fiscal 2009, revenue in the range of $67.3 billion to $68.1 billion; operating income in the range of $26.3 billion to $26.9 billion; EPS in the range of $2.12 to $2.18.

Conference Highlights:

Microsoft met or exceeded its guidance. Fastest revenue growth in a decade. Demand was strong across all of our businesses.

Operating income was $5.68 billion. Percentage comparisons year-to-year for EPS and net income was distorted by the $1.1 billion charge in Q2 2007 for Xbox warranty coverage.

“The outlook for fiscal year 2009 is positive given the breadth of our impressive technology portfolio and the expanding collection of online services we are bringing to market,” said Kevin Turner, chief operating officer.

Cost of revenue was $2.87 billion; R&D $2.41 billion; Sales and Marketing $3.88 billion; General and Administrative $1.00 billion. Total operating expenses were $10.15 billion. Leaving operating income of $5.68 billion. Other income was $284 million. Income tax provision was $1.67 billion.

Total cash and short term investments ended at $23.66 billion.

15% y/y increase in U.S. revenues, 35% increase in emerging markets, 16% other markets.

We have continued to make acquisitions and increased organic investments, particularly in our online businesses.

Enterprise renewal rates were in line with historical trends. Contracted not billed balance increased to over $13 billion, up $3 billion y/y. 23% total bookings growth. Foreign exchange rate changes added about 4% to revenues.

Client segment PC market unit growth rate was 12% to 14%. Client revenue growth grew 16% to $4.4 billion. OEM unit growth was faster than overall market. Gains were made on piracy, including in Asia. Lower ASPs due to mix shift towards emerging market. Over 180 million Vista licenses sold to date.

$3.7 billion revenue for Server and Tools segment, up 21%. Consulting revenue grew 30%. HyperV was released 2 months ahead of schedule.

24% increase to $838 million for online services. Advertising grew 18%; monetization lagged despite increased searches. Difficult advertising market.

Business division revenue was up 14% to $5.3 billion.

Entertainment and Devices division revenue was up 37% to $1.6 billion. Sold 1.3 million Xbox consoles. 7.7 software titles per console.

$5 billion in stock repurchases, $1 billion paid out in dividends.

Expects PC unit demand growth rate to remain healthy, driven by 20% growth in emerging markets, and single-digit growth in developed markets.

Has aggressive growth targets for advertising revenue over the next 5 to 10 years. Yahoo transaction would have helped us achieve our goals; instead we decided to accelerate our organic search and advertising goals.

Q&A:

Macroenvironment change since last quarter? Broadly speaking, it has remained the same. People are getting concerned about length of softness in U.S. We are growing faster outside the U.S., but we grew 15% in the U.S. over the last year. But online advertising demand was weak.

Cash flow issues? Payment of $1 billion plus fine to EU was the biggest issue; otherwise was a strong quarter. DSO (uncollected payments) was high, but that is typical for fiscal Q4.

Without Yahoo can you compete with Google? We are committed to advertising and search spaces, regardless of Yahoo. We have a good position in online content. We are most behind in search, where we are focusing on searches with commercial intent.

How long will you continue to spend your margins to make gains online? No timeline; as long as it takes.

Is return in aQuantive and other online investments taking longer than expected? Significant impact on revenue is not likely to be seen until 2010.

Client revenue growth weak? A number of factors, including difficult comparison, summary is will be the lowest client revenue growth rate for the year.

Cash and buybacks? This year we got to a level of cash we were more comfortable with, also we thought we were going to use a large amount of cash for the Yahoo acquisition. At these prices Microsoft stock is very attractive on a buy back basis.

Office 2007 vs. MBD? Business division did extremely well last year. Office was light mainly in the consumer area due to shift to lower priced versions. Overall adoption has been extremely good. Office is likely to grow at high to single digit rates, Sharepoint and other products will increase the growth rate to 14% to 15%.

Profitability of games and entertainment? We dropped prices this year. Windows Mobile is also in that group. Profitability will be sustainable.

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