Analyst Conference Summary

conference date: October 23, 2008 @ 2:30 PM Pacific Time
for quarter ending: September 30, 2008 (Q1 fiscal 2009)

as of the date this page was created. Also I sometimes get freelance work from Microsoft.
Forward-looking statements

Overview: Slow-down is evident, but earnings grow propelled by lower share count from stock buy-backs.

Basic data:

Revenues were $15.06 million, down 5% sequentially from $15.84 billion, but up 9% from $13.76 billion year-earlier.

Net income was $4.37 billion, up 2% sequentially from $4.30 billion and up 2% from $4.29 billion year-earlier.

EPS (earnings per share) was $0.48, up 4% sequentially from $0.46 and up 6% from $0.45 year-earlier.

Guidance:

December quarter (Q2 fiscal 2009) revenue range of $17.3 to $17.8 billion, operating income $6.1 to $6.4 billion, EPS $0.51 to $0.53.

Full fiscal year 2009: $64.9 to $66.4 billion in revenues, operating income $24.4 to $25.5 billion, EPS $2.00 to $2.10.

Conference Highlights:

Multi-year annuity sales showed particular strength for Client, Business, and Server and Tools businesses. Customers want to save money and do more with less. Major product releases included Microsoft SQL Server 2008 and Microsoft Hyper-V Server 2008. Guidance was exceeded in quarter.

Economic trends lower "are now forecasted to continue," so focus is now on expense management. Will lower capital spending on data centers; with other reductions, operating expenses should decrease $400 to $500 million. "We believe our exceptionally strong cash flow, product pipeline and financial strength will allow us to weather economic conditions well." September slowness has continued so far into October. Guidance was adjusted accordingly.

Client revenue grew 2% y/y to $4.2 billion. 10 to 12% PC unit growth rate, but mix was shifting to netbook segment. Strong double digit growth in emerging markets. 8% Windows client growth. OEM revenue declined 1% y/y due to price declines. We are doing well in netbook segment.

Server and tools revenue was up 17% y/y to $3.4 billion. Consulting and support service revenue was up 19%. Online $770 million, up 15%, with online ad revenue up 15%. Silverlight served up 70 million video streams for Olympics.

Business division revenue was $4.9 billion up 16%.

$1.8 billion entertainment and devices, down 6% but above guidance, compared to Halo 3 release year-earlier. XBox 360 shipped 3.2 million consoles. Operating margin was up.

Share of server virtualization market increased to 25%.

Contracted Not Built balance increased to over $13 billion. Total bookings increased 6%.

Cost of revenue was $2.85 billion. R&D expense $2.28 billion. Sales and marketing $3.04 billion. General and administrative expense $0.89 billion. Total operating expense $9.06 billion. Leaving operating income of $6.00 billion. Other income was negative $8 million. Income tax provision was $1.62 billion. 27% effective tax rate.

Cash, equivalents and short-term investments ended at $20.72 billion. Inventories climbed markedly sequentially from $985 million to $1.64 billion.

$40 billion share repurchase authorization made in quarter. $6 billion in shares repurchased in quarter.

9.2 billion shares outstanding.

10 to 12% PC unit growth expected in December quarter. 6 to 10% Q2 growth in online services revenue. Entertainment & Devices expected down 5% to up 1% for Q2.

We believe we will outgrow the IT spending market regardless of market conditions.

Q&A:

Premium mix in client business assumptions? It is in the mid-70s. We expect the same going forward. Margins on netbooks are lower than traditional, but may represent growth we would not otherwise have had.

Operating savings plans? On capital expenditures expect to spend about $300 million less in 2009 that prior plans. Headcount will grow less than in 2008. Lower priority spending is being reduced. Marketing spend will be reduced when appropriate.

Unearned income reductions? Q4 is a big billings quarter, so Q1 being down is what we would expect. Going forward economic slowdown will feed into billings. Our customers will be looking for cost-cutting opportunities, including renewals.

Goldman Sachs analyst suggested more major cutbacks to actually improve margins. Leave it to them to suggest profiting from their own screw ups by asking for huge layoffs out in the real world.

Buy backs? Share prices are relatively attractive, but we do not forecast what we do in any particular quarter.

EPS effect from buy backs versus guidance? May be offset by lack of returns from our investment portfolio. Some of our products have very high margins, 90% plus, so it is hard to make up for lost revenue with cost reductions for those products.

Guidance becomes more uncertain as we get further out in the year, that is why fiscal Q2 guidance is narrower than full year.

Inventory jump? We feel good about inventory going into holidays. The price points, including $199 for arcade, are fairly good.

Currency assumptions going forward? About one-third of our business is not in U.S. dollars. "We are pretty much fully hedged for this year."

6% to 12% growth in PC units for back half of fiscal 2009. That is pretty conservative. Emerging markets considerably stronger than established markets.

Merger strategy? Clearly that would be a benefit of this economic environment.

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