Analyst Conference Summary

conference date: April 23, 2009 @ 2:30 PM Pacific Time
for quarter ending: March 31, 2009 (Q3 fiscal 2009)

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

Overview: First year-over-year quarterly decline in revenues since I remember. Showing how dependent Microsoft is on the sales of computers with Windows pre-installed.

Basic data:

Revenues were $13.65 billion, down 18% sequentially from $16.63 million and down 6% from $14.5 billion year-earlier.

Net income was $2.98 billion, down 29% sequentially from $4.17 billion and down 32% from $4.39 billion year-earlier.

EPS $0.33, down 30% sequentially from $0.47 and also down 30% from $0.47 year-earlier.

Guidance:

For full fiscal year ending June 30, 2009, operating expenses will be between $26.7 billion and $26.9 billion (was $27.4 billion). Capital expense $3.1 billion (down from $3.3 billion).

Fourth fiscal quarter 2009 expects overall spending environment remains poor. PC shipments less netbooks to remain weak. Business division transaction revenues are expected to lag PC shipments, but renewals of annuities should be up slightly. Server shipments and attached software will stay weak. Display advertising pricing will remain under pressure. XBox revenue expected to decline on lower pricing.

For fiscal 2010 (July 2009 to June 2010), first half will probably be weak. Believes market conditions will improve in second half. 5000 positions to be cut by July 2010, but 2000 to 3000 new jobs in high growth areas.

Will continue stock repurchases and dividend payments.

Conference Highlights:

Operating income was $4.44 billion, up 3% from year-earlier.

Earnings per share were reduced by $0.06 due to $290 million in restructuring charges and $420 million of impairments to investments. Non-GAAP earnings of $0.39 met expectations.

$5.4 billion free cash flow generated in quarter. $1.2 billion to dividends. $25.3 billion in cash and equivalents at end of quarter.

All segments except enterprise were hurt by the weakness in global markets. Emerging markets were particularly hurt. "Pleased with the organizations's ability to offset revenue pressures with the swift implementation of cost-savings initiatives." Annuity licensing revenue held up well.

Business PC and server hardware sales dropped, hurting the software revenues usually associated with them. There were some pockets of strength, notably netbooks, XBox 360, and Office suites at retail.

We see broad and deep global economic pressures. We believe any recovery will be slow and gradual.

Renewals were 35% of revenue, OEMs 30%, transaction license (single sales) 15%, remaining from other businesses.

Contracted not billed exceeds $12.5 billion, up year/year. Total bookings declined 15%.

PC Market deteriorated 7% to 9% by our metrics, with non-Netbook PCs down 15%. Business refresh cycles slowed. Netbooks were 10% of total shipments, making consumer hardware unit sales flat y/y.

Windows Client segment: $3.4 billion, down 16% y/y. OEM unit sales declined 6%, but revenues were down 19%. Strong attach rate in Netbooks. Sales of premium SKU's were down over 20%. Advertising campaign has had a positive impact.

Business Division revenue was $4.5 billion, down 5% y/y due to PC market hardware decline. Annuity business grew 15%. CRM & SharePoint grew more than 20%.

Server and Tools $3.5 billion, up 7% y/y. Led by SQL Server, Windows Server 2008. Systems Center Manager Suite also did well. OEM business declined.

Online services revenue declined to $122 million or 14%. Ad revenue was down 16%. Page views and search queries grew.

Entertainment and devices revenue declined 2% to $1.6 billion. XBox 360 sold over 1.7 million consoles. Attach rates are 8.3, accessories 3.9.

Windows 7 operating system is on track for fiscal year 2010 launch.

Operating expenses of $9.21 billion included $2.81 billion for cost of revenue, $2.21 billion R&D, $2.98 billion for sales and marketing, $913 million for general and administrative, and $290 million for employee severance. Income tax provision was $1.07.

Employee headcount reduced by 800 during quarter.

Q&A:

As we shift to online model with datacenter investments, those costs will increase faster than sales, impacting margins.

Will Windows revenue drop off before Windows 7 introduction? We expect it will follow PC unit growth in Q4. Pressure will be on business segment, like Office Pro version. Sales should improve with Windows 7 introduction.

The 4th quarter is very important to us in terms of renewals. Customers are price conscious, but most renewals are at past rates. In the past we did better upselling, or sold more seats, which is not happening now.

Cost of goods sold? Trends of last few quarters should continue in general. Hardware costs of good sold move with XBox, online costs will ramp as we depreciate infrastructure costs.

May do a free upgrade to Windows 7 period, but revenues wash over the year in those situations.

Linearity in quarter? Saw no improvement at end of quarter that would indicate we are coming off a bottom. But conditions did stop getting worse in the quarter. Western Europe and U.S. about the same, but Eastern Europe, Japan and Brazil weaker.

Netbook attach rate is now above 90%. Inventory levels got a little lower.

Expenses going forward? We have beaten our targets on operating expenses because employees have cut travel expenses, etc., better than we demanded. Of course we hope to beat the expense numbers we give as guidance, but it depends on execution.

Office price model? ASPs were impacted by our price cuts, which resulted in volume increase. That is not permanent. We also so a mix change to lower SKU's We expect that to continue weak for the foreseeable future.

New software releases are going to be into a soft economic environment. When we get an economic pickup, we think we will outperform the pickup because of the new products.

Stock repurchases? Did not make in quarter in order to build up cash. Going forward will still purchase shares, but will depend on environment and will vary by quarter.

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