Analyst Conference Summary


conference date: January 24, 2008 @ 2:30 PM Pacific Time
for quarter ending: December 31, 2007 (Q2 fiscal 2008)

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Forward-looking statements

Overview: Another better-than-expected quarter. Guiding to a strong 2008.

Basic data:

Revenues were $16.37 billion, up 19% sequentially from $13.76 billion and up over 30% from $12.54 billion in the year-earlier quarter (fiscal Q2 2007).

Net income was $4.71 billion, up 10% sequentially from $4.29 billion and up 79% from $2.63 billion year-earlier.

EPS (earnings per share) were $0.50, up 11% sequentially from $0.45 and up 92% from $0.26 year-earlier.


Increasing guidance for year. Assumes global software spending growth remains healthy. 11 to 13% increase in PC unit shipments, and the usual seasonality.

For the March 2008 quarter, revenue is expected between $14.3 and $14.6 billion, operating income between $5.6 and $5.7 billion, and diluted EPS between $0.42 and $0.45. 13 to 14% client growth; server 17% to 19%; business 11% to 12%; online services 40 to 45% growth. 25% to 30% growth for entertainment and devices.

For full fiscal year ending June 30, 2008, revenue between $59.9 and $60.5 billion (up 17% to 18% y/y), operating income between $24.2 and $24.4 billion, and diluted EPS between $1.85 and $1.88.

Conference Highlights:

Revenues exceeded previous record high by over $2 billion. Strength across all customer segments, divisions, channels, and georgraphies. Investments we have made are paying off.

Enterprise segment was particularly strong. 38% growth in online business helped by aQuantive acquisition. Over 60% of sales are outside U.S. Emerging market sales increased over 30% over the year.

Operating margins were a healthy 40%.

Helped by new Zune offering, CRM, Vista demand, and Xbox. Xbox production costs decreased.

Correcting for the Vista deferred revenue issue, year-to-year revenue growth for the quarter was 15%.

14 to 16% increase in underlying PC market was above our expectations.

$12.2 billion in deferred revenues, far above expectations.

Bookings grew almost 20%.

Client market was robust, with revenues of $4.3 billion up 68% (but less when Vista tech guarantee deferred revenues considered). OEM unit shipments grew at 18%. Curbing software piracy is paying off. Premium mix rose 8% to 75%, but business portion did decline. Commercial and retail clients increased 18%. Over 100 million Vista licenses have been sold to date.

Server and SQL Server revenues grew rapidly, as did consulting revenue.

38% increase in online services revenues to $863 million, $154 million was from aQuantive.

Business Division revenue $4.8 billion up 37% (20% normalized for guarantees) from broadbase demand for Office, Sharepoint, Office Communications Server and Dynamics products.

Revenue of $3.1 billion for entertainment and devices, up 3% due to high-demand game titles. 17.7 million Xbox units and lead PS3. 4 game titles sold over 1 million copies in quarter. Zune is doing well.

Cost of revenue decreased by $75 million mainly from Xbox. Operating expenses were up 16%. Operating income was $6.5 billion, growing 40% operating margin, up 4 points.

$4.6 billion cash flow from operations.

120 million shares repurchased for $4.1 million.

Reminded us of the usual risks to guidance.


Can operating margins stay high compared to the past few years? Margins are different in the three parts (core, online, devices). Online business is still in investment mode. Devices has become profitable. But margins on whole should be good for 2008.

Online services strategy? We see it as a multi-year project and continue to invest in it. We did make good revenue growth in quarter, which is due to investments made several years ago.

Anti-piracy color? Historically we grew 1 to 2% faster than PC hardward units, lately we have hit 3% to 4% due to anti-piracy due largely to better legal enforcement. We also get better sell through due to shift to laptops. If is tougher to quantify with Office products. We estimate one-half of the global Office use in pirated.

MBD (Microsoft Business Division)? Growth has been unit driven, not ASP driven. Customer acceptance has been extremely good across consumer, small business, and enterprise. Sharepoint is over a billion $ business now, growing 20 to 30% per year.

If is possible a few verticals might be weak due to economic conditions, but none of them represent even 5% of sales.

Xbox to be profitable in future? It now has a very good attach rate, now about 7 games per console. So software and accessory spend is above cost of console.

Any softness in December quarter in enterprise software? Server had a shift to annuities, which is actually a good sign. No weakness except U.S. market in 1st half grew only 15% compared to non-US growth of 20%. Of course we could be hurt if there is a global slowdown.

EU new investigations? Overall we will cooperate fully.

Online investments now? Investing across a broad spectrum, including search, verticals, advertiser and publisher tools, content and services, and in operational infrastructure including datacenters.

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Copyright 2008 William P. Meyers