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Who: Tami Reller, Corporate Vice President and Chief Financial Officer, Windows Business
Group; Frank Brod, Corporate Vice President of Finance and Administration and Chief
Accounting Officer; Bill Koefoed, General Manager, Investor Relations; John Seethoff,
Deputy General Counsel
When: Tuesday, September 22, 2009
Where: Segment Reporting Changes for Fiscal Year 2010 - Redmond, Washington
BILL KOEFOED: Good morning, everyone. And thanks for joining us today.
With me on the call are Frank Brod, Corporate Vice President, and Chief Accounting Officer;
Tami Reller, Chief Financial Officer and Corporate Vice President of the Windows Business
Group; and John Seethoff, Deputy General Counsel.
As part of our Fiscal Year 2009 Fourth Quarter Earnings Presentation on July 23rd, we
provided a slide to help you model some recent organizational and reporting changes which
became effective in Fiscal Year 2010. Today, Frank will review our reporting changes, and
their impact to the FY '10 financial statements, while Tami will provide you with some
additional color on the Windows Live reorganization. You can get the slide deck for today's
call on the Investor Relations Web site at www.Microsoft.com/msft.
As I noted, we are offering the call to provide some background information as well as an
opportunity for you to ask questions regarding these changes to help you model our
businesses. We will not be discussing quarterly results, or any other topics beyond this
discussion today. Chris Liddell will join you for our first quarter earnings call on October
22nd, and we'll provide the results for the quarter at that time.
Please note that this call is being recorded. If you ask a question, it will be included in both
our live transmission, as well as any future use of the recording. A replay of the call will be
available on the Microsoft Investor Relations Web site through the close of business on
September 22, 2010.
Also, please note that we may be making forward-looking statements during this call.
These statements are based on current expectations and assumptions that are subject to
risks and uncertainties. Actual results could materially differ because of factors discussed in
our filings with the Securities and Exchange Commission. We do not undertake any duty to
update any forward-looking statement.
Thanks again for joining us today. And with that I'm going to turn the call over to Frank.
FRANK BROD: Thank you, Bill.
And good morning to everyone. We really appreciate you joining us today. As Bill
mentioned, during our fourth quarter earnings call, we presented a slide showing the Fiscal
Year 2009 impact of certain segment reporting changes. In addition to the changes we'll
talk about shortly, we also wanted to highlight that we're renaming the Online Services
Business to the Online Services Division, or OSD. While these changes did not become
effective until Fiscal Year 2010, we're updating previously reported Fiscal Year 2009 results
so that your current year models will have meaningful comparables.
It's important to note that these changes did not impact the consolidated Fiscal Year '09
results of Microsoft. Changes merely impacted the individual segment results previously
The primary change was the move of Windows Live to the Client segment from OSD. This
reorganization increased Fiscal Year 2009 Client revenue by approximately $520 million,
with a corresponding decrease to OSD revenue. In addition, Client's 2009 operating income
was reduced by $560 million, while OSD's operating loss was reduced by the same amount.
Let me now turn the call over to Tami, who will provide additional color on the Windows Live
move, along with the thinking behind the change.
TAMI RELLER: Great. Thanks, Frank.
Let me start with an overview of Windows Live, and then why it made sense to move this
business to be part of the Client P&L, as Frank described.
So, if I start with what Windows Live is, it is a set of applications and services, and they're
all designed to make it easier for users to stay connected to people and information that are
most within their inner circle. Windows Live enables communicating and sharing photos via
Windows Live Messenger, or Windows Live Hotmail, and Windows Live SkyDrive is a service
that delivers storage in the cloud, which allows users to access files and photos really from
The product portfolio of Windows Live also includes a set of applications that we call the
Windows Live Essentials, and this includes Photo Gallery, Movie Maker, Writer, and Family
Safety, and these are really examples of the ways that the Windows Live experience
complements the Windows experience.
A good example is Movie Maker, which has streamlined the way in which consumers can
make movies on their PC. In fact, this is the scenario that has been featured in some of the
Windows 7 television spots with four-year-old Kylie. I'm sure many of you have seen some
of those. So, obviously, the Windows Live experience is also a key part of how we're talking
about Windows 7, and launching Windows 7. And it's really this broad connection between
Windows and Windows Live, this connection of simplifying your PC and tasks that matter
most to our customers, that led us to bring Windows Live into the Client business. So,
that's a bit about the offering.
From a revenue standpoint, Windows Live primarily generates revenue from online
advertising. Going forward, this will continue to be the primary revenue stream. And the
drivers of this revenue continue to be a couple of key things. First is the overall growth in
digital advertising. Obviously, that's key as the movement from offline to online happens.
The growth of the user base as well as the engagement level of those users, and then also
our ability to monetize the inventory that we create through innovations in our advertising
platform. So, those continue to be the key drivers of revenue as they have been. This
doesn't change as we move into the Client P&L.
So, a bit more on the Windows Live business and investments. As noted in the numbers
that Frank discussed, Windows Live operates at a loss with the bulk of our investments in
three major areas. First, data centers that run the Windows Live Services, R&D, and
innovation on the Windows Live platform, and then sales and distribution as we build out
the user base and engagement of our Windows Live base.
The investments in the data centers is one of the most significant investments in the
Windows Live business, and really is a result of the large customer base and the strong
competitive position that we have today across these services. In fact, Windows Live is
number one in instant messaging, and is also number one in mail reach.
To put some numbers to that, we have over 500 million Windows Live customers worldwide,
and in many countries in which we operate, we are the market leader.
Of note is the investments in Windows Live have not changed in this move from OSD to
Client. It is an organizational move, not new or changed investment. So, going forward,
our data center capacity will require investment as our users as well as the engagement of
those users grow. And, these investments would have been reflected in any CAPEX
estimates you would have received from Chris Liddell previously.
In addition, R&D will continue to be an important investment, and we will continue to invest
in distribution to ensure that we expand our user base and the engagement of those users.
Windows Live is clearly strategic to the company, and strategic to Windows, and that's true
both in the short-term, and to the long-term. Windows Live does further our vision to
provide our customers with powerful services for both communication and sharing, and
certainly delivers -- helps deliver on our software plus services strategy in a way that
connects together the PC, the Web, and the cloud.
With that, let me turn it back to Frank who will provide you with the details on some
additional changes to our reporting.
FRANK BROD: Thank you, Tami, for that insight.
In addition to the Windows Live change, we've also moved our mobile services business
from OSD to the Entertainment and Devices division. This reorganization increased Fiscal
Year '09 Entertainment and Devices revenue by $70 million, and decreased operating
income by $50 million. OSD revenue and operating loss decreased by corresponding
Another change I would like to bring to your attention is a new basis for allocating certain
corporate level selling costs. Historically, indirect customer field selling costs were
presented as corporate level activity. We now allocate those costs, which totaled a little
over $1 billion in Fiscal Year 2009, to the business groups that they support and benefit.
In addition to the segment reporting changes announced in July, I also wanted to highlight
two other changes.
First, we're also making a presentation change related to our Media Center business. The
value of our Media Center services, which totaled about $220 million in Fiscal Year 2009,
will be presented as revenue adjustments rather than cost of sales. As our entertainment
and devices division is compensated by the Client business group for the Media Center
technology included in the Windows operating system, you will see offsetting changes in
revenue and COGS in both business groups.
And finally, on August 9th of this year, we announced that we had entered into a definitive
agreement to divest of Razorfish, our digital advertising firm, for approximately $530
million. Prior to the sale, which is expected to close in the second quarter of this fiscal year,
Razorfish was included in OSD. Pending the completion of the sale, Razorfish will be
included in corporate-level activities. And in order to provide you with meaningful
comparables, we have recast Fiscal Year 2009 results to reflect the same, meaning
Razorfish's financial results have been moved from OSD to corporate-level activity.
And with that, let me turn it back to Bill.
BILL KOEFOED: Thanks, Frank.
So, we hope this overview helps you better understand the financial statement impacts of
these organizational and reporting changes. And we now have some time left to answer
your questions. Again, please restrict your questions to items covered only in today's call.
Operator, can you lead the first question.
ADAM HOLT, Morgan Stanley: Good morning, thank you. Do you expect to break out
the contributions related to Yahoo on a going forward basis, and how should we think about
Azure-related streams of revenue flowing through the new breakouts? Thanks.
BILL KOEFOED: So, I think the answer to both of those are outside the context of what
we're talking about on today's call. And I think that's a question, Adam, that you should
hold on for the quarter one call, as I think some of those are a little bit premature at this
point. Specifically, the Yahoo one is going through regulatory review, as you probably
Operator, can you ask the next question.
KATHERINE EGBERT, Jefferies: Hi, thanks. Can you, for both Client and OSD, tell us
how the $560 million breaks out across the operating expense category?
TAMI RELLER: We're not going to provide the detailed breakout of that. But, if you look
at the commentary that I provided, and let me just recap that, it gives you a good sense of
where the items are. Obviously, data center costs would fall into COGS, and that is a
sizable portion of the investment. Sales and distribution would be the next category that I
would describe, and that would be split between sales and marketing category, as well as
some into COGS, then obviously R&D, much more traditional investment there.
KATHERINE EGBERT: Okay. Thanks, Tami.
TAMI RELLER: You bet, thanks.
SARAH FRIAR, Goldman Sachs: Thanks a lot, just a very quick one. Is there the same
deferral on Windows Live that we get with Windows 7, kind of pre the roll out, that
continues. Should we be thinking along the same lines of Windows 7, or it just comes in as
a piece, and it gets recognized as normal?
TAMI RELLER: Yes, fair clarification. It is not included in that same program.
SARAH FRIAR: Okay, great. Thank you.
WALTER PRITCHARD, Cowan & Company: Hi, it's Walter Pritchard here with Ken. Just
one clarification on -- or I guess how this may change any go to market activity around
Windows Live. It sounds like as it moves closer into the Windows business, is there any
change with Windows 7 rollout in terms of bringing some of those services to market, or is
this merely to reflect financial reporting, and no change there?
TAMI RELLER: Yes, it really is primarily a change in the financial reporting to reflect where
we see the synergies and the value going forward. There still will be a very close
relationship, as there always is, across many business groups at Microsoft, but there still
will be a close relationship between Windows Live and the other online advertising work that
we do in the online services group. In fact, we share many of the same sales resources that
exist in the company. And so there's a lot of shared activity, particularly between MSN and
Windows Live, and that will continue.
Having said that, I would say that we're getting better and better at incorporating the full
Windows story into how we talk about Windows, and in particular Windows 7. So, to your
exact question of will you see more of Windows Live scenarios in our Windows marketing,
the answer is progressively yes, and you've seen quite a bit already with what we've done in
WALTER PRITCHARD: Thanks a lot.
BILL KOEFOED: Great. Well, then thanks everybody. We're going to wrap this call up.
And again, hopefully you found it helpful, and you'll be able to obviously access the slides
on the Microsoft investor relations Web site, and the conference call will be available for
replay at that site through next year, September 22nd, 2010. Thanks again, and have a