Microsoft Corporation. Q3 2010 Earnings Call Transcript

Microsoft Corporation. Q3 2010 Earnings Call Transcript
By Seeking Alpha ,

Microsoft Corporation (MSFT)

Q3 2010 Earnings Call

April 22, 2010 5:30 p.m. ET

Executives

Bill Koefoed – General Manager, Investor Relations

Peter Klein – Chief Financial Officer

Frank Brod – Chief Accounting Officer

John Seethoff – Deputy General Counsel

Analysts

Heather Bellini – ISI

Walter Pritchard – Citigroup

Adam Holt – Morgan Stanley

Sarah Friar – Goldman Sachs

Brent Thill – UBS

John DiFucci – JP Morgan

Phil Winslow – Credit Suisse

Kash Rangan – Merrill Lynch

Brad Reback – Oppenheimer

Katherine Egbert – Jefferies & Company

Brendan Barnicle – Pacific Crest Securities

Rob Breza – RBC Capital Markets

Tim Klasell – Thomas Weisel Partners

Presentation

Operator

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Welcome to the Microsoft Third Quarter Fiscal Year 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator

Instructions). Today’s call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Bill Koefoed, General Manager, Investor Relations. Sir, you may begin.

Bill Koefoed

Thanks, Barb. And thanks everyone for joining us this afternoon. With me today are Peter Klein, Chief Financial Officer; Frank Brod, Chief Accounting Officer; and John Seethoff, Deputy General Counsel.

Today Peter will start with overall takeaways from the quarter. Then I’ll give you the details of our performance before handing it back to Peter, who will discuss our outlook. After that we’ll take your questions.

Please note we filed our Form 10-Q this afternoon. In addition, we posted our quarterly financial summary slide deck, which is intended to follow the flow of our remarks as well as provide a reconciliation of differences between GAAP and non-GAAP financial measures. You can find these documents at the Microsoft Investor Relations website at microsoft.com/msft.

Today’s call will be webcast live and recorded. If you ask a question, it will be included in our live transmission, any future use of the recording and in the transcript, which will be posted on our website. You can replay the call and view the transcript at the Microsoft Investor Relations website until April 22, 2011.

This conference call is protected by copyright law and international treaty. Unauthorized reproduction or distribution of this call or any portion of it without the expressed written permission of Microsoft may result in civil and criminal penalty.

We will be making statements during this call that are forward-looking. 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 today’s earnings press release, in the comments made during this conference call and in the risk factors section of our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement.

Okay, Peter, it’s all yours.

Peter Klein

Thanks, Bill. Good afternoon everyone. Our third quarter results reflect our strong product momentum, continued focus on controlling costs and the beginning stages of a return in business hardware spending. This quarter we generated record third quarter revenues and operating cash flow.

In addition, as a result of revenue growth and our ongoing focus on cost management, when adjusting for the impact of the Tech Guarantee programs this year. We had our third consecutive quarter of year-over-year margin expansion.

Strong demand for Windows 7 is a primary contributor to our performance. As evidence of that strong demand both internal and external checks show that over 10% of all PCs worldwide are already running Windows 7.

While reaching this level of penetration in six months qualifies Windows 7 as our fastest selling operating system ever, it also illustrates how much opportunity still remains. As I have met with investors, I’ve commented on the tremendous product momentum we have, which was evidenced this quarter across all our businesses.

Bing achieved 10 consecutive months of market share growth since its launch and both the U.S. Department of Justice and the European Commission cleared our search agreement with Yahoo!

Azure, our cloud development platform became commercially available in 41 countries. In the mobile space, we announced Windows Phone 7 and Kin. At last Friday, we released Office 2010 to manufacturing and are looking forward to its launch in June.

All of this was achieved while continuing to focus on managing costs and prioritizing our investments. As a result, we delivered operating income and earnings per share growth ahead of revenue growth with earnings per share of 36% over last year. We also returned $3.1 billion of cash to investors through dividends and stock repurchases.

So in summary, I’m pleased with our continuing performance this quarter. We had great momentum with current products in market. We have a very exciting pipeline of new products to come and we continued to deliver strong financial results.

I’ll now hand the call back to Bill to give you some additional details on the quarter and then come back and provide some thoughts on our outlook for our fourth quarter and the next fiscal year.

Bill Koefoed

Thanks Peter. As I review this quarter’s performance, keep in mind that all growth comparisons relate to the corresponding quarter of last year unless I specify otherwise. As Peter said, we had another strong quarter.

Overall, GAAP revenue grew 6% to $14.5 billion. During the quarter we deferred $305 million of revenue related to the Microsoft Office 2010 Technology Guarantee program. Adjusting for this amount, revenue would have been $14.8 billion, 8% growth over the prior year period.

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