Microsoft Conference Call Live Commentary (MSFT)

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By now, even the pygmies have figured out that Microsoft Corp. (NASDAQ: MSFT) had an awful quarter.  We already signaled the top-line and bottom-line miss this morning, and a warning that was without any formal quantitative guidance.  So we decided to listen in on the company’s conference call.  So far, the call leaves very little to be desired.  We have taken many of the conference call comments and paraphrased or quoted where appropriate.  We also included some of the Q&A from Wall Street analysts which you will recognize, and we have also regrouped some of the data where it is more important rather than sequentially.

CFO Chris Liddell and CEO Steve Ballmer has called this a "once in alifetime condition," but then went on to explain that the economy isresetting itself to lower levels of spending.  That is an echo of whatIntel just said last week.  In short, get ready for no growth for theforeseeable future, and then growth will be based upon a starting pointat lower levels.  Ballmer also said that the company plans to takemarket share during the economic crunch.

CFO Liddell also said that he expects Windows sales to track that ofthe PC market and said that the "netbook attach rates exceed 80%…"But premium Windows SKU’s fell in double digits.

The company repurchased about 94 million shares for some $2.2 billionin the last quarter.  Another area that Ballmer is outlining is"priorities."  He noted that Xbox, search, and servers are a priority.

  • OUR OWN PERSONAL NOTE: Please make interoperability a priority too.Firefox kept crashing when accessing the Microsoft call, so I had touse Explorer for that Silverlight play.

ON M&A… The CFO said that the opportunity to buy companies willbe great, but Microsoft likely won’t be doing anything major over thenext quarter or two. 

BROKER/ANALYST Q&A

GOLDMAN SACHS (SARAH FRIAR) asked about making money on fast growth segments:
Steve Ballmer said there is no magic number (in reference to an "8%Delta") and referenced that there will be a reset to a lower number.CFO said there are more moving pieces here than prior quarters.  Willsee inventory contraction, but will lose and gain in various parts ofother markets.

BANK OF AMERICA ANALYST (FRANKEN)
asked on headcount reduction and spendingslowdown.  This still leaves operating expenses of 10%, and he asked ifthis means the company is factoring in a rebound in 12 to 18months….. "Are you open to a new round of layoffs if needed?"…
Ballmer said we are not used to down markets and are used to the old 8%growth….. "Our model is not for a quick rebound…"  He thinks itwill rebuild from a lower base.  Ballmer said the basic view is thatthe expense structure will be the base case (could get better, couldget worse).

WINSLOW from CREDIT SUISSE:  Asked about charges this year….CFO Liddell said "tens of millions to low hundreds"

OPPENHEIMER ANALYST:  On slowing down repurchases and taking costs down…. Why not buy back more "of the best investment you have"….
CFO said the company will continue to be a net buyer of shares.  Hethinks that there will be small to medium acquisition opportunities…WE WILL NOT GET OUT OF BUYBACK ACTIVITY…. Ballmer noted that "wetendered at $25 because we thought they looked super-cheap."

JPMORGAN ANALYST:  Follow up to other questions, about decliningenvironment and challenging conditions……"Are you really resettingexpenses to deal with what is out there?"  because operating expensesare still going to be up….
CFO said point is valid… but said company has items in the pipelinethat will play out over 18 months rather than just the next fewmonths…. will layer in over time.

DEUTSCHE BANK ANALYST: On consumer versus transactional business, and annuity type pf business….CFO said annuity business was good in first and second quarter,provides some degree of insulation as it still grew 2% revenues….over time sees that annuity business slowing, enterprise resigningrates were in line with historic rates, broadly flat rather thandeclining.  CEO Ballmer said they recognize it at some insulation, but renewalcontracts are not all at same dollar rates because of shrinkingcompanies etc….
CFO said Xbox is non-annuity, but annuity is generally 30% to 40% of the company’s business.

RBC CAPITAL ANALYST:
When would you review your portfolio and decide to divest assets or technologies.
BALLMER said he likes the portfolio and the board likes the portfolio.  And that was essentially it.

JEFFERIES ANALYST:  Slowing buybacks to preserve capital, but adding search jobs… Is that status quo with Yahoo!????
Ballmer, said "we haven’t said anything about Yahoo!.  He knows Carol Bartz well, but hasn’t had anything.
CFO Liddell said that acquisition is no longer on the books. 
Ballemer then said they only purchased one company over $1.5 billion and 3 things over $1 billion, so we are not in big M&A.  He also noted the differences of some pricing today versus early last year (referring to Yahoo! share price and expectations.  Personal take: Microsoft wants to talk that down or kill it entirely… for now.

Here are some of the Steve Ballmer words from the memo that went out to employees:

"…we will eliminate up to 5,000 positions in R&D, marketing,sales, finance, LCA, HR, and IT over the next 18 months, of which 1,400will occur today. We’ll also open new positions to support keyinvestment areas during this same period of time. Our net headcount inthese functions will decline by 2,000 to 3,000 over the next 18 months.In addition, our workforce in support, consulting, operations, billing,manufacturing, and data center operations will continue to change indirect response to customer needs."

"… We’ll cut travel expenditures 20 percent and make significantreductions in spending on vendors and contingent staff. We’ve scaledback Puget Sound campus expansion and reduced marketing budgets. We’llalso reduce costs by eliminating merit increases for FY10 that wouldhave taken effect in September of this calendar year.

ADDITIONAL LABOR COMMENTS: company will cut roughly 15% of external contractors in all of the cuts it it plans now.

That is all…… As noted, a ghastly call if you compare it to anything in the past…..

Jon C. Ogg
January 22, 2009

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