Microsoft Corp. (NASDAQ:MSFT)
Microsoft to Acquire Skype Press Conference Call
May 10, 2011 11:00 AM EST
Frank Shaw – Head of Communications
Steve Ballmer – CEO
Tony Bates – CEO, Skype Global S.à r.l
Peter Klein – CFO
Ryan Lawler – GigaOm
Michael Kaplan [ph] – Fortune
Good morning. I’m Frank Shaw, Head of Communications for Microsoft. Thanks for coming by today. We heard there wasn’t much going on today, so wanted to make sure you had some news to cover. In just a minute, Microsoft CEO, Steve Ballmer and Skype CEO, Tony Bates will talk about our news from earlier this morning, and then I’ll moderate a short Q&A.
Just a reminder no flash photography and please limit photos to the first few minutes of the presentation.
Now for the fun stuff. During this conference we will be making statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk 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 statements.
Now, please welcome Steve Ballmer and Tony Bates.
Thanks. Thanks everybody for coming today. It’s a real pleasure to have a chance, Tony will be up in a minute, we thought we'd have a chance first to greet you together.
Today is a big day for Microsoft, and Skype, as well as consumers and businesses around the world. By bringing together the best of Microsoft, and the best of Skype, we will empower people around the world with new technologies that should bring them closer together. In a sense, if that sounds familiar, it's because it's at the core of who we are at Microsoft. We create technology that makes life better for billions of people, and millions of companies around the globe. We're making life better by providing tools that help people to learn, to analyze, to take action, as well as to enjoy, and to socialize.
At Microsoft, we're doing this through a number of products, products like our Office product, which enables users to consume information, to create and to communicate; Bing, which moves beyond serving up lists of information and tries to help people analyze the information, and actually make decisions and take action; Xbox, Xbox LIVE, and Kinect, creating tools for an enjoyable and social experience in the living room and online.
Communications, though, is perhaps the most fundamental area in which technology can be transformative. Communications is changing rapidly, and there are plenty of opportunities ahead. We'll move beyond email and text to rich experiences in the future, talking to friends and colleagues around the world will be as seamless as talking to them across a kitchen table or a conference room.
We dream about building experiences that aren't limited by distance or device. We dream about how to build experiences where people can enjoy and connect with the people and groups of people most important to them in the ways that are most natural. Think about everyday experiences, and how they can become more connected, like attending a college lecture, joining a PTA meeting, preserving memories from a family reunion, or simply having meetings with groups of colleagues. All of these experiences will be enhanced with online technology to make them richer and better, whether you're there in person, or you need to participate remotely.
At Microsoft, we see enormous opportunity that brings together what people want -- data, voice, video, IM, all on a single screen -- whether it's a smart phone, a PC, a slate, or the TV. Microsoft and Skype together will define this future and what it really, really looks like. Anytime, I would say, people around the planet talk about communications, they talk about Skype. The Skype brand has become a verb, nearly synonymous with video and voice communications. Clearly, Skype has built an innovative product with global scale, and the number of Skype users is rapidly accelerating, which really was exciting to me. There are 170 million connected Skype users, growth of 40 percent year over year. That number is growing by 600,000 new registrations every day.
And these are very engaged users. Skype users use over 207 billion calling minutes in 2010 alone. In February Skype had about 30 million concurrent users on the service, which is really phenomenal. I had a Skype yesterday with Tony Bates, and I happened to notice there were 25 million concurrent users at the time, just to give you kind of a sense.
These users love the video chat capability and it's exploding. It now represents more than 40 percent of all Skype use.
With that kind of growth engagement, Skype has developed multiple revenue streams, and overall revenue has grown 20 percent year-over-year, and I think represents a very significant go-forward opportunity. In case it's not clear, I'm excited about the Skype business. Microsoft has a strong history with Skype. We're familiar with them, based upon the Skype client work on Windows, and we've been talking for a while about other important partnership opportunities, including partnering in the advertising area.
Based on Skype's great market position and innovative technology though, it became clear to use that we had the opportunity to do even more together as a single company in a way that would be innovative and beneficial to customers, as well as both companies. So, we made an unsolicited offer to acquire Skype, to Silver Lake. We finalized price in mid-April, and we signed the deal last night.
Tony Bates, the current CEO of Skype, and soon to be president of the Microsoft Skype division, and I had a chance this morning to talk to Skype employees around the world, but particularly in Europe where Skype has a strong base of operations and developments, and product management and other things.
We did that very early this morning, in order to be able to reach the folks in Tallinn, in Estonia, who are ten time zones difference before they went home today, and we'll be going down to visit with Skype employees in Palo Alto later on today. Tony and I are actually heading to Europe for the weekend to meet with employees in a number of locations. Skype is a great business, and the heart of that business is the great people, and I certainly am looking forward to spending time with a broader group of employees over the next few days, building on the relationships we have with Tony and his leadership team.
In that context, I want to talk more specifically about the number and nature of the opportunities that we see ahead. First, and I've got to underscore this, we're committed to the Skype user base. Today and into the future we want to continue to build and engage that base, as Skype is doing today. Once we complete the regulatory process, Skype will become a Microsoft division. Tony will join the leadership team reporting directly to me and running the Microsoft Skype Division. Our vision is that products and services that Skype users know in lots today will simply grow and be enhanced. Part of that commitment is to continue investing and supporting Skype on non-Microsoft client platforms.
Secondary I want to talk about is the huge potential for us together to create new user experiences and market opportunity. We’re committed to optimizing Skype for the TV with Xbox and Kinect for the Windows Phone and the Windows PC. The opportunity to think about the design, software, application and communication experience and the hardware together is exciting for both companies.
At the same time, we want to extend the reach of Skype by connecting Skype users with users of our Outlook products, our Lync, Enterprise, Unified Communications product, Xbox LIVE, and other opportunities like Messenger and Hotmail. Fundamentally, part of our strategy here is to build and grow the Skype brand and we think that both of these activities have a chance to not only enhance customer value but enhance the brand reputation of the Skype brand.
We’re excited about the opportunities that we see in the consumer and the commercial area. But the one I’ll underscore just a little bit more is on the business or commercial side. For business, we’ve had an incredible uptake of our Lync and Unified Communications plan and we’re committed and want to build on that success. As I said, the product is off to a fantastic start and we have in plans to enhance it in addition to connecting it into the rest of the Skype customer base which I think in and off itself will be viewed as a great value to our customers.
Through this acquisition, we also think that there will be a number of other new ways to work proactively and positively on the partnerships that we put in place with mobile operators around our Windows Phone, and that will be an area of focus as we get through the regulatory process.
So if you’re a user or a consumer, how does this news really impact you? Let me kind of show you a little bit of a picture. We all know that people have things that they do at work and people have things that they do at home, and they have devices that they use that span both their work and personal life. What we want to do is to bring tools that help you communicate to everybody in your life no matter which persona you’re in and how you want to work. Outlook is such a tool. You can manage all of your electronic mail communications and calendars, your work life, personal life in Outlook. In a sense what you can say here is that Skype joins in really quite naturally. It connects both work and home and it fits into the context to the way that people live. It enables communication across all of people’s lives and all of their devices.
What I’d like to do now to talk more about Skype and to give a point of view from Skype on the deal is to introduce as I said the future President of the Microsoft Skype Division and current Skype CEO, Tony Bates. Tony?
Thank you, Steve. Thank you. This is really a big day to Skype. I think it’s a big day for our users. First and foremost, it’s a big day for our community for this incredible network effective global network that we have today. But most importantly, it’s a big day for all of our Skype employees. We’re incredibly excited about the opportunity as you laid out there Steve. And what I want to do is I want to share a little bit of perspective about what Skype really is today, where it’s come.
If you think about the history and the culture of Skype, it was found in 2003. It was founded around very disruptive and innovative software, very similar to the founding DNA of Microsoft in actual fact. And Skype has really grown from a sort of single platform capability into multi-client, multi-capability across many different devices, across many different geographies moving from voice and text to rich video.
What that really allows us to do as a key set of assets if you think about the core of what Skype is today, it’s being able to create a very, very engaged user base. Steve shared with you some of the incredible numbers, but we’re in a very special place in the industry. Not only are we a verb, it’s exciting to be use in that context where people say, “Can I Skype you?” and the first thing I think about is voice or video on a global basis.
We’re also part of a very exclusive club. I’d like to think of it is as the 100-100 club. We have over a 100 million users that who use us each and every month each, a 170 million at last count. So we also have a very, very engaged user base. A user base on average uses a 100-minute per user per month. They use us because we create great experiences. We’d like to think of it as a universal service that’s useful in terms of everyday life, in terms of business and creates incredible moments in terms of the way people use it.
There is an incredible use cases; people that are in remote location to use it to see their baby being born in very difficult to reach locations around the world, where some of them might be in the service, many, many of these stories. That engaged user base has taken us on a very fast growth trajectory and creates tremendous amount of monetization opportunities.
Skype is focused on three key opportunities. The first is our core communications business. Our communications service which has been around really since the start which started with voice has moved to video. On top of that, we layer new premium subscription packages, new ways of thinking about the way that people communicate, not only in real-time but also in non-real-time. That’s the key part of I think the shared vision. When we think about magical moments, sharing things together in a rich and expressive way, that’s a key lever of Skype strategy.
Also when you have such a large user base and such an engaged base we have an opportunity to change the way that we think about advertising, and we launched into that and that’s a key part of our monetization. When we start to think about those combined with the innovation we put in technology, we believe we have a very, very strong self key core assets that when we think about a partnership with Microsoft can only get accelerated around some of the ideas that Steve talked about.
We also have a very fundamentally strong business. We wouldn’t be here today if Steve didn’t believe that, if Microsoft didn’t believe it. We’re profitable, we’ve been growing at great rate, and we’ve got the foundation to build off that and keep growing the core assets. But I think what’s more important for us as we think about where we were going as a company and how this fits, but really at the beginning of the intersection of what we think of just three key trends that we really focus on as a company.
We started to focus very heavily into the mobile space and we talked a little bit already about some of the areas we can work together. Mobile is clearly moving to be a rich communications capability above and beyond just voice. We introduced two-way video recently in terms of our iPhone products and our Android products and we’re going to work together with Microsoft to keep enhancing and enriching those. And you can see just how much video is going to dominate the traffic as we look for the next few years. It’s one of the fastest growing parts of the industry and Skype is well positioned.
We’ve also focused very, very heavily on video. Video is in our DNA. It’s in the technology that we produce, it’s in the way that we think about communications. Over 40% of all of the traffic that Skype delivers today is already video. Video ads as I talked about is one of the biggest opportunity we see moving forward. We’re just in the beginning of that in the US, less that 5% of the market is there today. Video itself we think as an overall market for both advertising and for rich communications around collaboration and finding ways to create that engaged user base is going to be one of the fastest growing areas of the market. We estimate 45% growth just in video-based ads over the compound annual growth rate in the next few years.
And last not but not least, when we think about Skype, Skype really is that inner circle, it’s that inner social experience. Most people that use Skype have a very select set of friends or business associates to eight to 10 folks they talk to everyday. That is really the intersection that we see. So Skype is focused on mobile, it’s focused on video, its core communications service, and then how that intersects with social is really, really exciting for us.
We really appreciate the fact that Steve you put your faith in us. We think there is a tremendous amount of opportunities as we look forward. We think this allows us to expand not from hundreds of millions to reach literally billions. We believe that this is a platform and a set of services that can reach everyone on the planet. The exciting opportunity is ahead of us in terms of the way that we can interact with the key assets of Microsoft whether it’s Xbox LIVE, whether we talk about some of the end devices; the commitment from Microsoft to support multiplatform clients, whether that be Microsoft endpoint clients or other endpoint clients is absolutely critical and was one of the key decisions; and the folks from the brand. So we couldn’t be more excited Steve.
And, with that, I will turn it back to you.
One last aspect we want to make sure we get to before we wrap up is the financial aspects of the deal and the ramifications for Microsoft and to walk you all through that, please welcome Peter Klein, the Chief Financial Officer of Microsoft. Peter?
Thanks Steve. Anytime you do an acquisition ideally you’re looking for a company that has a strong and growing business and has a natural strategic fit for what we’re doing. I think Steve and Tony have done a great job describing how this transaction has those characteristics, so I’m going to provide a little more color up on the financial perspective.
Skype is a strong and growing business. Steve talked a little bit about the growth revenue last year with $860 million, growing 20% year-over-year. EBITDA was $264 million, growing 40%. So you can see the business has operating leverage. EBITDA margins have grown from 20% to 31% over a three-year period to 2010. So you’ve got a strong growing business with an engaged user base and great technology. You’ve got operating leverage. And in addition to that, you heard Tony talk about this, there is new revenue streams and new growth opportunities that we’re just scratching the surface on. We’ve got a strong foundation and new growth opportunities. So very strong business that we’re acquiring.
Obviously we think the combination of these companies accelerates what each of us is doing to provide value for both business and consumer customers across all devices. We’ve been investing in real-time communications, most notably with our Lync product, which we released last year and has great market momentum. Last quarter grew over 30%. Bringing these two products together and these two companies together will really accelerate what we can offer business customers.
Similarly for consumers bringing the consumer services that we both bring and the set of assets that we have in the engaged user base obviously scales distribution and drive synergy for our business. And, of course, we’ll have compelling and differentiated experiences across all devices, whether those are big screens in your living room like TV or whether they are small screens like mobile devices that you take with you on a go or a PCs and other devices. So really compelling opportunity to build on the strength of both companies and accelerate what we’re doing.
A few details; we’re paying total consideration of $8.5 billion, that is all in cash. And, in fact, we will be using overseas cash to make this transaction. Given the strength of the business and the fact that we’re using cash, we expect that this will be accretive excluding noncash amortization charges immediately and we hope to secure all necessary regulatory approvals during the remainder of this calendar year. Obviously pending the regulatory process is typical to make specific products roadmap disclosures. And as we get closer to approval and closing, we’ll have more to share on the products and implementation plan. That’s some of the details.
And, with that, I’ll turn it back over to Steve.
Great. I just want to wrap with a couple of words about Microsoft before we take questions. I’ve been at Microsoft for a long time at this stage, 31 years, company is about 36 years old, and there is a couple of things I would highlight. Number one, we’re a super ambitious company, we’re irrepressible in moving forward and pursuing new things, we’ve been consistently focused on empowering consumers and businesses to do more with technology. This Skype acquisition is entirely consistent with our ambitious forward-looking irrepressible nature. Sometimes we build things ourselves as we’ve done with being in Kinect or we will partner, form an alliance to seize the moment, and at other times we’ll make an acquisition as we’re announcing today, one that plays to our strength and is much more than the sum of it’s part.
This is a big day for Skype and this is the big day for Microsoft. We’re adding a new division and a new promise to our customers, the promise of universal next-generation communications. Microsoft and Skype together will bring together hundreds of millions or as Tony said billions of consumers and empower them to communicate in new and interesting life. It’s core to our mission, it’s core to our technology direction, and with that I’d like to wrap up, and we’ll open for your questions. Tony is going to join me back on stage. Peter is available. The three of us will welcome your questions. And I think Frank Shaw will moderate.
Thanks. [inaudible]. Jay [ph]?
Steve, this is the biggest deal Microsoft has ever made, $8.5 billion. What are the metrics you’re going – what are the metrics you’re going to look at that will help you determine whether or not this is successful deal as you go forward?
Well, quite sure we’re going to be successful with something like this, fundamental to kind of our essence which is the power of communications. From a classic approach, obviously we care a lot about users and engagement, we care a lot about revenue and operating income. and we care a lot about innovation, because innovation and the strength of the team will underpin all of the sort of customer adoption and financial metrics. So it’s, let me say, fairly classic shall we say in a business sense.
[inaudible]. There is – just could you provide some more color on the deal. Obviously Skype has been around for a while, and wanted to ask you when you decided that Skype would be right for Microsoft and how the process went down from there?
Obviously, we’ve known Skype for quite a while. We know the company. It’s a company that’s actually been sold before. So this is not the first time the industry, let me say, is engaged in a dialog. In this particular case, we were in a set a partnership discussions and our team including me, we all got excited about it. Skype was on a path of IPO, and we said, “Hey, we think, for at least from our perspective, it’d be better if we own this company.” So we did make an unsolicited offer. It was not – Tony didn’t look for it, the ownership group led by Silver Lake didn’t look for it, we just decided something that we thought made sense for us and that was kind of about the beginning of April, and we proceeded to sign the definitive agreement last night.
Okay, right there.
Ryan Lawler – GigaOm
Ryan Lawler – it’s Ryan Lawler from GigaOm. Just a quick question. You touched on some revenue opportunities. Can you provide a little bit more color about ads and that sort of thing?
Yes, we just – Peter said it well. We’re just scratching the surface of that. We just started in that. We have the ability right now within the new Windows client to put a homepage, to give you like homepage takeover type ad. There will be a number of other things. Obviously we can’t talk about future roadmaps. But we think advertising is a very powerful monetization stream for us. If you think about the size of our user base, it’s just a natural extension for that.
We want to approach the market really around a rich media approach though. So it’s – when you – if you see the ad it’s a very rich experience. You can click on the ad and you can then back and pop out. You can see a piece of animated rich media with advertising. So we really think that it fits the user base of where we’ve been moving which is to really have this immersive experience. So it’s going to stay true to that around the Skype brand. But given the size of our base and the amount of that today in terms of the free product that we give it seems like a natural monetization expansion.
Advertising is one of the areas we’ve been talking about for partnerships since we obviously have an Advertising Sales Board. And so it is an area that even without acquisition it’s been interesting for partnership.
Okay, right over here.
Michael Kaplan – Fortune
Michael Kaplan [ph] with Fortune. Two quick questions. Were you being quoted by others pre-IPO, if you can answer that? And also overseas cash, what are the benefits of doing it that way?
I’ll take the first one. We were very focused on our IPO. We had an unsolicited offer. We made an evaluation and last night we signed the agreement.
Yes, in terms of overseas cash, this is a Luxembourg company that we’re acquiring, and so we’ll use cash. I think it’s kind of well understood that we have cash in the US and in various places overseas. And from a shareholder perspective and balance sheet perspective that does matter to some extent and has some benefit. It’s also quite appropriate given that this is a Luxembourg company effect.
Okay, a question back there.
I use Skype and I think it’s wonderful. But I think I’m average in that, I don’t know how this makes my life easier for the working moms who might be like or working dads. How does this make my life easier with your purchase? Will it now make it even easier to log on, if you can speak to the grandmas out there?
Well, we absolutely love Skype and what it is today. So let’s start by saying it’s a great experience and we’re excited about it. So let me take just a couple of things. I think it’s pretty obvious today that not everybody is doing kind of video participation from their phone, that’s an opportunity where there is lots of things that can be done both with Skype and at Microsoft with our phone partners and also across the device.
Take Kinect, I mean a great scenario I think still is room size, you want somebody who is not present to be able to fully participate in a family event. When you think about what we’ve done with Kinect and kind of giving you almost like a home video conferencing system if you will, but one that costs you just a few hundred bucks I think it’s a lot of opportunities to innovate, so that’s on the device side.
In terms of the connecting up with the customer bases, people do have one life and the ability to call somebody from or communicate with somebody participate in meeting with people who work in your business and who don’t work in your business, who are in your PTA, but you haven’t met before, we want to stitch together the world and we have big customer bases that we can connect in a way that will add value to I think all members of the community. I don’t know if you –
I’d say at Skype we think about the world of communication across three lines of modality and we touched on those. One is clearly is the PC and we’re very established in that market. That’s where we started from. There is a natural obviously alignment with Microsoft there. The second one is clearly the mobile phone. People are more on the go all the time, smartphones having richer and better video capability even two-way cameras. And the third is also the living room quite candidly. I think there is a scenario where we’d like it just to be easier. This is where actually a lot of folks do spend time at home including the grandma who would actually not necessary have the smartphone, and Skype’s already shown how we can take what we’ve built and put that across a number of platforms. We’re already around 50 million TVs for example today. But really getting that go to the next level we need to actually broaden that and connect to other devices. So that’s one piece.
I think the other piece is as Steve alluded to, connecting these various services on networks together is really going to enhance both I think the consumer experience but also the business experience, because let’s face it, many of us are blending both of those on the go all the time, and having that ability to do that in an easier way is going to be I think very important for communications in general, and this is just a great fit for that.
And for the folks you talked about, I will give a good example of my own life. I hustled, I broke my back in an hour of traffic to make a meeting at my kid’s school. I got there and I wondered why I wasn’t participating electronically for the hour I spent in the car. I think there is just a better way to do these things whether they’re school meetings, PTA, family reunions, they’re just – there will be better ways, and Skype and Microsoft will drive those.
We’ll get that question right there.
So I mentioned there are a lot of people out there right now who are using Skype on other platforms like Android and IOS, and you mentioned the importance of multiplatform. What can you say to reassure these people that the multiplatform approach that Skype will continue and won’t be neglected since it’s now owned by a company that makes a competing platform?
Well, A, I said it and I mean it, we will continue to support non-Microsoft platform, because it’s fundamental, those are value proposition of communications. Two, we’re one of the few company actually who has a track record of doing this. If you take a look at the work we’ve done over the years with Office. For example on the Mac, if you even take a look at some of those great work we’ve done with applications on top of Apple, other Apple devices, I think we have a track record of understanding our customers and the need to support our customers if they want to travel in various places.
We obviously love Windows and we love Windows Phone and we love the Xbox and we’re going to do a lot of work together to design these things and optimize the work that we do across the device, the operating system, the communications software, no question about it. But fundamental to the value proposition of communications is being able to reach everybody whether they happen to be on your device or not. And I think that’s in fact one that will be our competitive advantages both for the Skype communications services and in fact for the devices since we move forward.
I’ll just add, I think the fundamentals of the Skype value prop as Steve alluded is that the fundamental to deal with that commitment and that’s where we have a shared vision alignment.
Okay. Peter [ph]?
Carriers have had a challenging relationship over the years with Skype not knowing quite know what to do with it. Right now obviously Apple and Android have a lot of momentum with carriers. I was just – is this really going to help you? How are the carriers feeling about it?
Well, certainly for particularly for Windows Phone, but a variety of other things to do, but let’s say anchored to Windows Phone, the partnership and collaboration that we have today is fundamental and certainly there will be fundamentals to getting Windows Phone to the next level of marketplace acceptance and we’re absolutely committed to that.
I’m encouraged by the good work Tony and his team have done already with a number of participants in the wireless industry to drive new value. And I think fundamentally, I think everybody who is in the network business the communications business understands that the key to business acceleration is innovation in new scenarios. And I think our opportunity to do that together has been enhanced. And we certainly will work with our operator partners, continue to work with them fundamentally on the successful for Windows Phone.
Just from a Skype perspective, what we hear increasingly from carriers is exactly that, to differentiate the communication experience that goes beyond just one form. So what Skype has offered is rich text, audio to video, and we’ve had great success, we’ve had some strong partnership with mobile operators, and I think that will continue in this line.
I certainly already that this morning from some of our operator partners who have been enthusiastic, and I’m sure we have some work to do to also clearly communicate clearly and continue to support the broad set of operator partners.
Okay. We’ll take one more question there and then we’ll wrap it up.
While Skype is in the enterprise, it hasn’t competed head-to-head as much as you might like with say your old company Cisco and WebEx, how will this partnership bring to Skype in as more of an enterprise class tool for these kinds of communications you’re talking about that?
Yes, I’ll take. Let me just outline Skype’s strategies. Skype – in terms of Skype for business where we really have been focused, sort of extending our network reach in with our Kinect offering, and so that’s been a big primary focus. And again we’re at the, perhaps at the early stages of that strategy. I think it’s given some of the things I outlined. You can see that, one, we can first Kinect, which is really important with different communities to business customer base, but clearly really it’s very strong within the Microsoft portfolio, and then we can see how we can actually take back to the next level over time.
Yes, we have a great offer today that’s been very rapidly adopted starting with our Office Communications products and Communicator and now Lync and the adoption has been swooping up. One of the key scenarios that Enterprise is on a level of control on the other hand that people want to talk to partners, vendors who live outside their four walls of their company. They want to talk to family and friends. And I think there’s a lot of value creation of building on what we have in place and are developing in the enterprise with some of the things Skype is doing not only with the consumer but tying that together with what we’ve got in the enterprise with Lync.
Great. Thanks very much for coming. This wraps up our press conference and we’ll be available for any questions that come up later on. Thank you very much.
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