Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Here’s the entire text of the Q&A from Microsoft’s (ticker: MSFT) fiscal Q1 2006 conference call. The prepared remarks are in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

[Operator Instructions] Our first question comes from Charles Di Bona with Sanford Bernstein.

[Q - Charles Di Bona]

Quickly, one housekeeping question. The accelerated repurchases is that built into your guidance here, or is that we had a much lower repurchase plan that got us to the prior guidance. Is that reflected here?

[A - Chris Liddell]

Yes, it is. The new guidance is in there, and clearly, we had some expectations of what our prior shape was going to look like in our previous guidance in there. We've got some expectations of what our new shape would be in the new one, but you're correct; it's built in.

[Q - Charles Di Bona]

Okay could we also just drill down a little bit on MSN here? You're up 20% year-over-year. It looks like Ad revenue probably declined sequentially from the fourth quarter. Is that correct?

[A - Chris Liddell]

The three components, as you know, to MSN. On the narrowband side, that did decline. On the display advertising, that was up. And you are correct on the search side, on the advertising quarter-on-quarter; it was down.

[Q - Charles Di Bona]

Can you give a little color of what is happening there? Your competitors in the space are up. Google is up 14% sequentially, Yahoo is up 6% sequentially. You guys are down. Are you losing share dramatically here, or is pricing weaker for you guys? Could you give us some color on what's going on?

[A - Chris Liddell]

It's not a volume issue from our perspective. As far as we can see, our volumes are in line. Our market share remains probably where it was over the last few quarters. So it's a monetization issue, and that is something that we are clearly going to have to address in the future. It's something that we intend to address through the introduction of our Ad Center platform over in the future, which, as Scott mentioned in his remarks, we are testing in Singapore and France at the moment and also starting to test here in the US. So we are conscious of that, and it's certainly something we're going to address in the future.
[A - Colleen Healy]

Thanks Charlie.

[Q - Charles Di Bona]

Thanks.

[A - Colleen Healy]

Next question please, operator?

[Operator]

Thank you. Our next question comes from Heather Bellini with UBS Warburg.

[Q - Heather Bellin]

Hi, thank you. I actually had a follow-up on Charlie's question about the buyback, and then one other one. It seems as if you are front-end loading product launch costs; you referenced that in your comments. But then, what does that imply for when we will see some EPS leverage from the accelerated revenue growth that you're seeing? Should we assume that you are front-end loading a lot of the Vista costs and Office 12 costs, that we actually have to wait until fiscal year '07 until we see that?

[A - Chris Liddell]

Sure. You are correct; the Xbox expenditure does tend to be more concentrated around the launch. So we've certainly seen the impact of that in the last quarter and in this quarter. In terms of the expenditure from a marketing perspective on Office 12 and Vista, that is a more gradual spend, but it has started. So we are already spending money in those areas. And in the Office side, we're also ramping up on the sales people side, as well. So you are seeing an impact of that from the beginning of the fiscal year. We talked a little bit about that at our last call, but you will see that through the course of this year, going into the launch period at the beginning of next fiscal year.

[Q - Heather Bellini]

Because then it would seem as if you didn't raise your buyback assumptions, that we would actually be facing lower EPS than what you originally guided to, based on the higher product launch costs. I just wanted to make sure I'm thinking about that correctly.

[A - Chris Liddell]

Yes, you are. We didn't decrease, when you look at the operating income, that's probably the easiest way to see it here, though. We haven't changed that number. So all of the marketing spend and the costs associated with the launch are above that. So, to the extent that we kept that the same, we haven't changed our expectations.

[Q - Heather Bellini]

And then, the follow-up is just really on Client revenue growth. And I know you walked through this in detail in your comments, but I guess I'm still having a hard time getting to the fact that PC shipments were up as much as they were, but you just don't seem to be as correlated to PC unit growth going forward. And I guess, as PC shipments start to decline, how should we think about the correlation your business would have in that type of environment?

[A - Chris Liddell]

Let me walk through the math again. And there are a number of steps, so I'll go through each of them in turn. If you start with overall PC unit growth of, let's say, 17% or thereabouts for the quarter, OEM unit actually grew slightly ahead of that, and we made some positive progress, we believe, on the unlicensed side. So OEM units, from our perspective, were up around 18%. But from that number, there is a couple of impacts. Firstly, the impact of large OEM sales versus small system builder sales, so we had a mix change toward the larger OEMs, where we tend to have smaller prices. And also, the mix in the premium segment was higher towards Media Center than towards Pro sales. And again, that's a lower-margin product. So the combination of those impacts takes us from an 18% unit growth to a 13% revenue growth. That's 80% of our business. On the other 20% of our business, which is the retail and commercial side, we saw a 19% decrease. And Scott mentioned that in his comments; there's a number of reasons for that. On the commercial side, we believe people are tending to buy, from a commercial point of view, more through the OEM channel. And on the retail side, there was a high comparable last year with the SP2 sales. And also, we think that is influenced by people waiting for the Windows Vista launch next year. So, when you take 80% of our business growing at 13% and 20% of the business declining at 19, you take the weighted average, and you get the 7% that we showed. Now, in terms of how that will go forward, we don't expect that same negative impact going forward, the 19%. To a large extent, most of the decline was through the course of last year, and on a quarter-by-quarter basis going forward, we think in absolute dollar terms, that side of our business will be reasonably flat, and hence the year-on-year comparables will be not as negative as they were. Though we will still probably get a mix change between OEM units and OEM revenue, but that will tend to be more representative of our Client growth.

[Q - Heather Bellini]

Okay great thank you very much

[Operator]

Our next question comes from Rick Sherlund, with Goldman Sachs.

[Q - Rick Sherlund]

Just a follow-up to Charlie's earlier, more clarification, I guess. Clarity in advertising wasn't that also a factor in your revenues? Or what was the impact of that on your MSN revenues?

[A - Chris Liddell]

It was an impact. On the positive side, we think it has been important, in terms of our search volumes and in terms of the customer feedback we're getting, which is generally positive. On the negative side, it did have some revenue impact. But I would not overstate that; it was a factor, but not a significant one.

[Q - Rick Sherlund]

And then, a follow-up to Heather's question. If the guidance for the year is unchanged in revenue, which it is, and the operating margins, effectively the operating income is essentially the same and EPS is up $0.01, because you beat by $0.01, excluding the $0.02 charge this quarter, I'm not sure how the math works, as far as baking in already the benefit you get from a lower share count from the repurchase. You're telling us it's already the benefit is in there, yet it would seem to me the math would suggest that it's not in there, because operating income is the same as we had before, earnings the same as we had before. I'm not sure how to reconcile those two.

[A - Chris Liddell]

We have been buying, certainly in the last couple of quarters, slightly ahead of the four-year pro rata amount. So you will have seen in the last quarter we bought just over $3 billion worth of shares. In our original forecast, we were assuming that we were going to continue to buy at a reasonably healthy rate this year. So the only benefit we get is the differential between the rate that we were previously assuming that we were going to be buying and the rate that we will now be buying. And when you spread that over two quarters because we're halfway through the quarter already, so we won't start buying at the increased rate, obviously, until after this earnings call and spread that over that period and then take it over the course of a full year. It doesn't have a dramatic impact in this year. It will have a more significant impact when we get the full-year impact next year. And if you would like, all of the program will be completed against only part of the program.

[Q - Rick Sherlund]

And then, on Xbox, if I count those two previous as follow-ups, the question would be on Xbox unit shipments for the December quarter. Some of us are saying it should be we're hearing from the channel maybe 1.5 million units, and it had been 2 to 2.5 or so. Can you give us any clarity on where that number might come out or, if you don't want to give a precise number, maybe what we are expecting, in terms of supply constraints? Because it sounds like IBM and Chartered were saying the game processors were meeting their commitments. So I'm not real sure why you wouldn't be shipping more units. If you could give us some clarity there?

[A - Chris Liddell]

Sure. We will be giving more guidance closer to the launch. We are not intending to do that for this quarter, on this call. But we will be giving the first 90 days' guidance closer to the launch. So, sorry; you'll have to wait until then. In terms of the shape of the year, it's very much shaping up the way that we had originally foreseen. I know, because we didn't give you guidance for this quarter on the original call that it's difficult for you to estimate how that would come through. But from our point of view, production and sales are, broadly speaking, in line with how we expected for the year. And they're going to ramp relatively steadily from launch all the way through until the end of the fiscal year. So, we will give you some more information in the next few weeks, but no more on this quarter, at this stage.

[A - Colleen Healy]

Okay, thanks a lot Rick. Next question please?

[Operator]

Thank you. Our next question comes from Mary Meeker with Morgan Stanley.

[Q - Mary Meeker]

You had some management changes in the quarter. We certainly know, I think, why they were done from a strategic standpoint. But can you give us some color, Chris, on how you think about them from the CFO seat and obviously, there's some confusion about I think you clarified it on the PC unit growth versus revenue growth issues. But can you give us an update of what you're seeing from a pricing standpoint, both on the Client side and the Information Worker side, in the emerging markets?

[A - Chris Liddell]

Okay, sure, just take the first one. From a CFO point of view, my perspective, seeing Kevin and Jeff and Robbie with a greater presence is positive, from my point of view. Certainly, they are very close to the business. We will see them making a lot more decisions and Steve delegating some responsibility to them. I think, from a general speed-of-decision-making point of view, I'm very happy with that. And also, I'm working with them clearly, again just on the overall cost profile. And with Kevin Turner coming in and his experience with a Wal-Mart background, I'm obviously looking forward to working with him in terms of the overall operations for the business. So overall, I'm very happy from a management point of view. It gives me some more people to partner with, if you like. And it's a great chance for them to work more directly with the businesses. We are also seeing Ray Ozzie taking more of a presence. I know he's talking next week, but it's great to see him also taking more of a presence. And all of those people I've formed a good relationship with and have a lot of confidence with. So positive messages from my point of view. In terms of pricing overall, in the mature markets, I don't believe we've had any significant pricing changes, so to speak. Some mix change, as I mentioned, but the underlying products, I believe, generally speaking, in line with previous quarters. In terms of the emerging markets, again, I don't think there's any significant changes. We have, obviously, a different product range in those emerging markets. But quarter-on-quarter, the pricing looks similar.

[A - Colleen Healy]

Great, thanks Mary. Next question please?

[Operator]

Thank you. Our next question comes from Steve Mahedy with Banc of America Securities.

[Q - Steve Mahedy]

My question will be related to database and specifically database demand. With the 1Q 15% year-over-year in SQL Server, especially in front of the launch, should we expect to see perhaps more linearity in the server line item over the next couple of quarters, rather than perhaps traditional kind of lumpiness?

[A - Chris Liddell]

What we're seeing in that market is that buying patterns are much more driven around, if you like, commercial needs rather than the launch as such. And that's one of the reasons, probably, the revenue shape is different than perhaps what you were expecting. So we're seeing a much more gradual ramp through the course of the fiscal year, and also a ramp in the second half driven around when some of our contracts mature, which tends to be more in the second half than the first half. So you will still see, if you like, different patterns on a quarter-by-quarter basis, driven around contracts when businesses decide to spend their underlying budgets and so forth. So it won't be influenced as heavily as might be expected from the launch, but will be driven by those other factors.

[Q - Steve Mahedy]

And just a follow-up relative to some of the commentary from the analyst day, on the Linux Win back program. Any update there?

[A - Colleen Healy]

We're seeing a really good value proposition relative to Linux, which as we shared with you at financial analysts day, has just increasingly become more commercialized. And we just feel like our value proposition on the server side is demonstrated by the continued strength that you're seeing overall in that segment, including from Windows Server. It continues to do really well, and we're seeing good progress when we go head-to-head against Linux. Business looks good.

[Q - Steve Mahedy]

And then, just finally, on the decision to accelerate the buyback or increase the buyback, what were some of the thoughts around that versus perhaps a change to the dividend policy?

[A - Chris Liddell]

I see those decisions as different. We continue to look at our dividend policy and will make decisions about that independently. In terms of the buyback, from my perspective, I'm positive and we are positive about the Company's future and, in particular, the next couple of years. And good capital position obviously our cash flows, since we originally announced the buyback, have been strong. And so, from my perspective, it was a good opportunity to accelerate. But I see it as an independent decision from dividend policy.

[Q - Steve Mahedy]

Okay. Thank you.

[A - Colleen Healy]

Thanks a lot Steven. Next question, please?

[Operator]

Thank you. Your next question comes from Drew Brosseau with SG Cowen.

[Q - Drew Brosseau]

I've got two follow-ups, first on the Xbox. Do you have any comments on what you think volumes of the soon-to-be old console will be? And to the extent that you're supply constrained, do you anticipate ongoing demand for that? Any specific numbers for the fiscal year?

[A - Chris Liddell]

Yes. We don't have a specific number that we're going to give out, but the general guidance is we continue to believe sales will be good for that. As Scott mentioned, they were a little soft in the first quarter. But overall, we continue to see it. From our point of view, it's really a different target audience, different price point, obviously, altogether, and a different target audience. But overall, we think that there is a good market for that particular product, and we intend to continue to sell it through the rest of the fiscal year.

[Q - Drew Brosseau]

And then, just a follow-up on the server platform comments. I guess I can understand why the launch might not have an immediate positive effect on growth, but why is it that you're anticipating that growth will actually be softer in the December quarter than it has been over the last several quarters?

[A - Chris Liddell]

There's no particular factor. It's a reasonably high comparable on the previous year. There may be a little bit of softness going into the launch, last month and this month, just people holding back a little in anticipation of next year. So I don't want to overstate it; it's still around double digits. And from our point of view, there's no particular message you should take from that, just a pattern of the year.

[Q - Drew Brosseau]

So it's not a comment on anticipated year-end budget flush or anything?

[A - Chris Liddell]

No. We are still sticking with 11 to 13% for the year, good double-digit growth for the year. And if anything, we see a strong second half for the business for the year.

[Q - Drew Brosseau]

Great, thank you.

[A - Colleen Healy]

Great, Brosseau. Next question please?

[Operator]

Thank you. Our next question comes from Chris Kwak with SIG.

[Q - Chris Kwak]

I have two quick questions. One is a follow-up on Rick's question. Just returning to the guidance, the revenue guidance, operating income and EPS and recognizing that the share count will go down, however linear you do the buyback, is there a change in the investment income projections that you guys have that offsets any of the accretion that we would ordinarily expect from the share buyback?

[A - Chris Liddell]

Clearly, as we spend faster, then we will have less to invest. So there is a decrease in the investment income associated with that. So that's an iterative calculation, if you like. And we have built that in.

[Q - Chris Kwak]

And just on the Xbox 360, I think you said that it would ramp steadily. Did you mean by that that March would be a bigger quarter, in terms of unit volume, than December and that June would be bigger than March? Or how do we think about that progressively?

[A - Chris Liddell]

I don't want to provide too much detail in particular, foreshadow what the launch volumes would be. We are certainly happy to give more detail out, in due course. Clearly, the launch itself will be in the Christmas season, all other things being equal, with a spike. I guess I'm just foreshadowing a constant level of demand. And, from our point of view, we're trying to constantly supply the retail channel so we don't get peaks and troughs through the course of next year.

[Q - Chris Kwak]

So the ramp steadily is not a comment on the linearity of the unit volumes shipping to the channel.

[A - Chris Liddell]

I'd say it's more it would be like a concept rather than an economic statement.

[Q - Chris Kwak]

Great. Okay. Thank you.

[A - Colleen Healy]

Thanks. I think we have time for just a couple of last questions, operator.

[Operator]

Thank you. Your next question comes from Laura Lederman with William Blair.

[Q - Laura Lederman]

Yeah, it's great. Following up on Heather's question earlier, on PC unit demand versus Microsoft, when would you expect those to come in closer? In other words, if you look out later in the year and next year, would you expect a closing of the gap there between unit and dollar volume?

[A - Chris Liddell]

Yes, we would. And in fact, for the year, we are guiding 9 to 11% on the PC unit demand and 6 to 7% for our revenue. So, for the rest of the year, as we don't have that strong retail and commercial impact, we would expect those two numbers to come close to each other.

[Q - Laura Lederman]

What about next year, as well, kind of expanding off that thought?

[A - Chris Liddell]

It's a little early to be sort of given guidance, but conceptually, we would see them running in line. Again, the retail and commercial has got to what we consider to be a steady state. And clearly, with Windows Vista coming up, there may be, if anything, some upside there.

[Q - Laura Lederman]

Can you also talk a little bit about small-business accounting, real quickly, and your sort of goals or expectations there? And I realize this is not a big season for it, but just generally what you're seeing so far?

[A - Colleen Healy]

On the Office side, we really see those coming from a few different sources, both in terms of continuing to improve and innovate on our Office product, which we feel we are doing really well there. We also look to new Office versions and categories, of which you're mentioning one there in the small-business space. We think that small businesses have unique needs that this product offers. And we are really looking forward to being able to tap a new category of users in a deeper way.

[A - Chris Liddell]

The other thing I'll add to that is the general response we have had from customers has been very positive. So it's very early days. It was just released in September, but the overall response from a product characteristic point of view has been very good.

[Q - Laura Lederman]

Thank you.

[A - Colleen Healy]

Thank you. And our last question please, operator?

[Operator]

Thank you. Our final question comes from Tom Berquist with Citigroup.

[Q - Tom Berquist]

Thank you. Actually, on the Microsoft Business Solutions, you showed some pretty good growth, I think, up 18%, and mentioned both strength in ERP and CRM. Can you talk a little bit about where those customers are coming from? Are you getting anything from any of the components that Oracle has purchased or about to purchase, or are they coming from any other vendors?

[A - Chris Liddell]

It's a very desegregated market, as you know. And there tend to be a large number of very small customers. So I'm not sure I can do a correlation between this customer coming from Oracle and coming to us. The overall comment I'll make is that we are just very happy with the progress we have made there. We do think we are making good strides, and the product range is being well accepted. So I'm sorry; I can't give you sort of a where are we taking share or where we are making benefits, but overall a large number of small customers and doing, generally speaking, well, in particular, in terms of the re-licensing.

[Q - Tom Berquist]

Is there any way to characterize it as competitive replacements versus customers that maybe, historically, didn't have a solution at all?

[A - Chris Liddell]

I don't have any data on that. I am happy to follow up, if we can find it. But we don't tend to stratify the market that way.

[A - Colleen Healy]

And I do think the point Chris is making, in terms of the market being fragmented with small businesses sort of being generated every day there's just a lot of in and out of that market, and we did well there this quarter, which was nice.

[A - Chris Liddell]

But when we look at other competitors for example, SAP they were up a similar amount, I believe. So there is probably, to your point, some category growth going on there. But we don't measure it that way.

[Q - Tom Berquist]

Okay, thank you.

Source: Full Transcript of Microsoft’s F1Q06 Conference Call - Q&A (MSFT)
This Transcript
All Transcripts