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Microsoft (MSFT)

Q2 2011 Earnings Call

January 27, 2011 5:30 pm ET

Executives

Bill Koefoed - General Manager of Investor Relations

Peter Klein - Chief Financial Officer

Analysts

Adam Holt - Morgan Stanley

Heather Bellini - ISI Group Inc.

Brad Reback - Oppenheimer & Co. Inc.

Katherine Egbert - Jefferies & Company, Inc.

Brent Thill - UBS Investment Bank

John DiFucci - JP Morgan Chase & Co

Philip Winslow - Crédit Suisse AG

Edward Maguire - Credit Agricole Securities (USA) Inc.

Walter Pritchard - Citigroup Inc

Colin Gillis - BGC Partners, Inc.

Robert Breza - RBC Capital Markets, LLC

Gregg Moskowitz - Cowen and Company, LLC

Kash Rangan - BofA Merrill Lynch

Presentation

Operator

Welcome to the Microsoft Earnings Conference Call. [Operator Instructions] I would like to turn the call over to your host, Bill Koefoed, General Manager, Investor Relations. You may begin.

Bill Koefoed

Thank you, Holly, and thank you, everyone for joining us this afternoon. As usual, with me today are Peter Klein, Chief Financial Officer; Frank Brod, Chief Accounting Officer; and John Seethoff, Deputy General Counsel. Today, we filed our Form 10-Q. In addition, we posted our earnings release and financial summary slide deck to our Investor Relations website at microsoft.com/investor. The slide deck is intended to follow the flow of our prepared remarks and provides a reconciliation of differences between GAAP and non-GAAP financial measures. As a reminder, we will post today's prepared remarks to our website immediately following the call until the complete transcript is available.

Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript and any future use of the recording. You can replay the call and use the transcript at the Microsoft Investor Relations website until January 27, 2012.

This conference call is protected by copyright law and international treaties. 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 penalties.

During this call, we will be making statements 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, and with that, I'll turn the call over to Peter.

Peter Klein

Thanks, Bill. Good afternoon, everyone. I'm extremely pleased with our performance this quarter. We delivered excellent top line and bottom line results. Business and consumer response to our latest wave of innovation, including Office 2010 and Kinect, helped drive yet another quarter of healthy revenue growth, resulting in revenue of nearly $20 billion.

Our solid revenue performance, combined with cost controls and continued prioritization of investments into the highest growth opportunities, enabled us to deliver record earnings per share and our sixth consecutive quarter of operating margin expansion.

On our last earnings call, I commented that we were looking forward to an exciting holiday quarter, especially from consumers. Kinect, in particular, exceeded our expectation. The controller-free entertainment experience is revolutionizing the living room. Kinect is the fastest-selling consumer electronics device in history. We couldn't be more proud of what the team has accomplished. But importantly, it's just our first step in delivering on the opportunity to fundamentally change the way people interact with technology.

The Microsoft Business Division also had a terrific quarter. Office 2010 is the most successful consumer version we have ever shipped, and the product is also performing extremely well in the Business segment. Companies are purchasing Office 2010 as well as our entire productivity platform, including SharePoint, Exchange and Lync.

Businesses are also deploying Windows 7. According to IDC, nearly 90% of enterprise companies worldwide have already started their formal migrations to Windows 7.

In addition to healthy enterprise deployment of our Business Desktop products, we saw a strong momentum for our business infrastructure offerings. Windows Server and SQL Server premium revenues grew double digits, and this quarter marks the one year anniversary of Windows Server 2008 R2. Since its launch, we have grown our share of the overall server market every quarter.

During the quarter, we continued our product launch momentum. In November, we delivered Microsoft Lync 2010, a next-generation communications platform that incorporates instant messaging, presence, audio, video, Web conferencing and voice into one interface that integrates with the applications businesses are already using today, including Microsoft Office, SharePoint and Exchange.

For the consumer, I already mentioned Kinect. Also during the quarter, we launched Windows Phone 7, which is now on nine devices with 60 operators in 30 markets. We said all along that our first priority was to make a phone people love, and to that end, we're pleased with the initial response. Customer satisfaction data indicates 93% of customers worldwide are happy with the product, and we're also seeing strong developer engagement. While we're encouraged by the early progress, we realize we still have a lot of work ahead of us, and we remain focused and committed to the long-term success of Windows Phone 7.

We continued to deliver sustained innovation and releases for Bing. In addition to transitioning Yahoo!'s paid search in the U.S. and Canada during the quarter, we also entered into a strategic partnership with Facebook. Bing now provides much more personalized experiences by allowing users to bring their Facebook friends into their Search experiences.

Read the rest of this transcript for free on seekingalpha.com