微軟 (MSFT) 2008 Q4 法說會逐字稿

Welcome to the Microsoft 2008 fourth quarter and fiscal year-end conference call.

At this time, all participants are in a listen-only mode.

And during the question-and-answer session (OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to Ms.

Colleen Healy, General Manager, Investor Relations.

Ma'am, you may begin.

Good afternoon, everyone, and thank you for joining us today.

This afternoon, I am joined by Chris Liddell, Senior Vice President and Chief Financial Officer; Frank Brod, Corporate Vice President and Chief Accounting Officer; and John Seethoff, Deputy General Counsel.

Today's call will start with Chris, providing some key takeaways for the fourth quarter of fiscal year 2008 (technical difficulty) [who will] review expectations for fiscal year '09.

I will then provide details around our fourth quarter results, and then hand it back to Chris for a more detailed discussion of our guidance for the full year and first quarter of fiscal 2009.

After that, we'll take your questions.

Our earnings release including an addendum of financial highlights, which contains more detailed information about revenue, operating expenses and other items.

We have also posted our quarterly financial summary slide deck, which is intended to follow the flow of our prepared remarks in order to assist you.

The slide deck offers highlights from the quarter, outlines our guidance, and provides a reconciliation of differences between GAAP and non-GAAP financial measures (technical difficulty).

(technical difficulty) financial highlights in the quarterly financial (technical difficulty) Investor Relations website at www.microsoft.com/ (technical difficulty).

Today's call [was] recorded (technical difficulty) recording.

As always, (technical difficulty) Microsoft Investor Relations website.

A replay of the call will be available at the [same] site at the close of business on July (technical difficulty) 2009.

This conference call (technical difficulty) recorded is protected by a copyright law and international treaties.

Unauthorized reproduction or distribution of this report or any portion of it may result in civil and criminal penalties.

Any recording or other use or transmission of the [text] audio of today's call is not allowed without the express permission of Microsoft.

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 risk and uncertainties.

Actual results could differ materially because of factors discussed in today's earnings press release, in the comments made during this conference call, and in our most recent Form 10-K, subsequent quarterly reports on 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.

With that, let me now turn it over to Chris.

Thanks, Colleen, and good afternoon, everyone.

I will start today's call with a few highlights from the year and then gave you an overview of our expectations for fiscal year 2009.

Quarter four results capped off an outstanding year for the Company in terms of both operating and financial performance.

All three of our key financial measures met or exceeded the guidance we provided entering the year, despite a challenging economic environment.

For the year, revenue, operating income and earnings per share increased 18%, 21%, and 32% respectively.

Furthermore, the 18% revenue growth represents our first annual revenue growth in almost a decade.

These results demonstrate the breadth of our business model, revenue growth being fueled by strong customer demand for our products and services across all of our businesses.

Our core businesses of Client Microsoft Business division and Server and Tools turned in fantastic results, growing revenue a combined 15% in the year.

The On-line Service business grew revenue 32%, while Entertainment and Devices Division was up 34% for the year.

Looking at the fiscal year results from a geographic perspective, revenue in the US increased approximately 15%.

Other mature markets were up 16%, and emerging markets grew a tremendous 35%.

Now for a couple of key points on our outlook for fiscal 2009 with our planning and budgeting process in place.

(technical difficulty) Our revenue and operating income growth [strengths] has remained relatively consistent with what we told you in April.

Specifically, we expect revenue growth of 11% to 13%; operating income growth of 17% to 20%; and earnings per share growth (technical difficulty) [%].

Since we last gave you guidance, we've increased investments in three ways -- first, we've continued to make a number of important inorganic acquisitions.

We are taking (technical difficulty) of the current environment [to effect] a positive one to acquire companies, if you are in the fortunate position of having a strong balance sheet and a willingness to take a long-term view.

Second, we've increased organic investments and operating expenses, driven in particular by a deliberate decision to invest more aggressively in our online services strategy.

Last, we remain committed to investing in ourselves, through our ongoing share repurchases.

For the year, we repurchased over 12 billion of our stock, with 5 billion of that amount occurring in the fourth quarter.

One final comment before we get into the details.

Clearly, we're disappointed that our strong financial results are not reflected in our share price because of general market turbulence combined with Microsoft specific issues, including the uncertainty of the outcome of Yahoo discussions.

In this environment, we remain focused on driving the factors inside our control; in particular from my perspective, improving long-term earnings per share.

I'm satisfied that despite difficult economic conditions, should we achieve the middle of our guidance for fiscal year '09, we will have increased our earnings per share from $1.42 to $2.15 in two years, an increase of 50% over that period.

With those high level themes for 2008 and 2009, I am going to turn the call over to Colleen now for more details on how we closed out the last year.

Thanks, Chris.

The fourth quarter was a solid finish to an outstanding year.

For the quarter, we met our top and bottom line items, driven by 18% revenue growth.

Let me provide you with details of our financial performance starting with revenue.

I'll discuss top line financial and business (technical difficulty), and then follow with revenue performance for each of the business units.

Then I will review the rest of the income statements.

All growth comparisons relate to the comparable quarter of last year unless otherwise specified.

Revenue grew 18% to [$15.8 billion] with every business growing in the mid-teens or higher.

Our annuity sales mix, which is approximately 40% of our billing revenue, continued to grow on both a year-over-year and sequential basis, with enterprise agreement renewal rates in line with historical trends.

The remainder of our product billings for the quarter was approximately 25% from OEMs; around 15% from license-only sales; and the balance from our other businesses.

Our unearned revenue grew 21% to $15.3 billion, over $600 million above our high-end guidance.

Our contracted [non-sales] balance increased both sequentially and year-over-year to over $13 billion, about $3 billion above when we started the fiscal year.

When taken together with reported revenue, total bookings for the Company grew 23%, driven by over 20% bookings growth for our core businesses of Server and Tool, Client, and the Microsoft Business Division.

Overall, changes in foreign exchange rates added about 4 percentage points to our revenue growth.

Now I will provide revenue highlights by business segment, starting with Client and its biggest driver, the PC market.

We estimate that the PC unit growth rate for the quarter returns to the 12% to 14% range that we experienced in the first half of the fiscal year.

This is about 3 points above our forecast, due to improvements in mature markets, including in the United States.

This helped to drive client revenue growth of 15% to $4.4 billion, which was over $150 million above our high-end guidance.

During the quarter, our OEM license units increased by 22%, about 9 points faster than the overall hardware market.

OEM unit growth outpaced that of the PC market, primarily driven by a couple of factors.

One, our OEM partners always have channel fluctuations; with this quarter, we estimate we're a combination of replenishing the channel from lower Q3 levels, as well as buying to hit some pricing tiers during the quarter.

And two, we returned to the trend of making gains on piracy, including in Asia.

OEM revenue increased by 13%.

The difference between OEM revenue and unit growth is due to three trends, which you are already well familiar.

One, volume mix shift towards emerging markets, which generally have more ASPs.

Two, channel mix shift towards large OEM's with volume pricing.

And three, premium mix shift toward consumer premium offering.

Specifically, while business and consumer premium units were up year-on-year, and the overall OEM premium mix remained unchanged from the prior year at 72%, the premium mix composition shifted down 4 points of business premiums and up 4 points of consumer premiums.

The remaining roughly 20% of client revenue comes from commercial and retail licensing.

This portion of the business grew over 20%, driven by continued strength in client annuity licensing, as business customers continue to demand our enterprise offerings, including those that help them more efficiently manage their desktop infrastructure.

During the quarter, we surpassed the $180 million mark for Windows Vista licenses sold to date.

And Windows Vista had a driven client revenue to an average growth rate of 16% since it became generally available.

Moving to Server and Tools, revenue was $3.7 billion, growing an outstanding 21% on top of the strain of Q4 double digit growth quarters.

And this quarter marks the Group's 24th consecutive quarter of double digit growth.

Next, for annuity contracts, covering our Server and Tools offering, continued during the quarter, driving Server and Tools, (technical difficulty) [unearned] revenues increased 37% from the beginning of the year.

This customer commitment to (technical difficulty) [existing] contracts demonstrates the increasingly critical role our server products perform and information technology infrastructure, as well as an increasing interest in the value offered in our long-term product roadmap.

Demand for our consulting and support services remains strong, driving associated revenue growth [of] 30%.

On the product front during the quarter, we released our eagerly anticipated virtualization feature, Hyper-V, two months ahead of schedule.

We also made significant progress on SQL Server 2008, which is targeted for release during [this] the first quarter of fiscal year 2009.

Online Services Business grew revenue 24% to $838 million.

Online advertising grew 18%, including $33 million of ad revenue from aQuantive.

While both search queries and page views are up and in line with expectations, monetization [last], driven by tightening advertising budgets combined with a more competitive display pricing environment.

We continue to attract users to our properties with live IDs hitting 460 million, up 80 million from last year.

And we grew the number of advertisers utilizing our advertising platform by 28% during the year.

We closed the acquisitions of THERCAST, which offered a technology to aid in the purchase of online tickets at the lowest price, and Navic Networks, which develops tools to deliver target ads to television set-top boxes.

In May, we announced the beta launch of Live Search Cashback.

Since then, we have 680 merchants participating in the program, with about 200,000 registered users.

Microsoft Business Division revenue was up 14% to $5.3 billion.

The business element of MBD revenue grew almost $700 million or 19% on both strong enterprise agreement signings and license-only sales.

Consumer revenue declined $66 million, down 7%.

This reflects both a difficult comparison to last year's quarter following the Office 2007 launch and a continuation of a shift towards our lower priced consumer SKUs.

Our emerging business product momentum continues, with share point revenue up over 30% and unified communications revenue up over 20%.

During the quarter, we completed the acquisition of Fast Search & Transfer, expanding our spectrum of enterprise search solutions for customers.

Our dynamics business also had a good quarter, with customer billings growth of 22% and two product releases -- Dynamic AX2009 and Dynamic CRM Online.

Dynamic's CRM continues to deliver the function and flexibility customers want, evidenced by over 120,000 CRM seats being sold in the quarter.

Entertainment and Devices Division grew revenue 37%, to $1.6 billion.

We sold 1.3 million Xbox 360 consoles, representing 88% growth over the prior year, and passing the milestone of 20 million consoles sold life to date.

In May, we announced that Xbox Live reached 12 million members; roughly doubling in membership for each of the last two years.

Software attach rates continued to lead the industry at 7.7 software titles per console.

As it was evident at E3 earlier this week, the interactive entertainment business was extremely busy during the quarter, procuring industry-leading media content providers such as Netflix, NBC, Universal, Constantine, MGM International, as well as developing innovative new gaming and social experiences that will continue to expand our audiences.

The mobility business within the Entertainment and Devices Division completed the acquisition of Danger, and released System Center Mobile Device Manager 2008, which has created the opportunity for our sales force to partner with customers' IT departments, helping them manage their mobile device assets with capabilities similar to those already used to manage PCs.

And Microsoft Surface moved into early commercial deployment in AT&T stores and in Harrah's Reno Casino.

Now for the rest of the income statement.

Adjusting last year for the impact of the $1.1 billion charge related to the expansion of the Xbox 360 warranty policy, cost of revenue as a percent of sales increased 1 point to 18%, driven by increasing Xbox 360 console sales, costs associated with the growth of our consulting and support services, as well as data center equipment and online content [expanse] expenses in our online service business.

Operating expenses increased $1.1 billion or 19%, driven primarily by headcount-related costs, acquisition-related expenses, and marketing-related expenses.

Expenses came in $500 million higher than our guidance, split rather evenly between cost of revenue and operating expenses.

First, cost of revenue.

We sold more Xbox 360 consoles than our guidance had reflected.

In Server and Tools, the higher revenue growth in our consulting and support services carried higher associated costs than does software revenue.

In our Online Services business, we were able to bring servers in our data centers online faster than expected, and we invested in premium online content, [which is higher] created at an agency expense associated with it.

Moving on to operating expenses, we took advantage of the economic environment out there to attract top talent to the Company, yielding higher close rates and filling headcount openings.

Also, across a number of our businesses, we spent more in product development in an effort to ready marketing campaigns.

And foreign currency rates presented some headwinds.

Operating income was $5.7 billion, up 42%, or 13% after adjusting for the impact of the warranty-related charge in the year-ago period.

Investment income and others totaled $284 million, as the Microsoft Treasury team continues to successfully navigate a challenging capital market environment.

Our effective tax rate for the quarter was 28%, a couple of points lower than expected, driven by an earnings mix increased and lower tax jurisdictions.

During the quarter, we repurchased [171] million shares or almost $5 billion of Company stock, and paid out about $1 billion in dividends to shareholders.

Diluted shares outstanding were 9.4 billion, down 3% from the prior year as a result of share repurchases.

Earnings per share were $0.46, in line with our guidance, and growing 48% or 18% after adjusting for the warranty-related charge in the prior year.

So, in summary, we had our fastest-growing fourth quarter revenue since 1999.

Adjusted for the year-ago Xbox warranty charge, operating income and EPS grew 13% and 18%, respectively.

With that, let me turn it back to Chris, who will provide you with our first quarter and full year guidance for fiscal 2009.

Thanks, Colleen.

I'm going to spend my remaining time on the call talking about what we see coming for the full year and for the first quarter.

Let me begin by outlining some of our key assumptions around the economy and general demand in the industry.

The forecast generally assumes a continuation of the economic conditions and demand we experienced in the fourth quarter to continue into the first half of fiscal year '09, with some improvement over the second half of the year.

We expect PC unit demand to remain healthy with growth rates similar to those in 2008.

Specifically, we expect PC unit growth for fiscal 2009 to be 12% to 14% for the year, and between 10% to 12% into the first quarter.

We estimate the growth rates to continue to be driven by roughly 20% growth in emerging markets, with high single digit growth in mature markets.

Now, let me go through our detailed guidance for the full year.

We expected our revenue to come in between $67.3 billion to $68.1 billion, growing 11% to 13%.

For the first quarter, we expect revenue of $14.7 billion to $14.9 billion, which represents an increase of 7% to 8%.

With that, revenue guidance by business group is as follows -- for Client, we expect full year growth to be 9% to 10%; for Q1 growth to be 6% to 7%.

The PC market growth will outpace that of Client revenue because of a continuation of the underlying PC market dynamics, mainly emerging markets PC growth outpacing mature markets; consumer growth exceeding business growth; and the shift in the system, both channel to large OEM.

Server and Tools revenue should be up 18% to 19% for the year, and 19% to 20% for the first quarter.

Coming off another impressive year of growth in fiscal '08, the Server and Tools business is expected to continue to show double digit growth across the breadth of our server platform products and services, driven by strong customer demand for the recently refreshed Windows server and Visual Studio offerings, and the soon-to-be-available SQL Server 2008.

We forecast revenue in the Online Services Business to increase 18% to 20% for the year, and 7% to 11% the first quarter.

The advertising component of revenue is expected to grow at approximately 25% for the year and 15% per quarter.

Our Q1 guidance assumes a continuation of the challenging online advertising market experienced in the fourth quarter.

We expect revenue growth to accelerate through the year, as we begin seeing revenue returns from the additional investments we're making in the business.

Microsoft Business Division revenue should be up 14% to 15% for the year and 15% to 16% in the first quarter.

We should continue to see business demand for the Microsoft Office 2007, SharePoint and Dynamic products.

Combined with growth in our emerging unified communication and business intelligence offering, this will drive another year of very strong growth.

Fiscal 2009 also represents an important year in delivering on our Software Plus Services strategy, with the upcoming releases of Exchange Online, SharePoint Online, and Office Communications Online later this calendar year.

The Entertainment and Devices Division, we expect revenue to be down 4% to flat the full year, and down 23% to 26% in Q1.

The strong customer demand for Halo 3, following its launch in fiscal 2008, makes a challenging year-over-year comparison in the Entertainment and Devices Division.

But having said that, we remain committed to a profitable performance in fiscal year '09.

Turning back to company-wide performance, operating income for the year is expected to be between $26.3 billion and $26.9 billion, increasing 17% to 20% or 10% to 12% in excluding certain tax and legal charges in fiscal 2008.

For the first quarter, we expect operating income to be between $5.9 billion and $6 billion.

Q1 operating income includes the impact of increased spending associated with our Online Services Business, costs associated with a number of new acquisitions, and investments in a Windows Consumer Marketing campaign.

I would like to address the overall impact -- the overall level of -- the impact of the overall level of spend on the Company margin.

To do so, as I've talked to you before, we need to look at the three individual parts of the Company that have [distinct] margin structures.

The core businesses of Client, Server and Tools, and Microsoft Business Division collectively will have an operating margin in fiscal 2009 that's essentially flat.

This performance is obviously very good, given that we're making a number of investments to drive the overall health of the business, and absorbing a number of acquisitions we've made this year, and growing revenue in the mid-teens.

The margin for entertainment and devices should also remain roughly the same year-on-year in fiscal year '09, even without the first party game release of Halo 3's magnitude.

(inaudible) our business is representing over 90% of our revenue will grow double digits next year with the market structure intact.

Clearly, the Online Services Business has a totally different dynamic and in a period of significant (inaudible).

We do not make these investments lightly, as a loss in this division will be a drag on a otherwise exceptionally good performance.

However, we believe that the additional investments, several hundreds of millions of dollars, is worth the short-term costs, given the opportunity to participate in a market where the opportunity is measured in the tens of billions of dollars.

While we are on the call, we'll take a few minutes to frame our reasoning behind the additional Online Services Business investments.

I will start with an overview of our core strategy and then provide details into the additional investments.

With the online ad spending expected to reach $80 billion by 2012, this area represents one of the largest growth opportunities for the Company.

We segment the market for online advertising in four different categories -- search, advertising platforms, information content, and communications and social networking.

For search, we are focused on driving query share improvements in business model innovation, specifically in the area of high value commercial search.

Our recent release Cashback is a good example of executing on our strategy, which combines innovation in the shopping experience for the shift in the distribution of advertiser economic for its end-users.

Additionally, we also seek to win targeted distribution through OEMs, ISCs, ISPs, and retailers.

The recently announced deal with XP in the US is an example of this.

Turning to the ad platform, our strategy can be summarized to consolidate, win and display, and there we are focused on integrating our advertising efforts into a single comprehensive system that can deliver our publishing partners' industry-leading yields and our advertiser's optimal return on their ad spend.

In the area of communications and social networking, which includes our [Mile] messenger and social networking assets such as Spaces, will delivery the leading end-to-end experiences across the PC, phone and Web.

And finally in the category of information content, we plan to invigorate our [image] in portal experience and improvement in user experience, social media consumption and premium content.

As well as overall advertising revenue, which is clearly the overall measure of success, we have aggressive growth targets in each of the above areas over the next five to 10 years.

These targets can be broken down in terms of the percentage of share of worldwide page views, percentage of share of Internet vendors, the percentage of share of search queries, and percentage of the growth of our online advertising dollars to pass through our platform.

Clearly, the Yahoo transaction, which I will make more comments on later, would have accelerated our progress towards these goals.

However, during the quarter, a transaction became increasingly unlikely.

Further, as you know, during the quarter, Yahoo signed a search outsourcing agreement with Google.

Given that environment, we made some decisions to accelerate our online services' organic growth strategy.

Mainly, we decided to increase our investment in the high margins scaleable areas of search and ad platform.

About two-thirds of the incremental spend that we are planning is related to investments to drive usage by a search offering.

We are dialing up a search distribution initiatives with targeted OEM toolbar [Ult-6] deals, scaling search globally with investments in localized engineering and data centers; procuring acquisitions and partnerships to build vertical content to support our commercial strategy; accelerating the rollout of our Cashback program; and increasing marketing and investments to grow awareness and drive traffic.

Second, we're upping the investments in our ad platforms, aimed at increasing the number of advertisers and high quality inventory on our platform.

Specifically, these investments are in the area of accelerating the integration of our ad platform assets, expanding our sales and service capabilities, small acquisitions to enhance platform technology, and investments in strategic partnerships to increase third party inventory available to advertisers on our ad platform.

Returning to EPS, our diluted earnings per share for the year are expected to come in at $2.12, $2.18, representing growth of 13% to 17%, 2 to 4 points faster than revenue.

To put this performance in context, as I mentioned at the front of the call, if we achieve the middle of our guidance, we'll have increased earnings per share from $1.42 to $2.15 in two years, an increase of 50%.

But first quarter, we expect earnings per share of $0.47 to $0.48, and these earnings assume an effective tax rate of 28%.

From a balance sheet perspective, we expect total unearned revenue to finish fiscal 2009 up 8% to 9%.

Contracted, not build, should also finish 2009 up from current levels.

When thinking about the sequential changes in unearned revenue from Q4 fiscal year '08 to Q1 fiscal year '09, we expect sequential decrease from Q4 to Q1 to exceed the rate of decline we experienced the last few years.

As always, when thinking about the guidance we provide, you should also consider the risk.

These include competitors, legal, execution and general market risks, such as foreign exchange rate movements, fluctuations in PC and server hardware growth rate, IT spending, changes in the piracy rate, and customer acceptance of our new and existing products.

Additionally, changes in the mix of our fillings between annuity and [LIFO finally] can have an impact on revenue operating income and EPS by delaying revenue recognition into future periods.

So, in closing, the strong results of fiscal year '08 with the outcome of both business and engineering execution.

In addition to the financial outperformance, we delivered the final phase in our multi-year product [risk] cycle with the availability of Windows Server 2008, and Visual Studio 2008, and are well positioned to continue that momentum into fiscal 2009.

The next fiscal year will be an important year driving mass adoption across a portfolio of products.

With our breadth of products and global diversification, we are confident in our ability to continue to deliver double digit revenue increases, even off our base of over $60 billion.

And we will continue to use that strong cash flow to invest in our organic growth, inorganic growth through acquisitions, and in our sells through buyback.

Before I hand the call back to Colleen, I wanted to take a moment to clarify the terms of our recent proposal for a search transaction with Yahoo.

Given the upcoming Yahoo shareholder meeting, I won't be taking any questions on this topic in the Q&A session that will follow this presentation, and we won't be providing any additional comments on that, as we've already discussed.

But with that, let me outline you the key elements of our proposal.

Firstly, we are providing significant revenue guarantees.

Microsoft proposed a 10-year minimum revenue guarantee totaling between [19.5 billion and $26.5 billion].

For the first five years, the guarantee is $2.3 billion per year; thereafterwards, both Yahoo and Microsoft have the option to extend the agreement for an additional five-year period.

If Yahoo unilaterally chooses to extend the agreement, the guarantee would be for $1.6 billion per year after the extension.

Conversely, if Microsoft unilaterally chooses to extend the agreement, the guarantee to Yahoo would be $3 billion per year after the extension.

These guarantees are not conditional on Yahoo search queries; rather the guarantees are tied to Yahoo's home page performance.

Our proposal includes an 85% tech rates for the first three years of the agreement and 70% thereafter.

Microsoft would pay Yahoo $1 billion for its search assets, provide $2.8 billion of senior debt to Yahoo on favorable terms; and make a significant equity investment in Yahoo through the purchase of $3.9 billion of Yahoo's stock at $19.50 per share, reflecting our view of the value of the company as a result of that proposed transaction, and the distribution of cash and the Yahoo Asian investments by Yahoo to its stockholders.

I should also note that Microsoft's proposal did not and does not include changes to Yahoo's governance.

We clearly continue to believe that our proposal is a compelling one.

With that, I am going to hand the call back to Colleen so we can get started taking your questions.

And I clearly look forward to seeing a number of you at our financial analysts meeting, which is next Thursday.

Thanks.

Thanks, Chris.

Let's now proceed to questions.

We want to accommodate questions from as many people as possible, so please avoid multi-part questions and limit yourselves to just one question.

Operator, will you please repeat your instructions?

Okay, thank you.

(OPERATOR INSTRUCTIONS).

Sarah Friar, Goldman Sachs.

Thanks for taking my question.

Chris, just firstly, could you give us a little bit of your overview on the macroenvironment and how that has changed when you think back to giving earnings three months ago?

And then just on your cash flow, it came in a little weaker than we were anticipating.

DSOs were up higher than we have seen and perhaps ever for Microsoft.

Was there a collections issue?

More back end loading?

If you could perhaps talk to the weakness there.

Sure.

Okay, taking those in turn -- in terms of the macroenvironment, it is broadly speaking the same as what we were expecting in April.

Clearly people are getting concerned now about the length of softness here in the US.

But as you are seeing for revenue, we have taken it up slightly since April.

So in terms of the visibility into our products, we are actually feeling very good about our position, not only here in the US but outside the US.

As I mentioned in my comments, if you look at the Company overall, our sales in the US in the year that we've just completed were up 15%.

The Company overall is up 18%.

So clearly we grew faster outside the US than we did inside the US.

But at 15%, given -- it's been a difficult environment for a number of companies, growing at 15% off our base was very good.

So going into next year, we are clearly cautious, like everyone is, about the impact of the environment, but for our products overall, we're feeling very good.

I'd say the one proviso to that is in the online advertising space, where we are seeing a direct impact.

It was weak in the fourth quarter and I think you're seeing from results of other companies some weakness in that general space.

So, there is a direct impact and we are not immune to that in the online space.

And we'll probably see that continuing certainly for the next quarter.

But overall, in terms of that core business growth, that feels very good.

In terms of your other questions on cash flow, the biggest thing in the cash flow that was probably a negative was the payment of the fine to the EU, which was over $1 billion, so -- $1.5 billion.

So that was clearly a big negative from a cash flow point of view.

Other than that, there really wasn't anything remarkable from a cash flow point of view.

In fact, it was quite a strong quarter, given the results overall.

And on a DSL standpoint, Q4 seasonally does tend to be a little higher than some of the other quarters.

We do close a lot of business.

And our fiscal Q4 as the sales force is out there closing deals.

But we didn't see anything unusual from a DSO standpoint.

But overall, I'd say revenue growth of 18% last year, guiding to revenue growth of 11% to 13%.

So you combine those and say it is 30% broadly for the two years that cover what was hopefully the worst of the economic conditions, so we are feeling good about it.

Okay, thanks, Sarah.

Next question, please?

Heather Bellini, UBS.

I was just wondering, Chris, if you could talk a little bit about the OSB business.

Given how far behind you guys are, if you are unsuccessful in getting all or even a part of Yahoo, can you walk us through how you are going to be able to compete with Google?

And also, are we in a critical period here in this segment, where if you continue to go down the path of going into loan, that we are going to be seeing this accelerating spending from current levels so that it is going to adversely impact overall op margins; so we're actually not going to see op margins expand for the next two years?

Thanks.

Yes, sure.

Okay, overall, clearly, regardless of what happens with Yahoo, it is a space that we are committed to.

I said that in the prepared remarks and it is one that we're committed to on a long-term basis.

I would split the market, as I did in my prepared remarks, into four areas, of which search is only one -- ad platform, communications, social networking, and information content being the other ones.

And clearly, we have a very good position in information content and communications and an ad platform with the acquisition of aQuantive.

So we feel very good about our relative position in those areas and a number of our investments are going into that.

In the search area, clearly, that's the one we are, relatively speaking, we are the most behind.

And that is why we're taking a different approach; which again, I mentioned in the prepared remarks, where we are focusing in particular on the areas of search where there is a strong commercial intent of verticals like retail, travel, real estate, local -- we're looking at different approaches where we might potentially take a disruptive and business model, for example, Cashback, and then looking at winning distribution deals.

Now in the short term, that isn't going to make the division profitable.

And I think clearly from our guidance that is not the case.

So as I said in the remarks, if you look at the operating margins structure of the Company, you really have to look at the three distinct businesses.

We feel good about the margins structure for our core businesses, in particular, growing double digit revenue.

On entertainment and devices will be broadly flat but online is going to be negative.

Chris, yes, I totally get what you're saying.

I guess the question that I'm getting asked a lot is -- how long are you going to spend the -- you're obviously performing well on the top line, but you're spending the upside, so that -- where people aren't getting margin expansion.

I guess the question that I am getting at is how long should we expect that to continue?

Well, we're not going to make -- and certainly, on this call, we're not going to give guidance for fiscal year '10 and '11.

Some of these investments that we are making will be multi-year.

So it will depend to a large extent on our revenue growth as to when that division becomes profitable.

So, it will need to continue to grow relatively substantially in order to cover the level of investments that we are making.

But it is going to be -- and I think we've made this point on previous calls -- it is going to be an investment-heavy area.

In particular, things like the ad platform, where we you see a convergence of two natural players over time, of which we clearly would expect to be one.

And that's an area where spending in particular on infrastructure is likely to be high.

So, I can't promise you that you are going to see a massive turnaround in the short term and certainly fiscal year '09, which is the year that we're going to today, it is going to be a continuation of an investment.

But again, put it in the context of what we would describe as the overall opportunity and the size of the Company overall.

Charles DiBona, Sanford Bernstein.

I would like to circle back to the Q4 results and really particularly the margins here.

I think the Xbox issue is fairly straightforward, but in something like five of the last eight Q4's, you guys have had an issue of not being disappointing on margins.

And maybe you can give us some color and comfort on sort of what looks to be like a fairly persistent control issue in Q4, and in some cases, it looks like you might be pulling some expenses forward.

Are we going to see that in the fiscal '09 numbers?

Yes, I always distinguish between the costs which were, if you like, a function of the revenue, a function of decisions that we made and functions of unexpected low quality spend, if you like.

But to give you some comfort, it's the areas that we spent more of in fourth quarter were more orientated in the first two.

For example, on the revenue side, we sold more Xboxes, so we had more COGS.

That's good news.

Okay?

We don't make any money from those, but overall, in terms of long-term health in the business, the more consoles we sell, the better.

And Server and Tools, our higher Enterprise Services revenue carries higher COGS with it.

Again, that is just a factor of it.

So the mix inside Server and Tools might not be as strong as you would like from a revenue point of view, but that's just a natural consequence.

In terms of decisions that we made, we have budgeted headcount on people hired to their budgeted levels.

That is a good thing in the sense that we actually hired people that we want to hire.

And we were particularly successful.

I think that is a reflection to a large extent of the economic environment and the fact that, if anything, at the moment we are an even more attractive company than we have been to people.

So again, that hits us from an expense point of view, but I have described one of the categories, it is a conscious decision to hire people.

In terms of things that are outside our control, FX was a factor.

FX has been our friend pretty much throughout the year in terms of driving more revenue upside than more expense.

Net-net it has been a positive, clearly because we have more revenue outside the US than we do expenses.

In the fourth quarter, it was an unusual quarter in that we hired a lot of people outside the US.

And the mix of expenses was such that the FX impact was higher in OpEx than it was in revenue.

If you look across the year, that's not the case, but in the quarter it was.

So I'm comfortable that there's not any lack of control over spending.

Most of the decisions I have talked about were either conscious ones or a reflection of better revenue performance in certain areas.

Kash Rangan, Merrill Lynch.

Thank you very much.

It looks like the stepping up of investments in the Online Services Business seems like the right thing to do.

I'm just curious, Chris, but I would have expected that to be accompanied by an increase to the revenue guidance.

Yet and you look back over the last 12 months, if I exclude aQuantive, I still come up with much faster revenue growth in the Online Services Business.

So my question is, is the return on these investments going to take more than one year lag to show up in the financials?

Or is there some conservativism in how you're budgeting for the revenue productivity as a result of these investments?

Is there a longer lag to these OpEx investments?

And also, maybe three or four seconds of your thoughts on [prime] guidance.

I know Colleen didn't want to answer multipart questions, but I couldn't resist this.

The 6% to 7% growth absent currency looks to be very low on the 2% to 3% side.

I'm just curious what was the thought process that went into that guidance as well?

Thanks.

Okay, sure.

Kash, you went blank through the start of your question, so if I don't cover it exactly, please come to me; we missed just the first few words of your question.

But in terms of online spending, is it likely to be more of a fiscal year ['10] impact on revenue, the answer is yes.

And that is not only because of the nature of some of the investments that we are making, things like marketing Cashback.

That is going to take time in terms of seeing the real impact from that.

But also, just because, as I mentioned in, I think, Sarah's question, the online advertising area is probably the part of the business, certainly in the short-term, which we think is most challenging.

From an economic environment point of view, we have actually done remarkably well in our commercial businesses and overall for PCs -- getting through difficult and choppy economic waters.

The online advertising area appears very difficult at the moment.

I think that is across the board.

That is not just us.

So I don't want to promise -- we might see benefits for example, in share, but I'm not sure whether that share is necessarily in [best display] in the search area.

Again, it translates in the -- certainly in the first six months and possibly across the year to significant revenue growth.

But I think you could expect to see us make progress in the years that I've talked about, which is the underlying dynamics, the driver, the percentage minutes, percent of share, et cetera.

That is really how we're going to have to measure ourselves over the next year.

I think the second half of your question was client-specific, is that right?

That's correct, yes.

In the 6% to 7%, yes, that is relatively light.

To some extent, it is because of the very high, strong quarter 1 that we had last year.

If you will recall, we had a very strong quarter 1 piracy performance last year.

It is also part of the strong Q4 performance from this year, which Colleen mentioned in the prepared remarks, was some channel inventory.

If you like, it was very strong unit growth in quarter four of fiscal year '08.

Some of that was because of a weak Q3.

You will recall that Q3 call, we talked about some of the inventory issues there and that was one of the reasons why Q3 of last year was weak.

So like a bit of a borrowing from Q3 into Q4, and also we think a little bit of a -- some of our customers brought forward from Q1 into Q4 as well.

So that is one of the reasons.

The other is we are about 10% to 12% PC unit growth expectation, which relative to the year of 12% to 14%, we are just seeing that quarter as being one of the low points.

So, you combine all of those factors and in fact, that is going to be the lowest revenue growth quarter for Client in the year.

Brent Thill, Citigroup.

Chris, the overall buyback for '08 was more than cut in half from '07.

Obviously it is understandable considering the acquisition strategy, but I guess as it relates to the overall plan, you only have $3 billion left on the current $36 billion plan.

How aggressive at 25 and change will you be with the stock here?

Okay, yes, going backwards and then go forwards.

Backwards, yes, you're right, it was lower than the previous year.

One of the reasons for that is we were getting down to a level of cash that we feel more comfortable with.

So there was some accelerated buying in the previous year.

The other impact was we [played at] the aQuantive acquisition, which was relatively expensive this year.

And last factor is when we announced the Yahoo acquisition earlier this year, we went out of the market, both from a sensitivity point of view and clearly, at that stage we are [envisioning] having to use a large part of that cash for the acquisition.

Subsequent in May when it was clear that the overall transaction wasn't going to happen, we went back into the market and we've been buying at levels that are more like historic levels.

So those are the reasons why we've been less in the year.

It was $5 billion I believe for the quarter.

So it was a reasonably strong buyback quarter.

Clearly at these prices it is incredibly attractive from a buyback perspective.

I can't tell you as I never do on a quarter by quarter basis exactly how much we will buy back.

You are right that we only have about $3 billion worth of our buyback left.

That's good news in the sense that I think we gotten ourselves through 2012 to complete it.

So we can put it a little ahead of schedule.

What we do here is we complete the current buyback, then we go back to the Board for authorization of any subsequent buyback.

And that will be exactly the process that we'll do here.

And when we get authorization from the Board to do further buybacks, we would clearly announce the amount at that stage.

But certainly wouldn't announce exactly the shape of what we do.

But clearly, the value of the Company relative to the last three years is as good as it's been.

Adam Holt, Morgan Stanley.

I have a question about Office and MBD.

Obviously, Office 2007 has been a terrific product cycle.

But MBD has been a little bit light, relative to guidance for the last couple of quarters.

Could you maybe talk about where you think we are in the Office 2007 cycle?

And what gives you confidence that we will see a re-acceleration of growth in MBD next year versus what we saw in the back half of this year?

Well, over all, obviously, the MBD division did extremely well last year.

So, put that in context.

But you are right in the sense that Office was slightly lighter than we might have thought -- mainly, to be honest, in the consumer area.

And that's around lower priced SKUs and retail.

So we are seeing more of a bias in the volume that we are seeing.

Volumes are very good and business sales are very good, but the volumes on the retail side tend to be more in the lower priced SKUs, so that's having an impact overall.

But the overall volume and the overall adoption and reaction to Office 2007 has been extremely good.

So we feel good and we've put it inside a business group, which grew at 15% to 20% last year.

So as we look at it next year, should we be thinking about Dynamics and SharePoint being the key drivers?

Or should we expect Office to reaccelerate?

I think those emerging products are certainly going to make a big difference.

We're guiding 14% to 15%.

That's very good.

I mean, Office is unlikely to grow at 14% to 15%.

It is likely to grow at more like high to single digits.

But the other part of the business will grow extremely well.

And that could average up to 14% to 15%; so you are up SharePoint, Office Communications, some of the online services that we're bringing in will start to have an impact.

So, overall, [it could] now our biggest division in terms of revenue, 14% to 15% looks very good.

Robert Breza, RBC.

Just looking at the $500 million in expenses that you're talking about, how should we think about that trending through the year?

And then depending on any outcome from an acquisition perspective, would you look to accelerate that investment or de-accelerate that investment?

Thanks.

Yes.

It has fairly different dynamics.

In terms of the consumer marketing, that is probably going to be front loaded in the year.

And one of the reasons for first quarter being relatively light compared to the other quarters would be some of the marketing spend that we see in the first quarter.

In terms of some of the online spending, that is probably going to be more progressive through the year.

In terms of acquisitions, that's really going to be opportunistic.

We closed a lot in the fourth quarter.

So one of the things that is impacting our results is clearly the amount of non-cash amortization associated with acquisitions.

And that was relatively substantial last year; it was over $300 million.

We don't call that out, as some companies do and take the benefit of adjusting our results to reflect it.

We take that fully through the P&L.

And next year, in terms of the guidance we have given you, we expect it to be more than $300 million.

How much more and exactly the shape will depend on acquisitions.

We have an expectation of it that we build in, but it will grow progressively through the year.

It is all non-cash but will continue to take the full impact through to P&L.

That's helpful.

Thank you.

Thanks, Robert.

And our last question, please, Operator.

And the last question comes from Kirk Materne with Banc of America Securities.

Yes, thanks very much.

Chris, you talked in the guidance just on [entertainment] devices about maintaining profitability.

Given that there is no new cycle of the hardware this year, is there any reason why profitability shouldn't start to trend up as attach rates get better?

Is there anything going on in that business that's going to require, say, more advertising dollars or spending in that?

One of the impacts obviously is we dropped prices during the course of last year.

So year-on-year, we have slightly different -- difficult price comparisons.

The other thing is there is more than just Xbox sitting in there.

There's obviously Windows Mobile, which has got a lot of opportunities.

So there are other areas that we'll be [standing on].

We aren't, in the CapEx today, giving any guidance on profitability.

My comment was simply that it will remain the sustainable profitability.

But we're not saying whether that's going to be significantly up or down from where it was last year.

Okay, thanks very much.

Thank you.

And thank you to everyone for your participation in today's call.

If you have any further questions, please feel free to call me or my team directly.

We're very much looking forward to seeing you at our financial analysts meeting next week.

As I mentioned at the beginning of this call, this conference call will be available on replay at our Investor Relations website through close the business, July 17, 2009.

In addition, you can hear the replay by dialing 866-515-1618 or for international calls, dial 203-369-2027.

The dial-in replay will be available through the close of business July 25, 2008.

Thanks again for joining us today.

Thank you.

And that concludes today's call.

Please disconnect your line at this time.