Highlights From MSFT's Q3 Conference Call; Some Bright Spots, But Expect Recovery Slow and Gradual

Last night, Microsoft (Nasdaq: MSFT) reported Q3 EPS of $0.39, ex-items, in-line with the analyst estimate of $0.39. Revenue for the quarter was $13.7 billion, versus the consensus of $14.09 billion. Shares are up almost 11% in today's trading session.

Highlights From MSFT's Q3 Conference Call:

• (CFO) On the macroeconomic front we saw a broad based slowdown across virtually all product lines and geographies.
  
• Transactional revenues in our emerging markets were impacted by the economic reset that we're all seeing, with demand down as much as 15 to 20%.
  
• Our annuity licensing held up well, we managed expenses significantly below our expectations going into the quarter and , despite all the distractions, including the first significant layoffs the company has ever implemented, we executed on our product development milestones. We ended the quarter with 800 less employees than we started the quarter with.
  
• Globally overall IT spend, and in particular business hardware purchasing continued to slow from the levels seen in the second quarter, and severely impacted transactional license sales in our Client, Business Division and Server and Tools businesses.
  
• We remain cautious - more cautious than most about the state of the world economy. Our globally diversified business gives us insight into a world where economic pressures are both broad and deep. While we'd all like to think that our recovery will be soon and painless, we unfortunately believe that it will be slow and gradual.
  
• In the fourth quarter we expect the overall spending environment to remain difficult.
  
• We now expect fiscal 2009 operating expenses to be between $26.7 billion and $26.9 billion.
  
• (VP, Investor Relations) Overall, revenue declined 6% to $13.6 billion due to continued weakness in global demand, particularly in the business PC and server hardware markets.
  
• Unearned revenue grew 1% year-over-year to $12.3 billion. Our contracted not billed balance exceeds $12.5 billion, and was also up year-over-year.
  
• We saw continued deterioration in the overall PC hardware market, which we estimate to have declined 7 to 9%. Traditional or non-netbook PCs were down 15 to 17% compared with the year ago quarter.
  
• Client revenue was $3.4 billion, down 16% from a year ago. OEM revenue was down 19%, driven by the dynamics in the underlying PC market.
  
• The commercial and retail portion of the client business grew 1%.
  
• We feel very good about the response we are getting to Windows 7 beta testers, and our progress against the next milestone, which is the release candidate.
  
• Server and Tools revenues grew 7% to $3.5 billion.
  
• The Microsoft Business Division had revenue of $4.5 billion, which declined 5%, due to declines in non-annuity licensing.
  
• Office 2010 will be for sale in the second half of calendar 2009.
  
• The Xbox 360 business had a very strong quarter, selling over 1.7 million consoles. This represents growth of almost 30% over the prior year.
  
• (Q&A) I just wanted to dig in to cost of goods sold just a little bit further, you commented on next year. I am just wondering if you could give us a sense of quarter-to-quarter there just what your expectations are. And that's it.
  
  Microsoft Corporation develops, manufactures, licenses and supports a range of software products for computing devices.

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