Highlights From MSFT's Q4 Conference Call: Enterprise Deployments Have Increased Almost 50% Since March

Microsoft Corp (NASDAQ: MSFT) reported Q4 EPS of $0.69, $0.11 better than the analyst estimate of $0.58. Revenue for the quarter came in at $17.37 billion versus the consensus estimate of $17.25 billion. Shares are currently trading flat on the session.

Highlights From MSFT's Q4 Conference Call:

• (Peter S. Klein) We closed the year with terrific sales execution as enterprises furthered their commitment to our Windows, Office and Server products. Customers continued to invest in our business desktop offerings, including Windows 7, where enterprise deployments have increased almost 50% since March.
  
• Our overall multi-year licensing business was especially strong, driven by attach of additional seats and additional products. As a result, fourth quarter bookings were up 17%.
  
• We grew fiscal year '11 revenue double digits and we delivered another year of operating margin expansion. We also grew earnings per share by more than 20% for the second year in a row.
  
• Our financial results reflect Office 2010's outstanding market reception. Deployment remains five times faster than the previous version. Customers are also adding our business productivity applications, including Exchange, SharePoint, Lync and Dynamics to their multi-year agreements. These four products collectively drove approximately 30% of the Business Division's growth this year.
  
• We made great progress on our Cloud initiatives this year. We continue to lead the industry through this transformation by enabling our customers to transition to the cloud in a flexible, customized way.
  
• In the enterprise, Office 365 enables us to increase revenue and profit per seat, while strengthening customer commitment through increased product satisfaction and high return on investment. It gives us new opportunities to address the workforce that doesn't regularly use a PC in the workplace.
  
• During the quarter, we partnered closely with Yahoo! (Nasdaq: YHOO) to uncover and address several platform gaps and inefficiencies. We still face monetization challenges and will continue to work closely with Yahoo!. We remain confident in the long-term potential of the combined search marketplace.
  
• In May, we announced our agreement to acquire Skype which will extend Skype's word class brand and global reach of its network platform while at the same time, enhancing Microsoft's existing portfolio of products and services. With Skype, we will increase the accessibility of real-time video and voice communications to both consumers and enterprises thereby generating new business and revenue opportunities for Microsoft.
  
• (Bill Koefoed) Revenue for the quarter was $17.4 billion, up 8% year-over-year, while bookings were up 17%. For the year, revenue was $69.9 billion, growth of 12%.
  
• Operating income was $6.2 billion for the quarter and for the year, a record $27.2 billion, up over $3 billion from the prior year.
  
• For the quarter, earnings per share was $0.69. For the year, earnings per share was $2.69, up 28%, the second consecutive year of EPS growth over 20%.
  
• This quarter, enterprise demand for our products remained strong and multiyear commitments drove our unearned revenue balance to $17.1 billion. Our contracted not billed balance is now over $18.5 billion.
  
• The PC market dynamics were similar to the third quarter. First, the business PC refresh cycle continued and drove estimated business PC growth of 8%. Second, PC sales to emerging markets continued to grow at a rapid pace as a record number of people around the world are using Windows PCs. We estimate that this quarter over 40 million PCs, representing half of all global PC shipments, were shipped to emerging markets.
  
• Last week, at our Worldwide Partner Conference, we announced that we have sold over 400 million units of Windows 7. 25% of enterprise desktops have already deployed Windows 7 and as we have stated before, over 90% of enterprises have committed to a deployment plan.
  
• During the quarter, we also provided an update of Windows 8. We demonstrated how we have re-imagined Windows for a new generation of touch-centered hardware. You'll hear more at our BUILD Developer Conference this September.
  
• Now I'll move on to the Microsoft Business Division which grew 7%. Consumer revenue declined 8%. The weak consumer PC dynamics in developed markets were partially offset by strong attach rates. The business transactional portion grew 27%, driven primarily by business PC growth and continued launch cycle momentum. The multi-year licensing portion of the business grew 6%.
  
• We launched Office 2010 one year ago and for the year, the Business Division's revenue increased to over $22 billion, an increase of 16%.
  
• Multi-year license revenue grew 12% and enterprise services revenue grew 14%. Our premium Windows Server and System Center revenues were both up over 20%. Customers are using Microsoft technology to virtualize their data center and build out private cloud environments. System Center revenue has also grown double digits 10 consecutive quarters.
  
• We are seeing customers continue to adopt SQL Server as they deploy mission-critical applications and implement cost-effective business intelligence capabilities. As a result, SQL Server premium revenue grew almost 20%.
  
• Next I'll move to the Online Services Division where revenue grew 17%. Online advertising revenue grew 20%, driven primarily by search. Bing's U.S. organic market share ended the quarter at 14.4%, up 340 basis points from last year. During the quarter, we launched new features based on Facebook's social graph to help people make better, smarter decisions.
  
• Now let me move to the Entertainment and Devices Division where revenue grew 30%. During the quarter we sold over 1.7 million consoles, an increase of 18%. Xbox 360 was the number one selling console in the U.S. for the year.
  
• At E3 in June, we announced the upcoming releases of Gears of War 3, Forza 4, Kinect: Star Wars, Kinect: Disneyland Adventures, Dance Central 2, Kinect Sports Season 2 and many more games.
  
• Xbox Live also continues to grow rapidly and consumer online engagement with the service remains a core part of our Xbox value proposition. Xbox Live has entertainment content from partners such as ESPN, Hulu, Netflix and BSkyB, and this fall we will make it even easier to find and access content via integration between Kinect and Bing.
  
• In the quarter, cost of goods sold increased 17% and had similar drivers as last quarter. Hardware costs are up due to the success of Xbox 360 consoles and Kinect Sensors. Third-party content royalties are also up, reflecting strong sales on Xbox Live.
  
• Enterprise services in our Server and Tools business continues to grow rapidly. And online services costs are also up, reflecting increased traffic acquisition costs, including costs related to the Yahoo! alliance. Operating expenses were $7.5 billion, an increase of 8%, primarily due to recently legislated Puerto Rican excise taxes and an increase in selling-related costs.
  
• To think about the full year tax rate, our effective rate was 19.2% after adjusting for the one-time benefit in the third quarter related to the IRS settlement.
  
• Operating cash flow for the fourth quarter was $5.9 billion, growth of 6%, while operating cash flow for the full year was a record $27 billion, an increase of 12%. In the fourth quarter, we repurchased $1.6 billion of stock and declared $1.3 billion of dividends.
  
• (Peter S. Klein) As we enter fiscal year 2012, we are excited by the advancing trends in technology and the resulting opportunities for us to evolve our businesses.
  
• Now turning to our outlook by business, for the Windows and Windows Live Division we expect revenue to continue to be impacted by market dynamics similar to what we experienced in the fourth quarter with emerging market growth significantly outpacing developed market growth. While emerging markets are an important opportunity for us to increase Windows penetration, they impact revenue growth percentages as they generate lower average selling prices and have higher piracy rates. We also expect business PC growth to outpace consumer PC growth with the business PC refresh cycle continuing throughout the fiscal year.
  
• Turning to the Microsoft Business Division, transactional revenue, approximately 40% of the division's total, will likely lag the overall PC market for both the first quarter and full fiscal year reflecting a higher mix of PC shipments to emerging markets and the launch of Office 2010 a year ago.
  
• Moving to Server and Tools, approximately 30% of the division's revenue comes from transactional licensing, 50% from multi-year licensing and 20% from enterprise services.
  
• Turning to the Online Services Division, we expect online advertising revenue to perform roughly in line with the overall online advertising market for the first quarter and full fiscal year.
  
• Switching to overall cost of goods sold for the company, the biggest factor impacting COGS going forward will be the shift of revenue mix across hardware, software, enterprise services and online services. In fiscal year '12 we will continue to prioritize our spending and manage our costs. We are reconfirming our guidance of 3% to 5% growth and expect operating expenses to be $28.0 billion to $28.6 billion for the full fiscal year.
  
• We expect our effective tax rate to be 19% to 21% for the first quarter and full fiscal year, and we still expect capital expenditures for the full fiscal year to be about $2.5 billion.
  
• Moving to unearned revenue, given our strong sales execution and our record unearned balance at the end of the fiscal year, unearned revenue in the first quarter will likely lag historical sequential growth patterns by a few points. We expect unearned revenue at the end of fiscal year '12 to grow low double digits over this fiscal year.
  
• (Q&A) You mentioned in the slide deck there that 20% of the Fortune 500 has started to adopt the Office 365 online services and I'm assuming it's pretty early there, but I'm wondering if you can help us understand how quickly you expect that to progress throughout fiscal '12 and sort what impact we should see on the financial statements as that starts to happen in fiscal '12 or maybe beyond. (A) Yeah, you see it hit the financial statement in two ways actually, Walter. One will be in the actual Office 365 revenue, but also as we continue to have the conversations about the migration to the cloud you see that show up in our multi-year licensing revenue. And you saw some of that this quarter with our really strong multi-year licensing revenue across the board. The market response so far has been great. We're really excited about it. We expect that to accelerate over time, but again I think you'll see it in both ways. You'll see it in our multi-year licensing revenue and in our Office 365 revenue.
  
• My question is about the E&D commentary for next year which was - I think a surprise relative to certainly consensus expectations and then it's a lot higher than where the consensus was for next year. Can you talk a little bit about some of the detail behind the assumptions there? Specifically what are you expecting or what is embedded around the Nokia relationship? And what are you expecting and what's in the numbers around any kind of share gains following Mango? Thank you. (A) Well, the single biggest driver in the E&D division is going to be Xbox. So we've got great momentum in the marketplace with the console which we've refreshed a year ago, with Kinect which just came to market last holiday, with a bunch of new content and titles that Bill talked about in terms of games as well as broader entertainment content. So as we look to continue the momentum that we have with our share position in the marketplace, you see the strategy really coming together in that business. Selling the install base of the console and then having the social connectivity with Xbox Live and the broader entertainment portfolio. And so a lot of that strength relates to the Xbox business.

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