KEVIN TURNER: All right. Well, good morning, and again welcome, and thanks for being here. We've certainly got a lot to cover with you, and I'm going to close out the "growing and extending the core" section that Jeff teed up. As we get into it, the areas specifically I want to touch on first are the corporate desktop value area and then the Windows OEM area, and then I'll wrap it up by pulling together what you heard from Jeff and through this piece on Windows Client, and how we're going to operationalize that and land that in the field, which I think is very important being able to monetize the innovation and how do we land it out there.

And then after I talk we're going to bring up Kevin Johnson, Bob Muglia, Jeff and myself, and then we're going to do a Q&A specifically around growing our core and close this particular section out.

So as we jump into Windows Client, you know, there's a couple of things I think a year ago that was on everybody's mind—a couple of, four, questions. Number one, will it ship? Number two, will Windows Vista drive revenue? Number three, will Windows Vista deliver a great experience? And, number four, will Windows Vista, particularly for commercial customers, deliver a lower total cost of ownership? And those are the four questions that I really want to frame what I'm going to talk to you about today in the Windows Client area.

You know certainly it was the big issue we've had in Windows. And as you look at it in terms of revenue for us, which we had high expectations for Vista, but also in terms of dollar growth. So year-over-year revenue growth of 14 percent, net revenue growth dollar year-over-year was $1.9 billion—that's the biggest net revenue growth in Windows history. And, as you look at that, 14 percent was certainly a very good number for us last year. You know, the numbers that we've given you for this next year from a guidance standpoint around GAAP and what our growth is going to be in Windows Client is around 9 to 10 percent growth—so again another healthy year we're forecasting or projecting for FY '08 in the Windows Client area.

But let's look across the customer segments and talk about how do the customer segments and where do we see kind of the results shaping up. Strong results in the consumer market driven by two things: one, certainly a healthy PC market—10 to 12 percent growth this last year. Also, for FY '08, as we look at the PC forecast, and Kevin Johnson and I and our teams collaborating on what do we think it's going to be next year, we're forecasting 9 to 11 percent PC growth. And so when you get those two numbers, it kind of helps some of you who have the modeling how we're going to shape up as it relates to Windows Client from a revenue standpoint this next year.

Customers purchasing our premium version of Windows in FY '07, our premium mix, was 68 percent. And that's a 16-point year-over-year increase as it relates to our premium mix. It's something we feel very good about, and certainly the consumer premium SKUs are driving the majority of that growth, as they were up 19 percent. So when you think about that, that's an important thing.

On the business side, volume licensing, which you all would have seen out of our Q4 numbers, new sales and renewals is growing at the best rate we've seen in many, many years, and that's driven by customers interested in both Windows Vista Enterprise and the ability to get the Enterprise edition deployed, as well as something we affectionately call MDOP, which is the Microsoft Desktop Optimization Pack. And that is where we deliver more value beyond upgrade rights in our Software Assurance offering. So that allows us to be able again to get more value into each socket or unit that we sell into the enterprise and commercial space.

So from a modeling standpoint, FY '08 looks like, again, from a revenue standpoint, GAAP is 9 to 10 percent growth; from a PC forecast 9 to 11 percent. And then when you think about the two trends you're dealing with, with a higher percent of the PCs coming through emerging markets, which we have at lower revenue per license, as well as the opportunity that we have from the consumers outgrowing the business mix, both of those are opportunities that cause a strain on our revenue for licenses. So the things that we're doing to offset that we'll talk in a little bit, or at least partially offset that, are around piracy and they're also around this MDOP being able to sell more value into our commercial customers.

So when you think about the experience and teeing up the experience and the fact that it delivered the revenue, we shipped the product—Kevin Johnson and Steve have done an amazing job. We had the best launches around the world—over 400,000 customers came to our launches, and certainly something that was the best launch that we've ever had—launch wave we've ever had in the history of the company, is something that we feel very good about.

When you look at it, you know, as we designed Windows Vista, our customers told us they needed three things to make sure that we built into the product, and those are three things that I still hear today that customers tell me today that they need to be able to move to Windows Vista. The first one they told us was security and reliability, and that was the number 1 feature in the product. So how did we do? Windows Vista is the most secure operating system we've ever released. In the first 180 days we've had far fewer high-severity vulnerabilities than XP. We've had 12 in Vista. We had 25 in XP. And think about the sophistication level of the people that create the vulnerabilities today versus what it was when XP released. It's a far different opportunity today than it was then. Over that same time period, I think you should also note that Windows Vista had far fewer than Apple, as well as any major desktop Linux distributor. And that's something, again, we feel very good about from a security and reliability standpoint. But we're not resting on our laurels; that is something we're going to continue to stay focused on. This is the first operating system we've ever launched with security built in on the front end from a foundation standpoint. And, again, we're going to continue to work on that and improve it as we go forward.

When you think about reliability, Windows Vista has got the built-in tools for diagnostics, backups, self-healing capabilities. Again, it helps increase uptime and lower support costs. And one of the metrics that I wanted to share with you today around this area from a reliability standpoint is that we've had 21 percent fewer support calls per unit shipped than we've had in XP—21 percent. And that's a big improvement for us as it relates to improving that reliability.

Now let's talk about desktop management and lower total cost of ownership. You know, the thing about Windows Vista in terms of managing and deploying and securing the desktop is we've made it a lot easier for people to be able to do that and drive down that TCO. And one customer example I wanted to share with you that we worked in and went with the customer and sat through the cost of deployment, what they're spending on PCs and the management of the PCs, is around the Australian Customs Service. And in the Australian Customs Service this year alone they put down on paper that they're going to save $262 per PC per year by deploying Windows Vista. And so what we've done is we galvanized that around the field, working with customers, being able to create those white papers and those lighthouse accounts with those wins that'd be able to show that lower total cost of ownership—something that we're going to continue to work on certainly this year.

And then when you think about better user experience, and certainly it makes search easier and being able to organize on the PC and across networks is easier and certainly more friendly. Windows Vista also offers a streamlined, more visual experience, so from a UI standpoint that's something we feel very good about.

And then when you think about support calls—I talked about that—but improved performance, and that's an important thing. But as we get into it there's one thing that we need to talk about, and that has to do with the ecosystem. Let's talk about the ecosystem as it relates to how we designed Windows Vista. You know, when any new operating system is released, it takes some time for Microsoft and the ecosystem to work through the compatibility issues. You know what? I'm here today to tell you we've made significant architectural changes to be able to fulfill that promise of improved security and reliability, but also the progress we've made with our partners to improve the customer experience is really incredible and unprecedented since we launched.

So let's take a look at our ecosystem progress. On the application front, over 2,000 applications have earned the Works with Windows Vista or the Certified for Windows Vista logo. That's up from 650 at launch. And so big, big improvements are getting made in this space every single day. Around 70 critical enterprise applications have been updated to be compatible since launch, and I'd like to tell you what a few of those are as it relates to Cisco, Nortel, Adobe, McAfee, Symantec, Citrix, Oracle, Tivoli, SAP, IBM, and many, many others are being resolved daily. And so that's something we've been very focused on since we launched.

The second area—you got two areas from a compatibility issue—one is applications, one is devices—over 2.1 million devices are now supported—that's up from 1.5 million—and you can see the bar chart there—at launch time, covering nearly all known hardware in the Windows ecosystem today. So over 98 percent of the devices are covered today. More than 11,000 logoed hardware and devices are now available. So this is something we've worked very hard on out of the gate. And we came out, both from a compatibility standpoint around applications and devices, in far better shape when we launched than we were with XP. The opportunity that we have is there's more devices, more applications and more complexity in the marketplace from then to now. And so what we've done is to be able to really close that gap to position ourselves to make sure that we can get focused on deployment right now here in FY '08.

So let's talk about deployment. So this is a new number for you: 60 million units sold to date. So really if you do over the last six months since our consumer launch, 60 million units have been sold of Windows Vista into the marketplace. And you know by our math we eclipse the entire install base of Apple in the first five weeks that this product shipped. And that's something again—this ecosystem that I just talked about—we're not building an ecosystem that handles four, five, six devices and five or six printers. The opportunity is 2.1 million devices and thousands and thousands of printers. And that's the importance of getting this product to mass and scale, which we believe is a huge competitive advantage for us.

And then when you look at the growth in business, over 42 million PCs today are covered by our volume licensing annuity agreements for Windows Vista. And the big opportunity we have, and our client EA renewal rates, I told you, and you saw those numbers in Q4 how strong they were, and the progress that we're making there—and customers are purchasing the rights to Windows Vista because they're planning their deployments. And that's the example. So what I wanted to show you today was some customers deploying at scale specifically. And you think about Continental Airlines here in the United States is going to deploy 10,000 seats by the end of this year. You think about Banco Bradesco in Brazil—over 70,000 Windows Vista seats deployed this year. Microsoft alone, we as a company, has deployed over 100,000 seats of Windows Vista. And so when you think about HP and Dell and some of the big companies—Citigroup out there—the deployments are under way—that this is the year of deployment for the field. So that was really our call to action with all of our sales force that we had together two weeks ago in being able to really rally them around how do we drive deployments. And the tools and opportunities that we have out there from customers is incredible, because when you look at it we've made a lot of tools available to help with deployment this year, and so far over 200,000 people have downloaded our application compatibility toolkit. And that's something, again, we didn't have in the past that we have today that's really making the competitive advantage for us.

So when you look at it, we're going to drive growth and focus across the Windows Client business in four key areas. The first one is around strong PC unit growth, and again, emerging-market PCs are expected to grow between 16 and 18 percent through FY '09, versus 6 to 8 percent for developed markets. FY '08 PC growth, again, as I said earlier, is 9 to 11 percent is what we're forecasting. And long term our emerging market growth opportunity is huge even with that lower revenue per license rate.

But then let's flip to reducing the usage of counterfeit software. You might have read this past week we were able to work with the U.S. government, as well as the government from China, and have the largest bust that we've ever had as it relates to counterfeiting—a company that we believe put over $2 billion worth of software in the marketplace as it relates to counterfeit software. And we were able to come in and operate and seize that product, and hopefully shut those lines down for good. And so that's something that we're going to get up every morning working on how do we reduce that piracy, how do we reduce the counterfeit software, and how do we continue to drive that.

Windows Vista also gives us the capability of having that enforcement software embedded in it that we've not had before. And so the ability for us to roll out Windows Genuine Advantage and be able to bring that into the marketplace is something we're going to thoughtfully and carefully study, as well as implement, this next year.

And as you look at it, when you go to upsell and premium within each segment, and thinking about delivering those premium offerings to our business and consumers—you know, the big opportunity that we have is we're very pleased with the surge of premium mix on the consumer side. But, quite frankly, we've got a big opportunity to grow our premium SKU business among our small-business customers, and that's one of the things that we're going to address in the coming year, because that's a big opportunity for us.

And then, lastly, when you think about enterprise and midmarket growth and that volume license in the enterprise, we're going to continue to grow at a good rate in the enterprise and midmarket space. But you should also know we only penetrated 19 percent of all of our annuity agreements as it relates to the Windows Client area. And that remains a big upside opportunity for us to execute and be able to drive that this next year. So Windows Vista enterprise, MDOP, along with our customer campaigns in the coming year will help us bring the value of Windows Vista to more large and medium-sized businesses over the coming year.

And, as Steve said this morning, an install base—over a billion install base this next year, which I'd heard for the first time is bigger than the number of automobiles we have in the world. When you think about how do we then take growing the core that we just went through with what Jeff covered and the Windows Client, and you think about how do we land that and operationalize it, Microsoft is a company that sells products out of 191 countries around the world. We have offices in 104 countries. And when you think about how do you catch all that innovation, how do you land all that innovation, we've come up with really a five-step growth framework that's important. And it starts with agility. From an agility standpoint it means this past year we've moved head count out of headquarters in what I call non-customer-facing positions into customer-facing positions. And we're going to continue to drive that productivity loop. And you'll hear from Chris Liddell a little later about the productivity of our people and how that's continuing to accelerate. But putting more and more people in customer-facing positions and reducing overhead is something we're very focused on in the field.

And now I want to talk to you about emerging markets and some of the opportunities that we have there. I don't know that we've ever showed you our emerging market growth numbers: over the last three years, 19, 27, and 33 percent growth just in our emerging markets. And when you look at that, that little line chart that goes across it, was 10 percent of our overall field revenue in '05, 11, and now it's 13. We expect that to continue to grow, that that's a very healthy thing as it relates to the opportunity we have in emerging markets.

But the next thing I wanted to show you is take a look at this—this is about—this says our total commercial CAGR in revenue growth over the last three years is 10 percent. When you look at our emerging market CAGR it's 26 percent. That's combined. But then I wanted to show you both BRIC—Brazil, Russia, India and China—as well as the non-BRIC emerging market countries. So as you can see, we're very bullish about BRIC—39 percent CAGR over the last three years. Figuring those markets out, getting in and tapping into the huge opportunity in those BRIC countries is very important to us.

But an emerging opportunity for us has to do with non-BRIC countries, and already 19 percent. And the focus we put on them over the last year, we think there's a big opportunity to be able to really get after some of the non-BRIC countries—and I'll share those in a second with you.

So as you look into tapping the emerging market opportunity, think about this: 57 percent of our revenue now—and that doesn't include direct OEM—is generated outside the U.S. OK? 18 percent non-U.S.-based growth rate in the company—very healthy as it relates to that. More than 40 countries this past year had over 25 percent growth in FY '07. I think we feel very good about that opportunity. But when you think about it, as I said there's all these other countries that we've got to figure out how to get into. So we put together a strategy to be able to really get after the next tier of emerging markets, and how do we do that.

But the third bullet on this slide is arguably the most important. We're focused on ensuring that we have a great team in place before we focus on building a huge business. And that's an important thing. As we look across all of our theaters of operation, it's important for us to make sure that we've got the right team and the right foundation in place before we put a lot of money and investment into a market and really grow that. But this emerging-market opportunity, as I said, will continue to be more and more of an important uptick as it relates for us driving growth.

The other thing I wanted to share with you a little bit is you've got a company that's very unique in the technology space—right? We sell from end users and consumers all the way up to the largest governments and corporations in the world. No other technology company does that. The opportunity that we have is how do we land all of that innovation and how do we accelerate the monetization of that innovation? We put in a common growth framework this past year that said, look, we're going to cluster our products around four key areas, and we launched something called revenue per socket. A socket is simply a unit. And around that we want to sell more units, and then we want to upsell the premium editions. And then we want to make sure that we cross-sell. So when you think about it, let's just take Windows as an example, yes, we want to sell more units—that can happen through piracy reduction, that can happen through being able to have market end-user consumer excitement that drives market activity. It can happen through product launches. Driving more units is an important thing. But being able to upgrade commercial customers to enterprise edition is an upsell opportunity. And then being able to cross-sell the Microsoft Desktop Optimization Pack to get more value in that socket is another opportunity for us. So when you think about it, in emerging markets it's about units, it's about share, it's about growing and continuing to grow your units and share. In mature markets it's more about upselling—how do I get to the premium editions and how do I cross-sell more value into that socket. And that's the thing that we've made this growth framework very common throughout the field to be able to monetize the innovation as it lands in the marketplace.

Now let me show you a little bit of the detail. I'm not going to go through all of this, but I did want you to see the detail behind our revenue per socket initiative. It's really about—let's just take our biggest single commercial growth driver in the company: big OEM accounts. Again, Windows unit growth is an important thing. That mix shift to premium edition is also an important thing. And how do we drive both of those and how do we sell more Office on every PC that goes out of an OEM? So we've got action plans to operationalize this in the subsidiaries around the world to be able to drive the biggest part of our growth for the next future as we continue to monetize these seven commercial growth opportunities.

And when you look at it, you know, when you think about how do we land the People-Ready Business—you know, we talked last year about, look, we're moving from a product-centric company into a solution-centric company. Jeff highlighted business productivity. He highlighted core infrastructure. And when you think about these are the three key scenarios and solution areas that we're going to drive the People-Ready Business—but we put this in the terms of the customer, and we work together with our partners to look at every single customer we've got and say, Hey, let's do an assessment across core infrastructure, business productivity and application platform and see where that customer sits—are they at the basic level, are they standardized, are they rationalized, or are they dynamic—and to be able to then bring the solutions to the table. So as we mature as a solution-selling organization, driving that People-Ready Business has been one of the most successful things we did this past year to really drive momentum in the marketplace, and that's important.

And the last four things I want to cover with you are about driving operational excellence along the field. We've got all this innovation, we've got a lot of opportunity in emerging markets, we've got a big opportunity as it relates to making sure that we monetize our scenarios and solutions across all our customers with our partners. These are the four keys that we're using to drive operational excellence in the field.

The first one is we have one definition of success, so everybody has the same scorecard of what success looks like in every subsidiary around the world, and we've stuck to that scorecard over the last two years.

The second one is about competing to win. Jeff talked about for the first time in more than a decade we're taking share from Linux. We're winning that by showing the value of our products in the marketplace. We're going to compete. We're going to compete to win. We're going to be tough-minded about competition, but making sure that we compete fairly and respectfully is a part of that, but making sure that we compete, whether it's against IBM Lotus Notes, whether it's against Oracle in the database area, whether it's against SAP with Dynamics in the ERP space—wherever it is we're going to compete, and that's an important part of that.

The third one is around driving customer and partner satisfaction. We've made a lot of improvements as it relates to the different audiences and making improvement on customer and partner satisfaction. We're just going to keep the focus on that. This is an imperative. This isn't a department, it's not an initiative, it's a way of life. And putting that and getting that institutionalized throughout the field and enlisting every customer to make us better is an important part of us improving our CPE, what we call customer and partner experience.

Lastly is leveraging this partner ecosystem. Arguably the number 1 thing that most of our field competitors admire is the power of the Microsoft partner ecosystem. The fact that we have over 640,000 partners over every shape, every size throughout the world, and we're continuing to grow that capability and continuing to make things available in the partner ecosystem to get them to mass, gives us that competitive advantage.

So these are the four things that we're driving and goaling, as well as compensating the field around how to drive operational excellence in these four areas.

And so as I conclude on growing the core, it's important that you know that we're very committed to making sure that we're world-class in that commercial space—we're going to have a world-class selling engine, we already have world-class innovation, and operational excellence is a key part of that.

And so as I close, I think we're going to bring up—for an executive discussion, we're going to bring Jeff and Kevin and Bob Muglia and have a Q&A on growing the core across the area. Thank you very much.

END

Due to the varying sound quality and subject matter of tapes, the information in this transcript may contain inaccuracies.