COLLEEN HEALY: Please welcome the president of the Microsoft Business Division, Stephen Elop.

STEPHEN ELOP: Good afternoon. Everyone back from lunch okay? Got a few people coming in at the back.

Well, it's a great pleasure to be here at my first Microsoft Financial Analysts Meeting. As you can well imagine, I'm living through a number of first-time moments here at Microsoft, like the very first time I went head to head with Steve Ballmer on the numbers for MBD and completely lost that one, as you can imagine; or the first time that I had the opportunity to present from the middle of an arena to 13,000 screaming sales reps, which for someone like myself was just an amazing experience, to understand the scope and the passion and everything that is Microsoft. It was very much a learning experience for me.

Of course, it's also quite remarkable because I have spent much of my career competing with Microsoft, be that in the very early days of my career as someone who was working in and around Lotus Notes and ultimately at Lotus, or at Macromedia, ultimately as its CEO, and then at Adobe as we merged Macromedia into the Adobe family.

But I'll tell you this. It is a fantastic time to be here at Microsoft, in particular because of the many changes that are under way within our industry. Be that the growing opportunity around software plus services, new business models, new competitors, new architectures, all of those things, makes it a really nice time to be here.

Like all great companies, Microsoft is truly at its finest as it makes the bold moves necessary to lead through these periods of generational change. I'm very proud to be a part of that as we go forward.

Now, during my first six months, which I think almost to the day is how long I've been here at Microsoft, I've had a tremendous opportunity to interact with customers and partners and employees all around the world. And I thought I would start off just by giving you a few quick observations of Microsoft as the new guy on the inside.

First, I have been incredibly impressed with the power of the Microsoft ecosystem, the absolute concentration of talent that's here at Microsoft, the dedication, the competitive spirit, the continued belief that the magic of software will change the world. It's really a remarkable thing to experience.

For example, two weeks ago I spoke at the Worldwide Partner Conference in Houston, and last week it was at MGX, the worldwide sales event in Atlanta. The sheer power of tens of thousands of salespeople that work for Microsoft and over a half-million partner organizations that are working on our behalf is just so emblematic of the incredible capability that we have to reach our customers and to support them and do what they need. It's an incredible asset and something that's really, really impressed me.

As a former competitor to Microsoft, I can tell you that I have a great deal of firsthand experience with Microsoft's tenacity and willingness to fight for the long term. There was a great example of this in FY '08, as we worked really hard on the whole effort around getting Open XML adopted as an ISO and IEC standard.

We believe very strongly this was the right thing for our customers, and we were gratified to see 86 percent of the voting nation saying the same thing, that this should be a standard and ratifying it. It took an incredible amount of work on a worldwide basis, and it demonstrated in a very real way our commitment to our principles of interoperability.

I have also been very impressed with Microsoft's intellectual integrity. And what I mean by intellectual integrity is that ability to look inward and say, "Okay, so what's not going so well?" or "What do we need to do differently?" or "Maybe there's someone else's ideas that are better than my own."

You see, as I went through the interview process, just to give you one example of this, I had the opportunity to be interviewed by Bill – three hours of opportunity to be interviewed by Bill. And as you can imagine, it's quite an intense experience and a lot of questions.

I did manage to squeeze in a few questions for him, and my focus was very much on the company's intellectual integrity. To what extent did Microsoft understand and have plans around some of the challenges that we know exist and that many of us talked about over lunch? And I'll tell you this. I was incredibly impressed with the candid and unambiguous assessments that Bill gave to me of what we had done right in various areas, what we had done wrong, what he could have done differently, and, of course, most importantly, what we need to do better going forward to continue to improve the company and our results and everything that we stand for.

And it is that same intellectual integrity that permeates the entire company, ensuring that Microsoft will always continue to deal with the challenges that it faces. And that's something that was really, really important to me as I came into and considered Microsoft.

And, of course, I have been very impressed with the strength of Microsoft and the health of the business that I have been so fortunate to inherit. Last year the Microsoft Business Division grew by 15 percent, adding an incremental $1.5 billion in operating income, which was just an amazing set of numbers.

This is a business that has a classic set of core products, which is mostly what you think about our division [is] about. At the same time, it has multiple new emerging growth opportunities. What I'd like to do today is to start my formal remarks by reviewing the strengths of the MBD business and giving you a better sense of what's going on, particularly in FY '08.

Now, there's multiple different ways of breaking down the MBD business. For the purposes of my remarks today, what I'll do is spend some time on the Office productivity applications with which you're so familiar, and then some time on the emerging opportunities and how they're doing – opportunities like Microsoft Dynamics, unified communications and SharePoint and other things that complement the Office business.

In the four years ending in FY '08, MBD has grown at a compounded annual growth rate of 12 percent, and our emerging businesses have grown even faster. Of course, it is a bit odd to call these emerging businesses, given that last year combined they represented more than $5 billion in combined revenue. But that's part of my process in actually getting used to the scale of Microsoft.

During this period, and even with the investments in the emerging businesses, you can see that a key tenet of our plan has been to manage operating income within a very tight band, and that's something that we're very, very focused on.

Now, let's double-click on the Office productivity applications to give you an overall sense of the performance of Office 2007. We made some very bold moves to improve the user experience with Office 2007. And as you can see in this graph, we're getting some really good pickup on that. There have been 120 million Office licenses sold since the launch of Office 2007, which is just a great result.

And if you double-click on this a step further to get a read on how we're doing with consumers, we're experiencing success in areas like, as shown here, the retail channel. At retail around the world, we have sold more than double the number of units we did through the corresponding time frame with Office 2003. This is a really, really important factoid and a really clear indicator of the success that we're having in driving attach in the consumer marketplace.

Now, part of the reason I'm showing you this graph is because it relates to our performance in Q4, where we came up just a little bit short on revenue in the consumer space. And as you can see, it was not a case of consumers opting for some other way of getting their productivity tools or picking something other than Office – not at all. Rather, what we have seen is a mix shift, or an increasing mix shift, as more people are buying lower-price SKUs than we forecasted and guided.

Now, for business customers, there are a number of key indicators to look at. For example, our Enterprise Agreement renewal rate was well over 90 percent in Q4, indicating that our customers are really satisfied with the ongoing value proposition that we offer there. As well in the business segment, we look really closely at the extent to which Office is being deployed within the enterprise. How much is it actually getting onto people's desktops?

As you can see in this graph, the deployment of Office 2007 is slightly ahead of Office 2003, in the same time frame, which is a remarkable success, given that each customer this time has to think a bit harder about deployment because of the user experience improvements that we've introduced. There's a bit more thought, a bit more preparation required, and yet it's outdeploying what we achieved in 2003 as a percent of the PC-installed base, so normalized for that.

Our research indicates, amongst our larger customers as well, that 90 percent of businesses will have deployed Office 2007 by the summer of 2009. So it's on a very good pace. It's being accepted very well, and we're really, really pleased with the results of that.

Now, the Office productivity applications are indeed the foundation of our business, and they are stronger than ever, as you've seen here. But the Microsoft Business Division has a number of other great emerging opportunities. In FY '08, Microsoft Dynamics, Unified Communications and SharePoint each surpassed a billion dollars in revenue for each of those things, and with growth for those areas growing by more than 20 percent, 25 percent and 35 percent, respectively. So, here you have multiple billion-dollar businesses, each growing faster and faster. It's just an amazing set of assets. And any other place in the planet those are companies.

So, when I get questions like, other than Word and Excel, what have you got, well, we've got multiple billion-dollar businesses that are growing rapidly and represent a great future for us.

Now, if I give you a bit of factoids about this, let me just share a few things. For example, in 81 out of the Fortune 100 companies, we're seeing Exchange used as the primary mail serve. Great results, particularly as we consistently knock out Lotus Notes from the enterprise, just huge momentum there.

Another example, on the Microsoft Dynamics side, the billings in Dynamics grew by 21 percent year on year, which is more than twice the rate of the market growth in the segments where we compete. So we ended the year with close to 300,000 ERP customers and over 15,000 CRM customers. So, we are very much in the line-of-business application business as well.

And SharePoint just absolutely on a rocket ship ride at this point with 17,000 customers who have purchased 100 million licenses so far. This is really, really a big opportunity today and going into the future.

And then in the area of communications, we were very pleased when Gartner put us into the leaders quadrant for Unified Communications, which was a big statement about who the players will really be as software changes the telephony environment as well. We've got a big role to play there as well in the future.

So FY '08 was a very strong year, and we expect FY '09 to be great again, anticipating revenue growth of 14 to 15 percent in the year ahead.

Now, as I learned about the Microsoft Business Division, a number of us spent a lot of time thinking about "Okay, so what are the next steps? What are the areas on which we really need to be focused going forward?" And a name we came up with for these is the MBD Strategic Thrust. And I'd like to spend a few minutes talking about those so you have a sense of what we're focused on within MBD.

First, and very consistent with the themes throughout the day, is we are fully embracing software plus services in the Business Division. Now, what does this mean? In very practical terms, it means giving customers the power of choice, the power of choice to take advantage of on-premise or hosted or fully in-the-cloud deployments, whatever makes sense for them -the power of choice to decide how they want to procure and deploy software in a way that's right for their business.

Microsoft Online Services, something we announced in the last year, is a great example of providing our customers with choice. Customers can now choose to take advantage of SharePoint online, Exchange online, OCS online, CRM online. They can choose to deploy these assets in an online environment instead of or in addition to deploying it on premise as well. They can do all of those things together, which is a remarkable advantage by giving them choice and not force them to go one way or the other. That's part of our strategy.

Now, it is the case that the Microsoft ecosystem that I referred to earlier is an incredible asset in software plus services as well. When I was at the Worldwide Partner conference, I had the great honor to actually activate or begin the process of activating our channel around software plus services, where we announced how we would compensate partners for their help in selling and supporting our online offerings. And that was very well received, because it says to our partners that there's a way we can be successful and mutually dependent going forward, even though some of the dynamics in the industry are changing. In the months ahead you're going to see many more examples of other products, other business models, all of these things advancing, as we fully embrace software plus services.

The second strategic thrust is to further extend the business value that we provide to our customers. You see, some of our competitors are trying to gain access to the enterprise by chipping away at the low end of the hierarchy with simple productivity offerings. Microsoft adds to our customers far more business value than simple bolding or underlining in a word processor. There's so much more that we do for them.

You see, what we believe is that if we continue to extend the business value we provide to our customers, we'll be able to further advance our conversation with them, be more successful with them, leaving our competitors further and further behind as we compete. So it's a key tenet of how we go forward.

To do this, we have to hold true to a number of things. For example, we have to hold true to what the Office brand stands for. For example, Office stands for a familiar experience. Whether you are working on Word or PowerPoint or Excel or on a sales contact within CRM or on a SharePoint team portal, whatever the case may be, that user experience has to make sense because it will draw users in in a comfortable and familiar way.

The Office brand also stands for a very high degree of compatibility such that your Excel or Word or PowerPoint files can move between all different environments -between your phone, between the cloud, the desktop, whatever -and maintain that same degree of completeness as it moves between those environments. That's something that we have to stand for.

And the Office brand has to stand for an incredible degree of interoperability, interoperability between all of these elements, so that, for our customers, the whole is ultimately greater than the sum of the parts. We hear that a great deal from our customers.

Now, the third strategic thrust for MBD is to use unparalleled experiences to continue to surprise and delight our customers. The Office brand stands for a certain class of experience, and this same brand of experience will be pushed further and further into the mobile environment, further and further into the cloud. New forms of computer interaction will be evident. All of these things will continue to evolve.

Now, as we've gone through these evolutions, for example, with Office 2007, big dividends have been paid to the organization. We've been very successful with this. So you can imagine how it felt for me, standing up at the worldwide sales meeting, and showing, for the very first time in any sort of audience, the very first signs of what Office 14 would look like. So we did that just last week. The sales people saw part of Office 14 for the very first time. And I'll tell you, the response -13,000, 14,000 people on their feet cheering with everything that we're putting forward. It's just amazing. So there's still so much more ahead.

As it relates to the timing of Office 14, all we're saying at this point is that we'll continue to follow the same general wavelength of releases that you've seen with previous cycles of Office.

And then, finally, in terms of strategic thrust, the fourth strategic thrust is to continue to take a leadership role in advancing and utilizing innovation. Having been trained in many years in Silicon Valley to believe something quite different, I was initially surprised at the amount of innovation that actually does go on at Microsoft; for example, when I was first introduced to the Microsoft research organization and realizing that it is one of the largest publishing research institutions in the world, which is just simply amazing.

In the near term, being aggressive with innovation actually means being very aggressive in helping our customers take advantage of the innovation that we have already delivered by making sure that they're successful in deploying products like Office 2007 and SharePoint. As well in the short term, it means being very aggressive in helping the consumers have better access to the Office technology so more and more people can use what we've already delivered.

In the medium term, being aggressive with innovation means continuing to pursue those big new opportunities, areas like Unified Communications and Voice and others. We have to keep doing that.

On an ongoing basis, advancing innovation within MBD means being a leading example as an applications vendor that takes advantage of the Microsoft platform in a synergistic way, such that we continue to maintain that cycle of learning between the applications and the platforms so that both ultimately succeed -a cornerstone of how we approach things within MBD.

So I'll tell you, just on a personal note, it was a very difficult decision for me to come to Microsoft. It was both difficult from a professional perspective and on a personal basis. Professionally, it was the case that I had to make a somewhat unplanned career change. On a personal basis, I had to pick up my wife, five kids and two dogs and move them for the second time in the same year; didn't play too well.

But you know what? As I went through that, I did so because I was so excited about the opportunities here at Microsoft. I was so excited about the opportunity for impact that I and all of us could have on people out there in the world. And I can tell you this. It was unquestionably the best career decision that I have ever made.

Thank you very much. And I'd like to introduce Mr. Bob Muglia.

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