STEPHEN ELOP: Good afternoon. Still got a few people coming in and taking their seats. Great.

Well, it's my pleasure to again have this opportunity to talk with you here today on behalf of the Microsoft Business Division. If you recall when we met last year, we had some pretty good conversations about the many changes that are under way within the industry and certainly as they affect MBD. Some of this is the generational change that we're seeing in information technology as it relates to software plus services, new business models that are coming forward, new and shifting competitive forces, and, of course, somewhat unexpectedly since last year, the economic disruption through which we've all been living.

To start this discussion, I thought it would be helpful to provide some more detailed insight into some of our most recent results for the Business Division. As you know, in Q4 we posted a 13 percent decline in net revenue. At the top level you sort of look at that and say, OK, what's really going on? Because, in fact, there's a lot happening below that number, and I thought I'd share that with you.

So MBD is broadly organized into two segments: consumer and business. And, as described by Steve earlier this morning, the business segment in turn purchases essentially in two different ways. Small and midsize businesses tend to purchase on a non-annuity or transactional basis, while larger organizations tend to purchase on an annuity basis, making multiyear commitments to the purchase of Microsoft products.

Let's double-click a little bit to provide some more clarity on how MBD is structured and how this revenue flows.

As you can see, on the consumer side that represents about 20 percent of our net revenue. Now, these are rough numbers. It changes quarter to quarter and with economic circumstances, but roughly 20 percent is consumer related. Another 20 percent is in the business non-annuity or business transactional space, and about 60 percent of our revenue is derived from business annuity—those longer-term commitments that people make.

Now, what I'm going to do is double-click further to describe the dynamics behind our performance in each of these three areas. Starting with the consumer segment, in absolute terms the consumer revenue declined around 30 percent year on year. Now, there are three factors in the equation that calculates out to that—and this is always the case. It's about the number of PCs that are shipped, sold to consumers; it's about our ability to attach to those sales of PCs; and, third, it's about the price at which we're able to attach. And what we saw in the consumer segment around these three variables of the fundamental equation is this: first of all, obviously significant declines in PC sales. All up, it was like a 6 percent decline. Exclusive of netbooks, it was a 20 percent decline of PC sales in those consumer markets. So that's the first factor.

The second factor is our ability to attach. Now, our ability to attach in the consumer segment was absolutely maintained. So, you know there's always discussion—oh, are people picking up free options on the Internet and all of that—absolutely not affecting our business. We are maintaining our attach rates. However, we did see a decline in effective pricing as macroeconomic conditions caused products to essentially select lower-priced SKUs, moving down the SKU ladder. That was the fundamental driver from a price perspective.

Now, moving on to the business non-annuity or transactional segment, in absolute terms revenue here declined about 35 percent year on year. Now, we do the same type of math, same three factors. In this segment we saw significant declines in PC sales—north of 20 percent. We saw some softening of our ability to attach in this segment as mid-market customers reduced their spend. Pricing, though, in this segment was effectively maintained through this period, so we were able to hold pricing. Now, also, in the small- and medium-business segment, there were some macro challenges that affected many other products within the MBD portfolio—products we don't talk too much about—Visio, to a certain extent Exchange. In that midmarket segment we absolutely saw some declines there as well. But a positive sign both for consumer and for business non-annuity, our results were sequentially stable. So while the year-on-year comparables are hard, the sequential pattern feels just a little bit better. So that was good.

Now, the third part of our business, the biggest part of our business, is business annuity. The business annuity increased about 5 percent in absolute terms. Where did that come from? Single-digit growth in Office sales, but very strong growth—double-digit growth rates—in other products, and I'm going to discuss those other products in just a moment. Very, very pleased with what we did in business annuity.

Now, as we look ahead, we expect the conditions from the first half of calendar year 2009 to continue. We think it's going to continue well into the second half of the year, and the weakness of PC sales—we expect that to continue to impact our results. We also expect that we're going to be facing the cyclical headwinds. With Office 2010 out there, customers will begin to anticipate it and make purchasing decisions based on that.

Now, despite the difficult economic challenges, despite the end of a product cycle, what we believe, as evidenced by the strength of our annuity business, is that there is incredible excitement out there in the market because of Office 2010 at a time—excuse me—definitely got a frog in my throat. So, at a time when we expect business productivity or the business spending climate to improve, we are launching the most innovative wave of technology we have ever launched.

So that should provide you with a bit of additional insight into how the business is going historically.

What I'd like to do is spend a few minutes talking about the strategic imperatives that we use to drive our business forward.

Maybe I was doing that game that Robbie was doing. Don't know what that was.

OK. So what I'm going to do is I'm going to focus on the three strategic imperatives that we are really using to drive our business going forward. First, I want to talk about how we are going to extend our business value advantage to deliver more to our customers. This refers to the consistent and high-quality experience and greater interoperability that we are pursuing across all MBD products. The intent of this strategic imperative is to deliver solutions to our customers where the value of the whole is greater than the sum of the parts.

In addition to Office, MBD is comprised of multiple strong component businesses or pillars. Let me talk to you about some of these pillars. For example, unified communications. Even in tough times, this remains a growth business, because our customers are out there looking to UC to help them reduce their travel costs and increase employee productivity. The numbers demonstrate this. In FY '09 our UC business grew to achieve $2.4 billion in revenue. Just as important, and as KT mentioned when he was talking about competitive forces, our ability to compete with products like Notes is better than it's ever been before—4.7 million seats switched from Lotus Notes over to Exchange. Also, our office communications business is experiencing tremendous growth. Revenue from the office communications services server is now growing at greater than 50 percent. So in terms of competitive displacement, in terms of increased share, we are really driving this very well.

Now, another key pillar is SharePoint. This business is absolutely on fire. Steve mentioned this earlier. It's a tremendous success. In fact, even on a base of what is now $1.3 billion annual revenue, SharePoint grew greater than 20 percent this last year alone.

Finally, let's touch on Dynamics. Dynamics AX 2009, which also launched this past year, is the sole owner of the leader position in Gartner's Magic Quadrants for midmarket ERP. And Dynamics' CRM, competing with salesforce.com, grew at approximately 40 percent year on year, and now has more than one million users. We are making tremendous progress with that product as well.

So the pillars are strong, but it's the consistent world-class and very familiar Office-based user experience across these products and high-quality interoperability between these products that are creating major points of differentiation, particularly in times like these when customers are looking to simplify and consolidate vendors.

Now, continuing on, as you are all aware, software plus services is the key focus area for Microsoft as a whole. This is also critical to the Microsoft Business Division. So it's no surprise that another of our strategic imperatives is to fully embrace software plus services. Simply stated, our mission here is to deliver the world's best productivity experience across PCs, phones, and browsers.

In the last 12 months we've taken a big step forward toward realizing this vision. We expanded the availability of Microsoft online services to 19 countries around the world. After just one year, we now have more than 5,000 partners out there participating in the online services partner program with more than 100 joining every week. The one million Microsoft online services licenses that KT highlighted earlier today—they have been sold to thousands of organizations worldwide, from local, small and midsized organizations like the city of Carlsbad, California, to very large enterprises, some of who are making commitments in the hundreds of thousands of seats to our online platform—customers like GlaxoSmithKline, Philips, A.P. Moller-Maersk, Aviva, Ingersoll Rand, Doosan Infracore, and a number of others. No other company matches the level of flexibility and the power of choice that we provide—the power of choice to select how they deploy software either on premise, in the cloud, or a combination of both, and, of course, the power of choice in how the software is licensed across a wide variety of options.

Now, the year ahead marks a period of significant expansion for our software-plus-services strategy. As announced a week ago at the Worldwide Partner Conference, Office 2010 will feature Office Web applications. These are the browser versions of Word, PowerPoint, Excel, OneNote that have functionality focused on specific scenarios tuned to the browser environment, including the provision of access to documents from virtually anywhere, regardless of device. Office Web applications will be available in three ways. First, through Windows Live, where more than 400 million uses will have access to Office Web applications at no cost. Second, we will provide business customers with the opportunity to subscribe to Web applications as a service hosted by Microsoft similar to other offerings in Microsoft online services. And, third, all 90 million existing business customers with annuity agreements, plus all of the new Office 2010 volume license customers, will have rights to run Web applications on premises enabling them to deploy and manage these applications like they would any other service—but, again, on premise, or in the cloud, or both. That's the power of choice. The Web applications will be accretive to the Office business. The Web applications will be accretive to the Office business because they broaden our reach to new audiences that we have not reached before or that had chosen to inappropriately use our products for free anyway. And it increases the value of our experience as it helps customers to use Office in any location or on any device.

Now, despite the economic conditions, we continue to focus on things that we can control. Continuing to lead the industry in delivering world-class business productivity innovation is the third strategic imperative that I am emphasizing today. FY '10 is going to be an amazing year for Microsoft—an amazing year of innovation and business productivity, with the 2010 family of products shipping this fiscal year.

At the Worldwide Partner Conference last week or two weeks ago, we announced that Office 2010, SharePoint 2010 and a variety of other products had reached the technical preview engineering milestone, with a select group of customers and partners invited to use the software. Due to overwhelming demand, in just two and a half weeks we have already reached capacity and shut down further access simply because of the popularity of what we have already seen. The majority of customers who were invited to participate have already downloaded bits and begun to use those products, often in conjunction with Windows 7. Overall, 2010 is going to help customers save money and increase their productivity.

And what I thought I would do is just take a moment and give you just a taste of Office 2010. I only have three or four minutes, so I can just do a few little things. I am going to give you a quick demo of Office 2010 just to give you a sense as to what that's all about.

OK, so what we're looking at here is Outlook 2010. I was sitting in the back earlier, and I saw that many of you were using Outlook. You'll notice a few differences right off the bat. First of all, the availability of the ribbon, the new user interface that was introduced in some products in Office 2007, now within Outlook. There's a whole bunch of new features that are designed to help people deal with the growing volume of information, be it e-mail, voice mail, whatever—and a lot of features that we've really put in to help people deal with that environment. So, for example, this first message that I'm looking at here is actually voice mail. With capabilities in Exchange and unified communications in general, you can have your voice mail service be delivered by Exchange—a great example of helping customers save money. Because they don't need the voice mail service any more, it can go right in to Exchange. And, of course, what I could do is choose to play this voice mail; but, what is really nice, and getting tremendous early customer feedback, is the fact that there is a speech-to-text conversion automatically provided with each voice mail.

So if you happen to be in a meeting like this where you can't easily dial up and listen to your voice mail, you can read the voice mail and get the translation. Of course, if you want to hear it, you can do that. For example, if you want to skip the niceties at the beginning and just start listening to the message right about here—you notice that this thing moved across automatically—hit the play button—(plays message)—the point being you can listen to what you need to listen to in the context of Exchange. The voice mail, of course, synchronizes and replicates to wherever you need to use it. So it's a great example of something that people are really excited about.

Something else that people are excited about relates to expanded capabilities that we've introduced around conversations. And let me us just—I think something has jammed up there—my mouse disconnected, so I'm going to switch. OK, so I'm going to go here into conversation view. And what I'm doing here is actually looking at an organization or structure of my inbox that is all around conversations, bringing together like messages on a particular thread. Now, we have had this in simple form before, but we heard from our customers that there's a lot more that we can do with this. So, for example, here's a particularly long and complicated conversation—I'm many messages behind, as you can tell. We've introduced a new feature called Clean Up. And the clean-up capability basically goes through that whole thread, cleans up all of the irrelevant or redundant messages, and just gives you what you actually need to read to get a complete understanding of the thread. Now, I could do that, but the one thing I'm noticing is that this particular thread is one of those threads where someone replied to all, and everyone else started saying, "Would you stop replying to all?"—and it goes around and around and just wastes everybody's time. Well, we have a new feature here called Ignore, which I will click on. And in the Ignore Conversation—at this point all the messages from that nonsensical thread have been moved aside—which is really nice—but what's even better than that is going forward, if more people pile onto that thread, they're automatically moved aside. You don't ever have to see them. So it's like putting a mute button on top of Outlook, which can be very, very powerful. So we're really pleased and getting a lot of positive feedback about features like that.

Now, what I can notice at this point, given that I've cleaned up my inbox, is that, in fact, I have a high-priority message here that was generated in this case by SharePoint behind the scenes, highlighting that there are certain KPIs about some aspect of my business that have run amok. So what I'm going to do is click on this link so that I can access SharePoint. I will authenticate and go into a SharePoint environment here. And you notice right off the bat all sorts of rich data that's available. You'll also notice, if you look carefully in the upper left-hand corner, that I'm using the Firefox browser, simply to demonstrate that cross-browser capability is something that has been a focus, recognizing the diversity out there in the enterprise environment.

Now, all of this rich data is significant because of a new capability we have called Business Connectivity Services, which provides read-write access between SharePoint and back-end data sources and systems. So in this case I happen to be going against a SQL Server back end. I notice I've got some reds here. So what I'm actually going to do is drill in to learn a bit more about this. I'm going to do that by drilling in and opening a spreadsheet that supports this. And what you see here is Excel 2010. But if you look very carefully, you'll notice that this is Excel 2010 in the context of a browser. This is an example of—no, it's not just about simple bolding, underlining, and formulation within the context of the browser. For someone participating in a model that has been created who wants to work with this, there is full fidelity in terms of what you see and what you're presented. Now, there are certainly limitations in terms of what you can do in the context of the browser to create some of these models, but unquestionably for people participating, if they're on the road in a particular scenario where they need quick access to something, this is a brilliant way to do it.

Now, as a demonstration, this is in fact full fidelity 2010 for viewing purposes. Take a look at some of the new features that are here within the spreadsheet. Notice these things right here. These are called Sparklines. And what they are essentially are simple line graphs that represent the data in this row, in this particular case, so that you can quickly scan down and get an idea of what's actually happening across all of this data. So, before: a complex line chart with 15 lines on it; now you can use spark lines to get a better understanding of what's actually going on with your data. A lot of positive feedback on that.

Similarly, if I switch over and select this tab, you're going to see something that we call Slicers—these capabilities over here. We've talked a lot about our focus on business intelligence and the desire to have business intelligence that's for the common person in an organization, the democratization of business intelligence. Well, this is a great example. It was a very large and complicated data set represented here by this pivot table. What I'm able to do is use these things called Slicers to quickly slice and dice the data so that I can actually boil that data down and get just, in this case, mountain bike sales in the United Kingdom. So it's a great example of business intelligence for the masses, if you like, and it's something, as you see, I'm using within Excel 2010 within the context of a browser—perhaps a salesperson out there on the road somewhere.

So let's go back to the SharePoint environment that we had there a second ago, as there's something else that I want to show you very quickly. And that is it goes back to my earlier statement about the whole being greater than the sum of the parts, about bringing together a technology like unified communications, collaboration, productivity, and what have you—bringing all of those pieces together and getting into a place where they all really work well together. A good for example of that is illustrated right here in the lower right corner, where I can see that there's someone else—in this case, Ann Livermore, who happens to be the executive vice president for Hewlett-Packard. That little green circle next to her name means she's present and available for communication. So I could reach out to her right now and have a conversation.

Now, the reason I'm highlighting this is, as many of you know, back in June we entered into a partnership with Hewlett-Packard, and that partnership was focused on precisely this: unified communications and collaboration, and it's something that we really are placing a big bet on going forward. It's a big part of our strategy to go to market in this space. As we announced at that time, we are jointly investing $180 million in joint R&D product development, sales, marketing—all sorts of go-to-market support to really put a lot behind this. So it's something we're really excited about.

What I'm going to do, actually, is to show you an early example of how this partnership leads to some really disruptive solutions for our customers that help with productivity and clearly help save money. What's actually going on right now is Ann is sitting in a conference room—I hope—we'll find out in a second—in Palo Alto at Hewlett-Packard headquarters. She is in one of those custom-built, high-end Halo Telepresence rooms—so a beautiful facility, highest-quality experience. What I am doing here on stage is just behind this monitor—I have a relatively pedestrian Hewlett-Packard desktop computer—relatively inexpensive. I have a $300 high-definition video camera, all integrated with Office Communications Server right here—the software—the magic of software that we bring to this business problem. And what I'm going to do is connect to Ann. And what you will see us engage in is a full high-definition videoconference using simply a computer here, a $300 camera, and some beautiful software. So let me go in here and indicate that I want to start a video call. I'll get that going. Got that connected. Ann, are you with us?

ANN LIVERMORE: Hello, Stephen.

STEPHEN ELOP: Everyone, Ann Livermore, executive vice president of Hewlett-Packard. And you are really there. This is not a simulated video—is that correct?

ANN LIVERMORE: I am really here. This is no simulation.

STEPHEN ELOP: Great, take it away.

ANN LIVERMORE: I just wanted to just take a minute, Stephen, and hello, everyone else out there in the audience. I just wanted to take a minute to make some comments about the partnership between HP and Microsoft. We certainly have this aimed at being able to deliver a number of very specific benefits to our joint customers. And at the core of it is just flat-out a better set of tools for a 24x7 workforce. It's all focused around real-time communication, real-time collaboration, enabling our customers to do faster decision-making, and also be faster in their business responses and other things they need to do.

We believe this set of solutions will absolutely reduce the complexity that many people deal with today between their applications and other communication activities, and, as a result, will help our customers arrive at a set of business outcomes that range from lower costs, if that's what they're after, enhanced productivity, if that's what they're after, or accelerating some sort of business innovation that's driven by collaboration.

With the breadth of our two companies, with the global reach of HP and of Microsoft, with the offerings that we have across software, across services, across our infrastructure offerings, our devices, HP together with Microsoft, we are just very well positioned in this marketplace. It's a huge market opportunity. Stephen already mentioned that it's going to be $46 billion over the next couple of years by 2012, and it's also one of the fastest-growing segments in the technology market.

We have dedicated a set of sales specialists inside HP, as well as a whole team of solution architects to work with Microsoft and to be able to architect and then deliver these unified communications and collaboration services. So it's something that HP is really quite serious about. And teamed together with Microsoft, we believe that our two corporations are really well positioned in the market to win.

STEPHEN ELOP: Very good. Ann, thank you very much for joining us.

ANN LIVERMORE: You bet. Thanks.

STEPHEN ELOP: So, as you can see, just a great opportunity. From a competitive perspective, the combination of services, software, devices, networking capability—all of that on a global basis is something we are remarkably excited about. So when you see some of those products, like SharePoint, unified communications, all of our collaboration suite—CRM—realize already today those products are doing remarkably well, even in tough economic circumstances. Combine it with these classes of partnerships, and you have some tremendous opportunity to add.

So over the last two weeks I've had the opportunity to meet with a lot of partners at the Worldwide Partner Conference. We had 12,000 of our field sales and marketing folks in Atlanta last week for the annual kickoff for the sales organization. And every day I'm talking to customers. There is no question that all audiences are inspired by the opportunities ahead. I am inspired by the promise of what we have coming, of the good things that are still happening, and very much about the opportunity that we see in the marketplace. I hope you are as well. I hope you have enjoyed learning just a little bit more about the Microsoft Business Division. Thank you very much.

And let me introduce Bob Muglia, the president of the Server and Tools Division. Bob?

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