KEVIN TURNER: Good morning. Great to be here, and it's great to be able to share with you a little bit about how we're operationalizing some of the things in the company and really focusing in on competing and growing share in this environment. And you're going to hear from the product group leaders, and they're going to go through a lot of the innovation stories. So, that'll be the two themes of the day for you: strong innovation—strong innovation in investment—as well as strong operational excellence that we're driving to compete and grow our market share.

And Steve Ballmer set up this first slide in terms of the two—our real approach to a company, investing for the long term. He talked about the ability to protect that investment when other people are pulling back. We're continuing to stay in there and invest for the long term. And an important part of that is the ability to really make that innovation pay off and grow our share. And so that's another important element that I'm going to drill a little bit deeper into and specifically talk to you about our approach, as well as how we're competing with some of the big competitors in the marketplace.

But I also want to talk to you about operational excellence. You know, three years ago at this very meeting, I sort of unveiled and launched this idea of operational excellence in building discipline in the company and scorecards and accountability and those types of things, and I talked about it last year. And certainly some of the early comments, at least at my lunch table, were, you know, "Good luck on that," and "You've got a lot of work to do," and, you know, "Gosh, that'll be great. Well, show me."

You know what? If you look at the income statement—and I know all of you are great students of our income statement this past year—there are three line items on there I'd call out. First and foremost is the sales and marketing expenses. If you look at that, we're down in dollars year over year, not just in percentage, but down in dollars year over year, coming off a year where we grew 18 percent revenue.

If you also look at the general and administrative expense line, down significantly in dollars. And then below it you've got employee severance. So, we actually made some very hard decisions this past year to really drive some efficiency and effectiveness in the company and right-size our organization during this once-in-a-generation (we hope) macroeconomic environment. So, it's very important that you all get a framing of how we really fell back and relied on that operational discipline and that excellence this past year like no other year. And it's a really, really good testament to the muscle we're continuing to build from an operational excellence standpoint, and I felt very, very good about that.

And when you look at the business from a balance standpoint, I remind you of the balanced business that we actually are blessed to have. I mean, we've got a tremendous sweep of product group and different audiences and customers that we try to reach if you look at this. I mean, clearly our client, which built the business to begin with some 34 years ago, has moved into Server and Tools think of the significance of that business. The Business Division—Stephen Elop is going to go through that; Robbie Bach's Entertainment and Devices, and Dr. Qi Lu's Online Business continue to develop. So, a real advantage that we've got is that broad portfolio of products, solutions, and services that we've got in the marketplace.

Then you look at the customer segment—and, you know, you could really put consumer and OEM together—that's largely the consumer line item. But I think it's also important for you to note the balance that we've got there, not only from the enterprise standpoint and the importance of it—Steve talked about the kind of year we had on that particular front. As tough of an annuity year as it was in the Enterprise business, our annuity rates are up year over year. So, we did not lose customers in that particular space, and that's an important call-out for you.

The small and medium-size business continues to be important to us. And it was hit the hardest this past year, no question, from a macroeconomic environment. And then you look at our geographic disbursement. As I've talked to you all before, we sell products out of 191 countries around the world. We've got subsidiaries in 105 countries and really good balance 59–41, and that number moves between 60–40 and 59–41 on a year-in, year-out basis. So, it�s a very, very balanced and diverse business, particularly for the company in setting us up for the long term.

Now I really want to drill into growing our market share. The importance of growing our market share is fundamental to the company. When you think about the fact that IT spend is shrinking, server growth is shrinking, PC growth is shrinking, you've got lots of contracting going on from GDP standpoint. Currencies are getting decimated out there. The pie, in general, is shrinking.

The opportunity for us as an organization to grow is fundamentally around growing our share of the pie, and therefore growing market share and the importance of that. So, when you look at growing market share, how do we think about that? There's a couple of things that I want to share to really give you some insight and sort of a look under the hood for how are we approaching this ability to grow our market share.

Well, it's intentional and it's thoughtful and it's around three specific initiatives. Number one, delivering great innovation enables our ability to have those conversations with customers and really cater to adding business value, as well as lighting up consumer scenarios.

Number two, creating our own demand. How can we create our own demand and find ways to really get after this in the marketplace? And then this whole competing to win approach, something we weren't as aggressive about, let's just say, in the past couple of years as we are right now and as we're going to be going forward from a competing standpoint. And I'll talk about that a little deeper in a moment.

When you look at the innovation, delivering great innovation in the marketplace, another form of engineering excellence, which is also operational excellence, has been our ability to really drive great products and solutions in the marketplace the past three years. It's unprecedented in the history of the company.

This is just a snapshot of some of the things we're delivering this year, which is an incredible lineup when you think about new releases of Windows; new releases of Microsoft Office; new releases of Microsoft SQL Server; new releases of Windows Server; new releases of CRM and new releases of Microsoft System Center, which is now a billion-dollar suite of products for us.

Look at the new releases that we've got coming out on the S side all the way through Entertainment Devices to the Business Platform Division. We've got that innovation engine working. I don't hear from customers anymore, "We need more consistency and dependability on your innovation."

The real challenge customers have right now is implementing, deploying, and adopting what we have in the marketplace, which is a great place for us to be. It puts us on the front foot, and we can also leverage our partner ecosystem to drive great deployment and adoption. But clearly no other company is putting out the innovation that we are in the marketplace. Just look at the past three years. We have the best sales bag in the business, which is what we talk to our field sales, services and marketing folks about, and that's the first step to really strategically finding ways to grow our market share.

Next, creating our own demand. We came up with an initiative in September that was the first we know of of its kind in the technology industry. We really went at 13 very specific things with every customer that we sat down with to have a proactive dialogue with them about how we can save them money and create business value.

So when the marketplace cratered and we began to have the financial meltdown, the financial crisis that we saw, we were in our customers' offices having a proactive dialogue about some very specific things that we can do with that customer to help them save money. And when I sat down with my counterparts at HP and Cisco and Accenture and the like, they weren't there. We were out ahead of them on this particular initiative. And this ability to really have and lean in in tough times with customers and have that proactive dialogue has really helped position us to be a trusted adviser with our customers, because you've got one of two things you can do in this environment. You can sort of pull back and retreat or you can lean in and know that there's going to be some headwinds and some budget cuts.

And in some cases, it meant more efficient and effective scenarios or better deployment or more best-practice adoption of our products. But this has been the most successful commercial initiative we've ever had in the history of the company, and we are going to continue to run this play in every geography this next year, because 100 percent of the customers we talk to want to become more efficient and effective.

Now, we're also seeing a second side of this, which shows that the market makers and the market leaders also want to find ways to take some of that savings and invest it in great innovation to improve productivity, to drive new revenue streams, to create new business models. And so we're actually now pivoting and tuning the initiative to make sure we innovate with the market makers and really drive great solutions around unified communications and our productivity solutions. Stephen Elop will cover a lot of those, as will Bob Muglia today. But you're going to see us continue to play and create our own demand in these two specific spaces.

One of the funnest things that we had going on this year was this idea of saving customers money around competitive product displacement. When you look at our portfolio, we've got a lot of competitors. You can look at this chart and see down the left-hand side, wow, Microsoft shows up in a lot of spaces. If you look down the right-hand side, though, of what we have to sell and the customer conversations that we're able to have to be able to help drive that value, it's an incredible way for us to continue to get in there and compete. And I'm going to go deeper on some of these in just a moment.

But you take a look at things like Siebel. What a ripe opportunity for us to go after every single Siebel seat out there and displace it with Microsoft Dynamics CRM and compete effectively with sales force, because we've now got a hosted offering that's very, very powerful. And so the ability to do on-premise hosting and give customers that choice and save them money in that particular area is a great way for us to come in and do competitive product displacement.

You look down through the list. You take Cisco and you take Webex. One of my favorite sales calls that I get to make is somebody that has Webex, because they're paying about two-thirds more than they will for a product we have called Microsoft Office Live Meeting. And that product is on fire. We're growing like crazy—very high percentage growth on that particular product because we're creating tremendous value.

And so we're really anchored around this idea of how do we get very precise, surgically go in and do real product displacement. In many cases, these customers will also own these solutions of ours already. We've just got to find a way to show them and illuminate the innovation so that they can get the value from it and we can help them extract that value.

Now I want to switch and pivot a little bit around competing. I walked you through the three areas of growing our share; delivering great innovation. We've got a pipeline like crazy, finding ways to really get in there and create our own demand, generally through that saving customers money initiative, as well as innovation.

And the third area is around competing to win. Competing to win is simply, in this environment that we're in, which, as I said, is hopefully a once-in-a-generation macroeconomic environment that we face from a headwind standpoint, is really a test of will. It really boils down to how bad do you want it? Do you want it worse than the other guy? And that's something that we're very focused on.

And we're going to do it respectfully and lawfully and all those things, but we are really firing up this ability of the importance of market share, because as this pie continues to shrink, our ability to grow is going to be completely dependent on our ability to grow our portion of the pie. And so that's why this competing to win is so important.

And so let me take you through some very specific things. One of the things we heard in this environment was, "Hey, you know what? Linux and Open Source are really going to get a lot of traction in this environment. These are the latest IDC numbers for Windows Server. Linux and Open Source are really going to get a lot of traction in this environment because, you know, it's just tough."

Well, our customers—when we get the facts and we show them the TCO story for Windows Server, the security story for Windows Server, and then we show them that Linux and Open Source aren�t free (we are competing against that fraudulent perception of free) —man, can you make traction and really illuminate. And so we've got the higher share we've gained in over three years in this particular space. We're up two points year over year in the toughest macroeconomic environment of our lifetime with this particular product. That's about competing to win—getting the facts out, educating customers, showing them the value, explaining the TCO and the security story to them. And they choose Windows.

And one of the things that we think is great is not only are we the best platform for proprietary, or for our own software, we're the best platform for proprietary and open-source software. And so we're actually running a lot of those applications as well in this particular area. And so, when it comes to that, we have the ability to compete, stem to stern, throughout an environment. And that's when we're going to continue to throttle up.

Let me talk to you about VMware. We aren't the big guy here. We don't have the dominant market share position. We launched our first product in October of this past year. From then until now, we've gained 24 points of market share against a very, very formidable competitor. And the one thing that we haven't had, that we hear from customers, is this idea of live migration, something VMware has called �VMotion.� And I've tried to be very objective here to show you. In all cases, we don't have 100 percent of the functionality, but what we do have is one incredible value proposition—a sixth of the price. And, oh, by the way, we are the only cross-platform solution out there. So, if you already own VMware, when using our systems management product, you can also manage their environment and our environment with a single pane of glass. What a competitive advantage that is.

And with R2 coming out, where we get this live migration feature—and Bob's going to talk more about that in a moment—wow, are we going to be able to compete in the marketplace; 24 points without it, and we've got big expectations for what we do this next year with this particular product in this environment. We've got a great solution. It's a sixth the cost on average of what we see in the marketplace. Evangelizing the tax that VMware is getting from the product is something we look forward to competing with in this environment. Again, it's about getting specific. It is about getting aggressive, and that's where we're headed. And the value drives share. As Steve said, we're a tremendous high-value, low-cost, high-volume software provider. That's our strategy, and that's what we're driving in this environment.

Now let me talk about Internet Explorer. This is an area that hasn't been positive. We have the largest market share today, but we've been declining quarter after quarter after quarter. We released Internet Explorer 8 right around the end of April, and, boy, have we seen good acceptance. And you know what? It's been a long time since we've had a good release of this particular browser product. And I'm so proud of the progress the client team and Steven Sinofsky has made. They've given us a great release. We've got great momentum on this particular product, and we're going to compete aggressively to continue to find ways to show the value of where Internet Explorer 8 is going and what we're able to do with it.

When you look at where it compares in the marketplace with Firefox or Google, we've got a great technical story. And some people hit us a little bit on performance and say that we don't run or provision the JavaScript as fast. When you look at that and the way people actually use the product, our Web slices and accelerators, we're down to milliseconds. We've got a great story on this. We certainly have a more secure, more private, and more manageable solution, and one that is certainly more enterprise-friendly.

And when you look at the progress we made with this particular release around compatibility, we're very, very well-positioned to compete in the marketplace. So, we've reversed the trend. We've got to keep fighting, scratching, and clawing every single day to improve the market share in this particular space. But we're very committed to winning with Internet Explorer 8.

Now let me take you to Google Apps. This is a lot of noise we heard in the system about Google Apps. Can we really compete with Google Apps, and what's the real story? Well, we've had some incredible wins across the world versus Google Apps. But you know what? We should. This is our space. And the reason we have such a superior competitive advantage is we offer customers choice. Customers don't want 100 percent of every piece of data for every application managed in the Cloud. They simply don't. For some users, for some applications, for some competitive reasons or privacy reasons or security reasons, they want to control that and manage it.

The company that offers them the ability to have that choice is Microsoft, because for some users, for some applications, they are going to want to put it in the Cloud. That's where we have the integrated story with our Business Productivity Online Suite offerings that we launched this past year. And the traction we've gotten out of that, we are already hosting over 1 million people on e-mail. And it's just going to continue to grow and continue to grow.

And offering that end-user experience and choice and flexibility is really at the heart of how we're able to compete. But we're also going to compete in this space with our partner ecosystem. We have got an incredible asset in our partner ecosystem, and we're going to leverage that and continue to leverage that. We've got a business model, a real business model for partners that's very, very important to us.

And I know of a company that I personally visited called Lion's Gate, the film company, and we went in there. And Google had a big trial and they were rolling it out, and they were unhappy with the security issues, the privacy issues and the performance issues that you continue to read about in the press. In fact, that's one of my favorite ways to compete against this particular product. It's just go out on the Web and pull down the outages, the security issues and the privacy issues for the past 18 months and print them out, and you staple it. And it's about this thick. And you hand it to a CIO and say, "Let's go through this and really understand what you are getting into." And so it's an incredible opportunity for us, again, to get very competitive and to really compete to win in that particular space.

Steve talked a lot about netbooks. I will give you a couple other caveats on this. As he said, we went from basically zero to seeing over 93 percent of the netbooks sold include Windows. Now let me talk to you about some things you may not know. One of the things you may not know is these netbooks come without a DVD. And so they're a lot harder to run a nongenuine copy of Windows. We actually have very good piracy rates on these particular devices.

The other beautiful thing about a netbook is to complement it with what we've got coming out with Windows 7. We have the ability now to up-sell people on Windows 7. So, to move them from Windows XP all the way up the stack to Windows 7—and it runs great on these netbooks—is a tremendous up-sell opportunity for us and one that we're going to continue to do. And the reason that we were able to make so much traction—because this is the first real test of the value of Windows—the reason we were able to make so much traction on this particular space is because we went to retailers and said, "Hey, what are your return rates on these Linux netbooks that you are getting?" And they said, "Oh, gosh, they're, like, four or five times higher than what we're seeing on other PCs that have Windows." I said, "Exactly." So let's do the TCO story. Let's talk to customers. And you can't find a retailer—I challenge you to find a retailer who wants to sell Linux on these netbooks, because the returns are bad. The customer complaints are bad. And our ability to really showcase the value proposition with Windows has never been greater and was never tested more than it was with this particular product. But we've made great progress there, but the up-sell opportunities with Windows 7, because it runs so well on these low-end laptops, is going to be tremendous for us.

Steve talked about Apple. We've made so much progress communicating to all the people that are thinking about Apple. They are thinking about buying an Apple laptop, how they are going to get ripped off and pay too much, quite candidly. This came straight out of my Sunday newspaper on July 12. Look at this particular comparison. For $1,199, you can get this 13.3-inch Apple Netbook notebook. For $649, you get basically more RAM, a bigger hard drive and certainly a larger screen size. What a great opportunity for us to get the facts out on our value proposition.

And when you put Windows 7 on top of that, what a tremendous opportunity we have as a company to be able to really compete in this particular space. And the fun we are going to have here has been tremendous.

And you may have also heard that we're going to open up some retail stores. And the announcements on that basically are we're going to open up two stores this fall and really learn and find ways to illuminate our innovation story and completely bring the software to the front across the PC, the phone, and the television, and really share all those learnings that we get, having that first-hand customer experience back with our retail channel partners to make the PC-buying experience so much better, because everyone that we've heard from, from a customer standpoint, has told us they want more choice, they want more value, and they want a better service as it relates to buying a PC and buying Microsoft software. And we're going to have a lot of fun competing in that particular space as well.

So, Windows simplicity, choice, and value, as well as our partner ecosystem, are going to be a tremendous opportunities for us to continue to compete in this particular front, but more important, a tremendous opportunity for us to grow our market share.

Now, I've shared with you the past three years about IBM Lotus Notes. This has always been a fun challenge for us. We've taken out almost 13 million Lotus Notes the past three years. What a great opportunity for us to continue to compete to win in this space. Now, the thing that I would tell you is there's still 15—we count—there's still 15 million out there.

So we've got a lot of opportunity to really excite our teams, because we've got great momentum here. When you think about the fastest-growing, hottest product in the history of Microsoft, which is Microsoft SharePoint Server, and the ability to put a new release of Microsoft Exchange Server with it, and how we are telling our collaboration and unified communications story, the opportunity for us to continue to eradicate countries of Lotus Notes has never been better. And we're going to continue to compete that way. And that's a real important area for us to work on.

So as I close out, I want to remind you of our long-term approach: investing in innovation for the long term and growing our market share. And we are reinvigorating this idea of how do we get more energy and excitement around getting the facts out about this incredible value proposition that we have, the incredible solutions that we've got, and services we've got coming out, as well as the lost cost and the value we provide from a monetary standpoint.

So we are going to compete hard to win in FY '10. I look forward to coming back up at the end of the day with Steve and Chris Liddell for the Q&A. Enjoy the rest of the session. Thank you. (Applause.)

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