Summary: The theme of the meeting was Steve defending, over and over, the need for Microsoft to keep spending on R&D and not make “imprudent” budget cuts.
And yes, the economy will take its toll.
EARLIER: Microsoft (MSFT) CEO Steve Ballmer, CFO Chris Liddell, and Investor Relations GM Bill Koefoed are presenting a “Strategic Update Meeting” to financial analysts at 8am ET.
Listen in here, but refresh this page for LIVE coverage of Steve and Chris’ talk, starting in about 10 minutes.
Anything not in quotes is a paraphrase.
7:53 Hold music, still waiting for the show.
7:58 Music off, getting ready to start?
8:00 Sounds like someone’s tapping a microphone. Testing, testing.
8:02 Nothing yet. Wonder if Steve or Chris will issue guidance.
8:03 Standard disclaimers. Here we go.
8:04 Is this Chris? “Purpose is a mid-year update.” Biggest change is the tanking of the economy. $31.7 billion in revenue.
8:05 Actually a good first half. Q1 good, Q2 bad, second half of Q2 really bad.
8:06 Expect tough conditions throughout second half. Everything said in earnings call still true. Deteriorating sales.
8:07 Server deteriorating as well. Negative environment.
8:08 Similar trends in Online business. Ad sales “under pressure, likely to continue that way.”
8:09 Very happy with devices, particularly Xbox. But all businesses will be effected by the economy.
8:09 Revenue side difficult. Expense side: We’re trying to manage that closely.
8:10 AAA balance sheet, virtually no debt, good cash flow.
8:11 “No significant change from earnings call.” Here comes Steve.
8:11 Steve: For New York maybe we should have started at 9, but 8am is 5 in Seattle so I’ll try to bring West Coast energy.
8:12 We’re looking at who did well in 1937 and 1938. RCA is our role model, they kept investing throughout Depression, and dominated when the Depression ended.
8:13 Steve again talking about the economy “resetting to a new level.” You don’t “beat” the economy, you “manage” it.
8:14 Seven big businesses at MSFT, including a bucket of randoms.
Windows, Windows Mobile (those two will become closer), Desktop Productivity, Servers, Enterprise Software (DB, Middleware), Search & Advertising, Entertainment & TV (“Zune software — I took out the Zune hardware” & Xbox. Those are the 7 in expecting big returns.
8:17 Windows is very profitable. Windows Mobile is somewhat unprofitable. Server, Desktop, Enterprise VERY profitable. Search & Ad VERY unprofitable.
8:19 Wants to reduce MISC opex (legal, IT, HR, etc). Legal in particular is a drain.
8:21 “We will stay in search & advertising. It’s a big opportunity.”
8:22 Ramped up opex in Windows spending. Doing a lot more advertising for Windows.
8:23 More Windows Mobile spending too. Servers flat. Enterprise flat. Search & Ad more spending. Entertain & TV flat. More incubation (2% of spending).
8:24 Laying some off but still hiring. You can’t take a video game designer and move them over to databases (SQL Server.)
8:24 You can always take share! Maybe especially in a down economy.
8:25 A lot of what we do is upselling people on more services.
8:26 Certainly there will be economic effects on PC sales. Things biggest hit will be big-ticket discretionary items like new car or extra PC. No avoiding it.
8:26 Will see a slowdown in corporate IT too.
8:27 Windows licence is #1. Pirated windows in #2 — tough competitor, great product and a price that’s tough to beat. (Laughter.)
8:28 Very focused on both Linux and Apple as competitors. Expecting Android-based PCs as well as phones.
8:28 IE is in “red” — losing share. With IE8 set to regain share, browser share is important.
8:30 Windows 7 has “early good looks.” Windows Live is essential component that “completes Windows-based experience.”
8:31 Netbooks: Wants high market share on netbooks. High return rate for Linux machines, still has >90%. Netbooks are “not all down side”, market wouldn’t be where it is w/o them.
8:33 From revenue, healthiest in netbook where rev is lowest. 2nd biggest is emerging markets, big piracy problem there.
8:34 On to Windows Mobile. #1 smartphone is Symbian, #2 RIMM, Windows Mobile is #3. But all the mojo is with Apple and to a lesser extent BlackBerry. But real growth is Windows Mobile and “to a lesser extent Android.”
8:35 REPEATS: Not our strategy to build our own phone. We build software and give people choice.
8:37 The move from feature phones to smart phones is a bigger deal for MSFT than general contraction of mobile market. Windows benefits as a smartphones, Steve thinks it’ll grow.
8:38 Desktop productivity (Think Office) – Hurt my low PC sales and sluggish corporate IT spend. Will be impacted.
8:39 We keep competing with OpenOffice. We have superior offer, we’ve lowered Office prices. Office 14 “will not be this year.”
8:42 Server share is “yellow” — stable. Linux dominates web and science.
8:43 New low price Windows Server coming. Something “akin to netbooks at the server level.”
8:44 IT budgets are “more of an opp than a challenge.” MSFT only has 16% of revenue, ORCL recently raised prices, Steve wants to take share from Oracle. But admits “we’re outmanned” by Oracle’s spend.
8:47 Search & Ad — “we are a small share.” Some people say, why don’t just give up? If you give up, you can’t get back in the game. “We have good ideas, this will not change quickly.” Talks up Qi Lu, “10 other key technologist from Yahoo.” We are up against incredible odds. They [Google] have huge team, we have much smaller team. We would like to pool MSFT and YHOO, not talking acquisition. But these two guys should figure out a way to get together. Maybe we’ll be able to have that talk with new management at yahoo as Carol comes on board.
8:51 Working on raising US share first. Have to improve ad relevance. Will be “hurting P&L” by reinvesting revenues. It’s not going to go from 4% to 25% in a year, that’s not realistic. “I don’t want to be known as the Jerry Yang of this market” and keep investing with no returns. But makes clear Microsoft will keep spending.
8:53 Entertainment & TV: Don’t think Xbox — the real opportunity is having a device that sits “next to or in every television set.” Steve watches some TV like “Lost” on PC.
8:55 Still pushing Zune.
8:55 Xbox: Gamers still buying “triple A” titles, but not second tier games. Saw that last Xmas.
8:57 Cutting opex even more would be “imprudent,” defending still spending money. No, can’t take out another $2 billion in costs.
8:58 “The economy will be relatively weak for a relatively long period of time.” Steve is more negative on the econ that most, but still defends his opex spend.
9:00 Q: Something above the Windows XP price point coming for netbooks?
9:01 Steve: XP on netbooks isn’t full XP anyway. Working with Windows 7 netbook edition. “We will continue to have a netbook product at the current Windows XP price point” but enocourages up-trades.
9:03 Steve on retail stores: We’ll carry more than MST products, including hardware. Steve punts on how many stores, what they’ll sell, etc etc.
9:06 Q: What about enterprise adopting Windows 7?
9:07 Most customers will update while buying new PCs, minority upgrades without a new PC. Microsoft dependent on overall PC sales. “We have a pretty good product, and some pent-up interest, but we’ll have to see.”
9:13 Chris on acquisitions: No change in MSFT’s strategy, but people haven’t reset their expectations on value, so expect a slow 12 months.
9:14 ANOTHER netbook question: What do you take out of low-end netbook Windows? And what about piracy?
9:15 Steve: No solution to piracy, the harder you make it on pirates, the harder it is on legitimate users.
9:16 If you want a decent-sized screen, you can’t get netbook OS. Can only run a certain number of apps at a time.
9:17 That’s it, call over.
Thanks to everyone who joined us.
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