Thank you for standing by, and welcome to the Third Quarter 2011 Microsoft Corporation's Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. Now I would like to turn the call over to Bill Koefoed, General Manager of Investor Relations. Bill, please proceed.

Thank you, Bobbi. And thank you, everyone, for joining us this afternoon. As usual, with me today are Peter Klein, Chief Financial Officer; Frank Brod, Chief Accounting Officer; and John Seethoff, Deputy General Counsel. Today, we filed our Form 10-Q. In addition, we posted our earnings press release and financial summary slide deck to our Investor Relations Website at microsoft.com/investor. The slide deck is intended to follow the flow of our prepared remarks and provides a reconciliation of differences between GAAP and non-GAAP financial measures. As a reminder, we will post today's prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript and any future use of the recording. You can replay the call and view the transcript at the Microsoft Investor Relations website until April 28, 2012. During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Okay. And with that, I'll turn the call over to Peter.

Thanks, Bill. Good afternoon, everyone. This quarter, we again delivered solid financial results, reflecting strong business and consumer demand for our products and services. Despite a mixed PC environment, the breadth and depth of our portfolio drove another quarter of double-digit revenue and earnings per share growth. On the commercial side, we saw strong multiyear licensing commitments by enterprises and robust transactional sales, particularly to small and medium businesses. Let me give more color on these. On the business desktop, customers continued to embrace our offering. Not only is Office 2010 the fastest-selling version of Office in our company's history, but businesses are purchasing our entire productivity platform, including SharePoint, Exchange, Dynamics and Lync. And with the recently released public beta of Office 365, the next generation of our cloud productivity service, we are enabling new scenarios that weren't viable in the past, especially for small and mid-sized businesses. Office 365 eases deployment for our customers while lowering their upfront costs and provides significantly better returns on investment. Enterprises are investing in our business infrastructure offerings, with a growing preference for our premium products. Windows Server, SQL Server and our management tools are enabling our customers to transform their data centers to be more efficient. Companies are reaping the benefits that Windows 7 brings, including enhanced productivity, efficiency, security and manageability. Enterprise deployments of Windows 7 have more than doubled over the past 6 months. While business PC shipments showed strength this quarter, consumer PCs declined. Within both segments, emerging markets continued to be an area of strong growth. As demonstrated by Bing's continued market share gains since its launch, we have made great strides in relevancy and design and continue to transform search beyond just queries to task completion and decision making. While we are pleased with the progress…

Thanks, Peter. Revenue for the quarter was $16.4 billion, 13% growth year-over-year, and earnings per share was $0.61, up 36%. Adjusting for Tech Guaranteed programs, this was our fourth consecutive quarter of double-digit revenue growth and our sixth consecutive quarter of double-digit EPS growth. Operating cash flow for the third quarter was a record $8.7 billion or growth of 17%. Operating cash flow year-to-date has surpassed $21 billion, an increase of $2.6 billion. Many of the demand trends in the third quarter were similar to the first half of the year. Specifically, Office 2010, Xbox and Xbox Live and Kinect continue to enjoy exceptional consumer momentum. On the commercial side, enterprise demand for our products remains strong. Businesses are deploying Microsoft platforms and applications, including Windows, Windows Server, Office, Dynamics and Management Tools. The business demand is translating into healthy increases in transactional licensing and strong enterprise agreement renewals. Our unearned revenue balance grew 6% to $13 billion, reflecting continued strength in our customers' multiyear commitment. Our contracted not billed balance is now over $17 billion, growing approximately 20%. Bookings for the company were up 8%. Now let me turn to the PC market. There are 3 trends we are observing. First, business PC growth was 9% this quarter. The business PC refresh cycle continues and is still in the early stages. Second, emerging markets continues to play a larger role in total PC shipment volume and now represent nearly half of all worldwide PC shipments. Finally, the consumer PC market declined 8% as there are several dynamics at work, including a 40% decline in netbooks, broader consumer macroeconomics, increased competition for consumer spending and the strength of Windows 7 consumer PCs in the prior year. In total, we estimate the PC market declined 1% to 3% in the third…

Thanks, Bill. For the remainder of the call, I'll discuss our expectations for the fourth quarter and some high level themes as we begin to think about fiscal 2012. From a macro perspective, we expect the next quarter will be similar to the third quarter. Within the PC market, we expect growth in emerging markets to outpace developed markets and growth in business PCs to outpace consumer PCs. As a result, we expect Windows division revenue to grow roughly in line with the PC market for the fourth quarter. Turning to the Microsoft Business division. Transactional revenue, approximately 40% of the division's total, will continue to exceed PC shipment growth rate, but at a moderating rate as we approach the Office 2010 launch anniversary. Revenue associated with multiyear licensing agreements, representing approximately 60% of the division's total, should grow mid to high-single digits. Turning to Server and Tools. Approximately 30% of the division's revenue comes from transactional licensing, 50% from multiyear licensing and 20% from Enterprise Services. Within this division, we expect transactional revenue to generally track at the hardware market, and multiyear licensing revenue and Enterprise Services revenue to both grow low double digits. Within OSD, we expect online advertising revenue to perform roughly in line with the overall online advertising market. Moving on to the Entertainment and Devices division. Considering the enthusiastic response to the Xbox 360 platform, we now expect this division's revenue to grow roughly 25% for the fourth quarter. Switching to cost of goods sold, as was the case this quarter, the biggest factor impacting COGS going forward will be the growth of Entertainment and Devices, Enterprise Services and integration and traffic acquisition costs associated with our search business. Turning to operating expenses, we are reconfirming our guidance of $26.9 billion to $27.3 billion for…

Thanks, Peter. We want to get questions from as many of you as possible, so please stick to just one question and avoid long or multipart questions. Bobbi, please go ahead and repeat your instructions.

[Operator Instructions] Our first question comes from Adam Holt from Morgan Stanley.

My question is on expenses. In the quarter, the gross margin was a little bit lower than I had modeled. I was wondering if you could go through the puts and takes of what hit gross margin this quarter? And then looking into fiscal '12 in general, would you expect revenue to outpace your operating expense growth?

Thanks, Adam. On gross margin, it was really the 3 things that Bill described. Sort of the biggest thing is fantastic growth in the Xbox business, and that was the single biggest driver of COGS growth in the quarter. Secondly, Enterprise Services, which is volume-driven, and they are having nice growth, so that shows up in COGS. And then finally in Online Services, some costs associated with the Yahoo! alliance. As you know, some of that revenue that we get from that alliance from the Yahoo! property gets tacked out in COGS and some other traffic acquisition costs. Those were the 3 big drivers of the COGS growth, all volume driven.

With respect to the second part of your question, Adam, as you know, we don't give revenue -- specific revenue guidance. And we give you operating expense guidance and you can model it from there.

Our next question comes from Walter Pritchard from Citigroup.

Could you help us understand just on the COGS, I guess, following on to Adam's question here? As we look into next year with some of the integration costs around Yahoo!, and I guess I'm also wondering around kind of mix within EDD, how much we should expect, sort of what we've seen over the course of this year be indicative of where gross margins are in the future? Do we think we're on sort of a new kind of trajectory in those individual businesses?

Well it depends what you model in for the volume, right? So these COGS are volume driven, so depending on how you think about each of those individual businesses, really is the driver of COGS. We try to give that framework, so it's easier to understand that. And certainly on the Online Services business, our key focus is that COGS are volume driven. Most important thing there is to get that revenue per search up because that really has the biggest impact on the gross margin.

Our next question comes from Heather Bellini from the ISI Group.

Peter, I was just wondering if you could talk a little bit about buybacks. I know that Bill said the return of capital to shareholders was up 1/3 versus last year. But I'm just wondering if you could talk about the level of buybacks and kind of, how we should think about your appetite for buybacks going forward?

Yes -- no, I think we have a pretty consistent track record over the last several years in terms of distributing cash back to shareholders, in terms of dividend and buyback. And so those numbers that Bill cited were sort of indicative of that. We've had a pretty consistent track record on that, and that's been our philosophy.

The next question comes from Brent Thill from UBS.

Peter, can you just reconcile, on the PC market, Intel and AMD are saying one thing, you're saying it's worse. And just trying to understand, is this because of piracy or lower ASPs? What's accounting for that? And what's your view in terms of the snapback for the PC market in the second half of the year?

There are some unique things going on with Intel's results that you can sort of reconcile back to what we're saying that make a lot of sense. First, if you try to reconcile their revenue growth, certainly, they have an ASP uplift, which is actually the single biggest part of driving the growth. There's a few other things in terms of an extra week in the quarter. They've also excluded netbooks from the PC MPU numbers. And I think there was some appropriate inventory buildup so if you look at our numbers, it ties pretty closely from a unit perspective to what they're seeing. And obviously, we're in line with the big third party analysts as well.

Mr. Phil Winslow from Credit Suisse, your line is open.

Just looking for a little bit more color on the Microsoft Business Division side. Obviously, we're coming on the sort of the tail end directly of uplift of Office 2010. Obviously, you're talking about tougher comps, but what is sort of the right long-term growth rate for that business over the next couple of years? And then also, just in terms of G&A, we saw a big step up quarter-to-quarter this quarter. Was there anything onetime in there like you guys had in the December and March quarters of fiscal '10?

So obviously, we're not guiding to specific growth rates for MBD, but I would highlight a few things. Obviously, we're incredibly excited about the customer reaction to Office 2010. But even beyond that, you heard us talk about how customers are adopting the whole sort of suite of products, not just the Office application, but SharePoint, Exchange, Dynamics and Lync. And that really provides long-term sustainable growth for the MBD business all up, even in a year that's sort of not a launch year. So that's, I think, a way to think about what's going on in MBD. In addition to that, we've got Office 365, so -- over the course of the next coming years. We've had great growth. As we talked about, quadrupled the number of sort of Business Online Services customers we have. With the introduction of Office 365, we sort of take that to the next level. So as you think about the next year or 2 for the MBD business, those are some of the factors that I think really drive their growth.

Colin Gillis from BGC Financial, your line is open.

Can you just talk to the new leadership in Servers, like what Satya brings to the group?

Yes, Satya is just a wonderful business leader. He comes from a background of both business applications and cloud services, so he's really the ideal guy to take that business to the next level. I personally had the -- an opportunity to work with Satya closely in the past. [Technical Difficulty] He's a great leader.

Our next question comes from Brad Reback from Oppenheimer.

So Peter, there's been a lot of confusion or a lot of talk around the Nokia partnership, what the economics are. Could you maybe help straighten out the record on that? And probably more importantly, give us any sense that there's going to be an impact to 2012 COGS as it relates to this deal?

Well I will talk about the Nokia. The great thing about the Nokia deal is this in an incredibly perfect opportunity for both of us to build a really compelling, vibrant third ecosystem, if you think about the complementary set of assets that we all bring to it. And in terms of the hardware design, the hardware manufacturing, the global relationships with operators, certainly with our platform that has great developer momentum and the kinds of services of Xbox Live and Office. Clearly, this is a broad strategic alliance, it's a long-term strategic alliance, and we're going to be working closely together. And we are each making investments together along those lines. And I think the important thing to think about is, as we sort of build that out in its success, it's going to be a great thing for both companies and for customers and for other partners in the ecosystem.

Robert Breza from RBC Capital Market.

Just quickly, can you talk about the delay that you're doing internationally? And how long do you think that'll take before you can get it up and running?

Yes, we're going to work on North America, the U.S. and Canada. And when we feel like we've got that straightened out, we'll move on to the other international markets.

Our next question comes from Gregg Moskowitz from Cowen.

Peter, you're tracking to lose a few more cents in the online division in fiscal '11 versus fiscal '10. Obviously, RPS improvements going forward would help, but you'll also be rolling out the integrated platform to additional markets. So wondering if you could perhaps offer anything else about the EPS prospects for OSD next year relative to fiscal '11?

Yes, well certainly, we're not going to give specific outlook more than what we've given, but you've hit on the key issue, which is the revenue per search. That's -- we've been clear on the opportunity. And the strategy there is to continue to grow share and to increase our revenue per search. And so obviously, we're laser focused right now on getting that revenue per search up, and that has high leverage into certain margins for the company going forward.

Sandeep Aggarwal from Caris & Company.

Peter, can you provide us any color in terms of the -- how's the, your new architecture effort for -- on tablet size progressing in terms of system-on-a-chip?

No, I've got nothing else to talk about that other than what we've already said.

Ed Maguire from CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc. You discussed healthy activity in multiyear commitments. Could you address how you and your customers are mixing Business Online Services? And looking at Office 365, how ultimately that may affect your model in terms of COGS?

Yes -- no, it's a great question. Actually, one of the interesting things about Business Online Services and the coming -- the pending Office 365 is, it's enabling really great conversations. And actually, it's been a driver of the increase in multiyear licensing commitments because people have a lot of questions about the cloud and the transition to the cloud, having a clear story, having a partner that can help them transition in the pace that they want to. It's actually been the driver of the conversations we're having with enterprises. And going forward, the economics of that are it's an increased revenue and total profit opportunity for us. The subscription services do have a higher COGS and so a lower gross margin in terms of percentage, but over time, that's a growth in absolute margin dollars for us.

Our next question comes from Kash Rangan from Merrill Lynch.

When I look at this quarter, we've already gotten past the 4 quarters, how product cycle helped revenue growth. It looks like this quarter, if I make adjustments for Office, you're still looking at high-single digit 8%, 10% type growth rate against normal comparisons. Any reasons to think that if IT spending and economy continue to stay the way they are, to think that this growth rate should, in fact, decelerate as you go into fiscal '12? Or if you can argue the other side that it should stay, that this growth rate is sustainable? Both sides of the argument, appreciate it, thanks.

Yes, without giving specific guidance on growth rates, I will say we feel great about how enterprises are investing in IT, and in particular, how they are very interested in our product suite. I think we've got a very broad compelling set of products for the enterprise. And if you look at any number of CIO surveys, most of them say, a high priority focus area for CIOs is our suite of products. And so directionally, I would say we feel great about sort of the IT market and certainly, our position in that and our product set.

Our final question comes from Tim Klasell from Stifel, Nicolaus.

Maybe you can just give us your thoughts about the timing of a launch of the next-generation Xbox console? And if a decision hasn't been made, do you guys internally have a time point of when you think you have to make that decision?

No, we're really not talking about that. Right now, we're incredibly excited to about what's going on with the Xbox 360 console and certainly Kinect, which is relatively new in the market, so we're very focused on that. Okay, so that will wrap up the Q&A portion of today's earnings call. A few weeks ago, we announced our plans for Microsoft's 2011 Financial Analyst Meeting, which will be on the afternoon of September 14, 2011, in Anaheim, California. FAM will be held in conjunction with our Developer Conference, which will kick off on September 13 at the Anaheim Convention Center. This year's FAM will feature presentations by key executives about the company's strategic direction and will supplement the Developer Conference Presentations, which offer people the opportunity to learn directly about our product strategies and roadmap. In the meantime, we look forward to seeing many of you at the numerous conferences in which we are participating in this quarter. For those of you unable to attend any of our events in person, you will always be able to follow our comments at microsoft.com/investor. Please contact us if you need any additional details. Thank you again, and have a great day.

Thank you for everyone's participation. You may now disconnect.