Welcome to Microsoft’s Fiscal Year 2013 First Quarter Earnings Conference Call. All lines have been placed in a listen-only mode until the question-and-answer session. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. And I would now like to turn the call over to Bill Koefoed, General Manager of Investor Relations. Bill, you may begin.

Thanks Gabrielle 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. On our website, microsoft.com/investor is our financial summary slide deck which is intended to follow our prepared remarks and provides a reconciliation of differences between GAAP and non-GAAP financial measures. Note that all growth comparisons we make on the call today will relate to the corresponding period of last year. Unless specified otherwise, all impacted numbers for the current quarter have been adjusted for the $1.2 billion revenue deferral related to the Windows upgrade offer and Windows 8 presales to OEMs and the $189 million revenue deferral primarily related to the Office offer. 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 October 18, 2013. During this call, we will be making forward-looking statements that are predictions, projections or other statements about future events. 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 and the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Qs 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, and thanks everyone for joining us. Our first quarter revenue was flat year-over-year at $17.4 billion reflecting solid growth in multiyear licensing, but a slowdown in transactional revenue. Our transactional revenue which includes our OEM business was impacted by a challenging PC market, normal purchasing slowdowns in advance of upcoming product launches and tough economic conditions, particularly in Europe. This impact was offset by growth in multiyear licensing revenue which benefited from healthy renewals of enterprise agreements as customers continue to make long-term commitments to the Microsoft platform. Our productivity and infrastructure offerings remain a top priority for CIOs. In productivity, our collaboration and communications solutions continue to perform well, with double-digit revenue growth this quarter. In the datacenter, our virtualization capabilities and hybrid cloud scenarios are enabling enterprises to move to the modern datacenter on their terms. And on the data platform, we are well positioned to take share, as customers increasingly turn to SQL Server 2012 for their mission critical workloads and business intelligence needs. As part of our ongoing focus to increase the overall value we bring to our customers, we are enhancing our unique hybrid IT capabilities, with targeted acquisitions like StorSimple and PhoneFactor. Acquisitions of industry leading solutions like these accelerate our ability to help CIOs better manage their environment. As I mentioned earlier, the PC market was challenged this quarter. In addition to a tough economic environment and competitive pressures, OEMs drew down their Windows 7 inventory as they began the transition to Windows 8. Our partners are building an incredible breadth of hardware. To-date, we have certified over 1,000 unique Windows 8 systems, including beautiful new tablets, convertibles, laptops and all-in-ones and there will be more to come. As I look at where we are, we have kicked off the largest…

Thanks Peter. First I am going to review our overall results and then I will move on to the details by business segments. Revenue for the quarter was flat at $17.4 billion. Operating income was $6.7 billion, down 7%. Earnings per share was $0.65, a decline of 4%. Cash flow from operations was roughly flat at $8.5 billion. Foreign exchange had a $257 million or 2 percentage point negative impact to revenue this quarter, but the impact to net income was immaterial. From a geographic perspective, this quarter we saw tough conditions in Europe where revenue declined mid-single digits. In emerging markets, PCs were roughly flat, a significant deceleration from the growth rates we had been seeing previously. Our Enterprise business in emerging markets continued double-digit revenue growth. When looking at our revenue mix, consumer and business transactional revenue declined which is typical ahead of launches. Multiyear licensing revenue remained strong with 15% growth representing roughly 45% of our total revenue for the quarter. When adjusted for the $1.9 billion cumulative impact of the Windows and Office revenue deferrals, unearned revenue was $17.7 billion, up 13%. Our contracted-not-billed balance was roughly $20 billion. Now let’s move onto the PC market. We saw the overall PC market decline this quarter in advance to the launch of Windows 8 and in part due to competitive pressures and the challenging macroeconomic climate, I noted earlier. Business outperformed consumer and emerging markets outpaced developed markets although at a reduced rate. Moving to the results for the Windows division, revenue declined 9% and lagged the PC market due to OEM inventory drawdown prior to the Windows 8 launch and the ASP dynamics of emerging markets relative to develop markets. We have discontinued the bridge to the PC market as Windows 8 will be a platform…

Thanks, Bill. For the remainder of the call, I will discuss our revenue expectations for the second quarter and full fiscal year 2013. Starting with Server & Tools, product revenue including transaction and multiyear licensing is about 80% of the division’s total revenue, and enterprise services is the remaining 20%. As we noted the last quarter, our customers are moving from transactional purchasing to premium products and multiyear licensing agreements. We expect product revenue to grow high single-digits for the second quarter and low double-digits for the full fiscal year. And we expect enterprise services revenue to grow low double-digits for the second quarter and mid-teen for the full fiscal year. In Microsoft business division multiyear licensing revenue which is approximately 60% of the divisions total should grow low double-digits for both the second quarter and full fiscal year. Excluding the Office deferral, transaction revenue which is the remaining revenue in the division, should grow low single-digits in the second quarter and mid single-digits for the full fiscal year. As a reminder, when updating your Q2 models, you should defer between $850 million and $950 million of revenue related to presales into the channel and the Office offer. Amounts deferred for presales will be recognized upon general availability, while amounts deferred to the Office offer will be recognized upon delivery, redemption or the exploration of the program in the fourth quarter of fiscal year 2013. Moving on to Entertainment and Devices division, while we have been maintaining our share and leadership position, the console market continues to be challenged. As a result, we expect revenue to decline low teens into second quarter, but to grow low single-digits with the full fiscal year. In the Online Services division, we look to build upon our improvements in share and search monetization. For…

Thanks Peter. And with that, Peter and I will take some questions. We want to get questions from as many of you as possible, so please stick to just one question and avoid long or multi-part questions. Gabrielle, can you please go ahead and repeat your instructions.

Yes, of course. (Operator Instructions) Our first question does come from Rick Sherlund with Nomura. Your line is now open.

On the Windows and Windows Live division there was no real guidance for the year; you just said you would recognize all remaining deferred revenue. Can you just help us understand what the variables are that we should be thinking about other than what the PC market grows out; and by PC market, I think we need to find out as you know, all Windows 8 compatible devices including tablets. So are there mix shift issues, the price you realized on a tablet versus traditional notebook; what are kind of variables we should be thinking about in terms of how to model Windows and Windows Live revenues for the year?

Yeah. That’s exactly right. One of the exciting things about Windows 8 is how it really redefines, so how people think about devices and the experiences they get across those devices and up until now, that’s sort of narrowly been defined as PCs or tablets and customers have been forced to choose and may trade-off, frankly of what they get. With Windows 8, you can kind of get whatever you want at whatever price point you want. So whether you want convertible with touch and pen and integration with your line of business apps, or do you want a tablet for great information and communications and entertainment, whether you want a touch ultrabook, all those things come into play and all those things are available with Windows 8. And I think overtime, we're going to see how that plays out and that’s the opportunity for us and it's really a factor of thinking about how all those are going to play against each other.

Operator, next question please.

Our next question comes from Heather Bellini with Goldman Sachs. Your line is now open.

Just to Rick’s question a little bit more specifically and I was on another call before this, maybe you said it. But, can you give us a sense of your expectations for Surface in the quarter, or if you can’t do that, can you give us a sense for what pre-orders were thus far, just to give us a sense of how that’s ramping out of the gate and what your expectations are there for that?

Yeah, thanks Heather, right now we’re focused on our launch both of Surface and Windows 8 next week and so that’s really what we’re excited about and the opportunity to show people all the great devices, all the great capabilities and so we’re not talking about that now. As we mentioned on the call, we’re working hard on production, we’re ramping production, we’re excited about what we’ve heard so far, the feedbacks are great, the reviews have been really good. And I think that demonstrates what we’ve been talking about, the capabilities and experiences that Windows 8 delivers across various form factors. Operator, next question please.

Our next question comes from Adam Holt with Morgan Stanley. Your line is now open.

I am going to shift to the Server and Tools business; the billings were a little bit better than we thought, but the recognized revenue in the forward guide was a little bit lighter than we have been looking for. And I just want to drill in to some of the expectations for the forward guidance. Are you assuming the transactional environment remains weak? Do you still think you can outpace the transactional piece in terms of your business and what should we be thinking about in terms of the convergence of billings and recognize revenue? Thank you.

Yeah, thanks Adam; what we are continuing to see is that a migration from transactional revenue to multiyear licensing agreements, which is great, because it’s one of the things that’s driving the business, which is the vision we have for the roadmap, the resonance that has with our customers and so they’re making long-term commitments to the platform. And so, it’s one of the reasons we gave you the bookings number and the multiyear licensing revenue number of 20% and 19%, because that’s what you’re seeing and so as that’s growing faster than the transactional you’ll see the bookings and the backlog grow and the recognize will follow overtime. So that’s really the thing to watch for in Server and Tools and we continue to be very bullish on that opportunity across the board whether that’s to Window server, system center what we are doing in the private cloud and public cloud and certainly with SQL Server. So that trend that we are seeing in the migration to the multiyear licensing agreements is driving that business both now and for the long-term.

And just to build on that, this is one of the strongest bookings quarters we’ve had in the last several years, so again for a $19 billion business to have over 20% bookings growth we feel obviously in addition to all the products that have come so far this year I think we feel pretty excited about the opportunity in that business. So thanks for asking that question. Gabrielle, next question please.

Our next question comes from Mark Moerdler with Sanford Bernstein. Your line is now open.

So question, given the slowdown in the PCs, how should we think about the change or what’s going on in the Windows adoption processes; are we seeing continuation at the current rate or is this some proportional slowdown in the roll out of Windows 7?

We continue to see -- you are talking about enterprise adoption?

Right.

We continue to see that grow this quarter although at a slower rate than we had in past quarters, so that opportunity remains very large. We are over 50% deployed and remember the end-of-life for XP is about a year and half away, so that remains a great opportunity for us that we see continuing on.

But it is slowing a bit?

It did this quarter.

It did yeah just this quarter and it’s a summer quarter, so I don’t know that I would read too much into just one period. Gabrielle, next question please.

Our next question comes from Walter Pritchard with Citi. Your line is now open.

Just to follow on with some launch questions, so there are sort of two changes here to the business that we will see going forward, one is the hardware piece in Windows and the other is, what looks like a pretty big ramp-up on the retail side with some store presence; understanding that the latter is probably in your guidance. Can you just remind us on the store side, where are you allocating the expenses and is that presence potentially grows overtime; how you expect that to the impact your financials? And then on Surface, should it be anything we think about other than sort of a price time to unit and making margin assumption, are there any other new ones around, the way you account for Surface in your financials?

First question was about the retail stores and were they showing up…

Yeah, where the expenses are?

Got it. The expenses are [incorp] and they show up a little bit in COGS and a little bit in operating expenses.

And sorry, what was the second part of your question?

To on Surface, I mean is there anything else, we should be thinking about in terms of how to model the impact of Surface; we know the price, we can make a unit assumption, we can make a margin assumption. Is there any deferrals, any OpEx impact and warranty you know…..?

Yeah, you’re thinking about it right.

Gabrielle, next question please.

Our next question comes from Kash Rangan with Merrill Lynch. Your line is now open.

As you enter the world of the new form factors; since you’re coming little bit behind relative to Apple, what is the right way to think about your differentiation relative to the consumer market, opportunity for tablets and the enterprise market opportunity for tablets? Thank you.

Well, I think one of our differentiations is we give everybody what they want for the purpose they want it. When I talk to CIOs for example and the enterprises, one of the things they really excited about is that Windows 8 devices give them a chance for their employees that uses that technology to have the devices they want and bring to work, they get the kind of manageability, security, integration to go on in business apps they want. So I think there is a big differentiation in the enterprise across all the form factors especially tablets that that are increasingly coming in for a place. On the consumer side, I think there not only a range of price points and different kinds of form factors, but also unique and differentiated set of services and experiences that come with the device including Office, including SkyDrive, including Xbox Music. So I think across the board we see similar differentiation both in the enterprise and on the consumer.

Our next question comes from Brent Thill with UBS.

Peter if Surface is successful, shouldn’t the cogs be well above the high single-digit growth for the fiscal year. I was just curious why you excluded, are you just waiting to see how the traction is before you give us more guidance or what is the explanation for that?

Yeah, that's exactly right (inaudible).

Our next question comes from John DiFucci with JPM.

I have a question on the deferred revenue specifically for the Windows business. Even if you exclude the adjustments, deferred revenue for this business increased in the quarter. And you normally or actually you always see a seasonal decline. I guess can you talk a little bit about that. What are we seeing there, is this tied to multi-year deals in this business now or is there something you do, or some of these adjustments maybe we are not accounting for correctly.

It actually is that its multiyear licensing deals is continuing to grow double-digits so that’s what’s driving the deferred there. That's one sort of example of how enterprises are continuing to see value and adopting Windows.

Our next question comes from Colin Gillis with BGC Financials.

Looking at the Server and Tools line again, when the results first printed we were asked quite a bit if that was showing any weakness in the enterprise [spend] environment. It sounds like a lot of that was just driven by the rotation to multiple year contracts. But can you talk about the market place right now, and if the market place is weakening, do you find out to be an advantage given the cost preferences in that line?

It definitely is the migration from transaction licensing. Irrespective of a weak market, strong market, we’ve got a great value, and it does play very well in tough macroeconomic times, because one of our great value proposition is the savings and efficiencies people get from using integrated technology across their stack at a really good price performance characteristic. So I would say, we feel great about our value proposition in any environment, does play very well in a tough macro environment. But what we're seeing now in the financials this is how we highlight bookings growth and multi-year licensing growth. It’s related more towards the migration from the transactional business.

Okay, our next question comes from Philip Winslow of Credit Suisse. Your line is now open.

Alright, thanks guys. Just have a question on just the margins of Surface, kind of the high level doing in an exact margin percentage. But how did you get sort of price Surface relative to (inaudible). I mean, obviously you guys talked about this one including implied your revenue amount for Windows license. Did you also take in to account sort of a weighted average or [tax] rate of Office for the buyers and then you add on a gross margin for the hardware. Just kind of how you built up to that, and then just kind of a high level, what was the pricing thoughts behind service. Was it the drivers, just adoption of the platform, was it actually may be some business, and does it change at all, near-term versus longer term? Thanks.

As a [ready] pricing decision, it’s really about the value proposition effort through your customers and the degree of capabilities and value you are delivering to them at a variety of price points for what they want. And that’s really fundamentally what drives all of our pricing decisions. Do we have a really compelling value to offer our customers with the capabilities that we’re delivering, and that’s what we do across all our business and that’s what drives our economic performance.

And our next question comes from Ed Maguire with CLSA. Your line is now open.

Looking at how you’re beginning to combine products and services with Office 365 for home and then, the bundling of services with Windows RT. Looking forward, is this going to change the way that you allocate, what might have been transactional revenues in the past to accommodate those transactional and services revenues?

Yeah, generally that is correct. As we move to more delivery at services that will show up as services revenue as oppose to transactional revenue, that’s correct. But I do think, it’s a long-term trend and you saw that in the commentary that we made around our server and tools business. But we are having people that are making longer term commitments to Microsoft, and that shows up in our annuity business and server, it shows up in things like Office 365 where people are having a subscription service, it shows up in things like Xbox LIVE which you’ve seen happening over the last couple of years. So, Ed, I think you’ve got it right that we’re seeing a lot more people that are committing to a longer term relationship with Microsoft which is clearly what we’re striving toward.

Okay. Our next question comes from Brad Reback with Stifel Nicolaus. Your line is now open.

Peter, historically the transactional aspect of MBD has followed the PC market roughly. Is there any reason to think that that’s not the case here for the final three quarters?

Yeah, in general there are two things that impact the transactional business at MBD, one is PC market and the other is product cycle. So one of the things we also see period right before a launch of a new product from a transactional side and businesses is a slowdown, and also it does track the PC market. So those are the two things to keep an eye on.

Alright. Our next question comes from Raimo Lenschow with Barclays. Your line is now open.

Historically when we had to launch a Windows product there was a big uptake especially on the consumer side. Now this time around it’s obviously different from the factors that are playing in and consumers need to get used to it. How do you think about the momentum we should see in terms of the first quarter or the second quarter etcetera? Thank you.

Well without giving specific [items] we are certainly very excited about the capabilities that come with Windows 8 and the excitement that comes from that, and we are excited to talk about that at the launch next week. I think I am encouraged by what we saw from the Windows 8 selling that we’ve seen so far the 40% growth over the comparable period last time. So we will just keep an eye on that and watch as we get further into the launch.

Alright our final question comes from Greg Moskowitz with Cowen. Your line is now open.

This is somewhat of a follow up t Raimo’s question. Over the past several months many of those reviewing Windows 8 for PCs while praising the significant innovation behind the OS have also continued to focus on the dual interfaces and the adjustment that users will have to make. Is that something that causes you concern just when it comes to initial adoption levels of Windows 8. Just wondering how you think about that?

Not a lot, I hear the feedback and as a user we sort of have gotten used to it very quickly. At Microsoft when we do an innovation historically across our products often times there is new things that comes and I understand initially people do look at those things. And what we see overtime is that those innovations have delivered way more value, way more productivity and way more better usability. And so I am very confidence that is even more true with the great technology and capabilities and experiences that we have at Windows 8.

And I think you have seen that the use of people who have used it over a longer period of time. And again for those who will be helpfully using it early. You will see that shopping your experience as well. Okay, so that’s going to wrap up the Q&A portion of today's earnings call. We look forward to seeing many of you at the numerous events and conferences in which we will be participating in this quarter. For those of you unable to attend and personally, these events will generally be webcast and you will be able to follow along at microsoft.com/investor. Please contact us if you need additional details. Thanks again for joining us today and have a great day.

And that does conclude today's conference. Thank you very much for your participation. You may disconnect at this time.