Microsoft and LinkedIn Conference Call: Chris Suh, Satya Nadella, Jeff Weiner, Amy Hood, Brad Smith

(Operator Direction.)

CHRIS SUH:  Great.  Good morning and thank you for joining us today.

On the call with me today are Satya Nadella, Chief Executive Officer; Jeff Weiner, Chief Executive Officer of LinkedIn; Amy Hood, Chief Financial Officer; and Brad Smith, President and Chief Legal Officer.

On our website,, is a slide deck which follows today’s presentation.  As a reminder, 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 in any future use of the recording.  You can replay the call and view the transcript on the Microsoft Investor Relations website until June 13, 2017.

During this call, we will be making forward-looking statements which 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 press release, in the comments made during this conference call, and in the risk factor section of today’s presentation slides, 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 statements.

And with that I’ll turn the call over to Satya.

SATYA NADELLA:  Thank you, Chris.

Thank you for joining us.  Before turning to the news about this deal, Jeff and I wanted to take a moment to express our condolences and sympathies for the victims and people of Orlando.  There should be no place in the world for violence and hatred exhibited this weekend.

Let me turn to the information we wanted to share with you this morning.  This deal brings together the world’s leading professional cloud and the world’s leading professional network.  Let’s start by going through some of the deal specifics.  Microsoft will acquire LinkedIn for $196 per share in an all-cash transaction valued at approximately $26.2 billion inclusive of LinkedIn’s net cash.  LinkedIn will retain its distinct brand, culture and independence.  Jeff Weiner will remain CEO, report to me and join the Microsoft Senior Leadership Team.  Reid Hoffman has stated his full support for the transaction, which the LinkedIn board recommended unanimously and his intention to vote all his shares in accordance with the board’s recommendation.  And we expect this transaction to close by this calendar year.

As I think about acquisitions, it’s important to call out how I think about them in terms of the dimensions that we evaluate.  First, is this an asset that will expand our opportunity, specifically does it expand our total addressable market?  Is this an asset that’s riding the secular technology trends?  And is this core to who we are and our core mission as well as sense of purpose and structural position?  And when I look at those three dimensions, LinkedIn really checks all the boxes.

It starts with the mission.  LinkedIn and Microsoft share a mission.  When we talk about Microsoft’s mission, we talk about empowering every person and every organization on the planet to achieve more.  There is no better way to really realize that mission than to connect the world’s professionals to make them more productive and successful.  That’s really what this merger and this acquisition is about.

So let me, with that, turn it over to Jeff to talk a little bit about the vibrancy of the LinkedIn asset as we see it today.

JEFF WEINER:  Yeah.  Thanks, Satya.

So on the next slide we’ve captured a bit of the highlights in terms of our ongoing progress and momentum.  With regard to the membership, now up to north of 433 million, worth calling out there, China remains our fastest growing and not surprising given the size of the addressable opportunity there.  One in five of the world’s knowledge workers and students, pre-professionals, if you will, reside within China.  So that continues to be a focus area for us.  105 million monthly actives, and that year-over-year growth rate reflects an acceleration not only in mobile but desktop as well, a byproduct of the recent investment we made in a reimagination of our mobile application.

You can see the carryover effect in terms of the growing engagement in the section below that.  Mobile now accounts for about 60 percent of our traffic, and we continue to expect that to grow.  And then, lastly, with regard to our revenue and results, talent solutions comprises roughly two-thirds of our overall business.  You can see in 2015 was up 41 percent year over year, and sponsored content within our marketing solutions line continues to be the fastest growing business at scale.

SATYA NADELLA:  Great.  Thank you, Jeff.

The opportunity ahead for us is to realize this mission that both Jeff and I referenced, and that’s the most exciting part.  And the way we do that is by driving the product usage and engagement across LinkedIn, Office 365 and Dynamics.  That really truly becomes the core of what Microsoft does.  And we’ll accelerate that engagement and usage through a variety of different business models, subscriptions for individuals, subscriptions for organizations as well as advertising.  So that’s really the opportunity ahead.

When you think about the total addressable market, it goes up by 58 percent.  But to give you a bit of a feel for it, you should think about how Dynamics, for example, gets enhanced with LinkedIn Recruiter, how Dynamics gets enhanced with Sales Navigator and social selling.  How you can take some of the learning solutions of LinkedIn and then build out the full learning management solutions.  The marketing solutions that LinkedIn has and our distribution.  And then, of course, not to forget, Office 365 usage, which is at the core of Microsoft, and the LinkedIn usage.  So this is how we realize that total addressable market.  And our share of this total addressable market is just 9 percent, so we see plenty of opportunity going forward.

Now we already have a great position here.  Some of the numbers in this slide, I think, are well known to you.  We have over 1.2 billion users of Office, now over 300 million active devices running Windows 10, 70 million MAU or monthly active users of Office 365, Dynamics is 8 million paid seats.  And now you take all of that and look at LinkedIn, 433 million members, 105 million monthly active users, and all of the other data you see on the slide.

Now besides the numbers, though, what’s underneath that is this rich information graph.  What we have at Microsoft today is what we refer to as the Microsoft Graph, where people and their relationships, their calendars, their work artifacts, their projects, as well as what’s inside of business systems, whether it be leads and prospectives, all of that is connected as one information graph.  And, of course, LinkedIn has a similar graph.  It is about the professional network.  It’s about you, your job history, your skills, the people you know in your profession.  And if you connect these two graphs, that’s when the magic starts to happen in terms of how digital work gets completed.  We really can transform the life of professionals in terms of completing it.

And let me just turn it over to Jeff to talk a little bit about some of the vision he has shared here.

JEFF WEINER:  Yeah, so one of the things both Satya and I are most excited about is when you combine Microsoft’s corporate graph with LinkedIn’s professional graph.   We think we’re going to be able to take a very substantial leap forward, in terms of the realization of our vision, which is creating economic opportunity for every member of the global workforce.  And we’re going to do that through the development of the world’s first economic graph.  That’s a digital mapping of the global economy.  And for those of you a little less familiar with this, it’s something at LinkedIn we’ve been talking about for several years now.

The economic graph envisions a profile on LinkedIn for every one of the 3 billion members of the global workforce, a digital representation for every company in the world, somewhere on the order of between 60 and 70 million companies, when you include small and medium sized businesses.  A digital representation for every one of the job availabilities made possible by those companies, on the order of 20 million-plus.  Digital reflection representation of every skill required to obtain those jobs, and through our Lynda acquisition the coursework to make that possible, a digital profile for every university or higher-education organization, vocational training facility that enables people to acquire the skills they need to get the jobs offered by those companies.  And then lastly, a publishing platform that facilitates the sharing of professionally relevant knowledge between individuals, companies and universities to the extent they’re interested in doing so.

And the goal is then to take a step back and to allow capital, all forms of capital, intellectual capital, working capital and human capital to flow to where it can best be leveraged and in so doing help transform and lift the global economy.  And we now believe through this combination we’re going to be better positioned to make that possible.

SATYA NADELLA:  Great, and so let me now sort of take you through a couple of illustrations to bring this home.  I want to start, in fact, with talking about more of the usage of Office 365 and LinkedIn and how that will get lit up and really help drive engagement on both sides.  Take the most obvious one, which is the profile.  LinkedIn essentially becomes the social fabric across all of Microsoft, whether it’s in Outlook, in Excel, or Skype, or PowerPoint, or Word, or SharePoint.  Now you have the ability whenever you’re looking up a contact not only to see that contact with the information that’s contained in Active Directory, but you can get at the full richness of their information in the professional network.  And who are all the others in their professional network.  So that’s sort of what we mean by the social fabric of your digital work and Office 365.

Another scenario is something that I’m very, very excited about is the newsfeed.  It’s the fastest growing engagement part of LinkedIn.  This is where there is fantastic traction on the mobile usage, with the new flagship app.  And it’s already a very relevant feed, based on what the LinkedIn profile contains, which is you, your skills, your profession, your company and your industry.  But just imagine now that feed being informed even by the projects you’re currently working on, the calendar information, essentially all the meetings into the next month that you have.  The relevance of that feed, bringing some of the AI and machine learning technology from Microsoft to improve that on a continuous basis and drive engagement and then, of course, the ad monetization that goes with it, which is one of the fastest growing businesses in LinkedIn.  So we are very, very excited about the newsfeed and what it can do.

Of course, the next one is Cortana.  Just imagine you’re walking into a meeting and Cortana now wakes up and tells you about the people you’re meeting for the first time, but tells you all the things that you want to know before walking in and meeting someone, because it has access to the professional network.  Cortana is about knowing everything about you, your organization, the world and now the professional network.  So really being able to reason about all of that and be your personal digital assistant that’s truly the best professional digital assistant is a fantastic opportunity.

So those are some of the end user benefits that drive intensity of usage across Office 365, in particular, and inside of LinkedIn itself.  But it’s not just about that, because it’s also about business process usage, whether it be CRM, whether it be HR, whether it be talent management and learning.  So I wanted you to get a bit of a feel for that, because I want Jeff to go over some of these business process things that we can do with LinkedIn and Dynamics and other products.

JEFF WEINER:  Yeah, thanks, Satya.

So historically at LinkedIn for us our overarching value proposition is connecting to opportunity, that holds for both members and customers.  And Satya just touched on a few of the examples of how we’ll be able to create additional value for members.  I’m going to turn now towards customers.  And historically it’s been about several different areas of focus, hire, market, sell and learn.  And we think this combination has the opportunity to tap new addressable markets, as Satya mentioned earlier, and create true differentiation in the marketplace.

Let’s start with social selling, it’s something we’ve been focused on now for a couple of years through our sales navigator tool, which provides business intelligence to sales people and enables them to take selling to social selling.  What does that mean specifically?  It means being able to identify exactly the right prospect by virtue of leveraging data flowing through LinkedIn on a proprietary basis.

It’s connecting with that prospect, turning cold calls into warm prospects by virtue of leveraging your network to get the introduction, which can make all the difference in the world.  It’s tapping an understanding of who that prospect is to best engage with them and reach out to them.  And all of this is done in service of greater sales efficacy and closing the deal.  And now we’ll be able to take that business intelligence tool, sales navigator, deeply integrate that into Dynamics and CRM and we believe we can change the game that way.  So that would be one example.

Turning now to organizational insights and transformation, and this is going to be a fun one for us.  You know, we have arguably the most unique and proprietary set of insights in the world of recruiting.  And as a result of that we’ve been able to transform and disrupt the way recruiting works, specifically able to scale what we call passive candidate recruiting, which has disrupted the industry in a significant way.

We are also able to provide insights to customers and a show stopper historically has been what we call talent inflow and outflow.  So you’ll sit down with a company and their executive team, the CEO, at an executive briefing and we’ll show them where their talent is going to, in terms of the competition, where the talent is coming from.  And I just briefly and anecdotally, it’s always fun to see the response, because when it’s green and there’s a lot of talent coming in from the competition, the CEO says this is the greatest thing I’ve ever seen, I love this.  And when it’s red they’re like this can’t be right, I’m not losing talent to the competition.  And it just speaks to the importance of that kind of proprietary insight.

And when you take Microsoft’s assets, specifically in this case volumetrics, and this acquisition that enables you to understand all kinds of business intelligence within an organization that speaks to productivity, whether it’s sales productivity, organizational effectiveness throughout the organization, you can start to paint a picture of how we can create a platform here, how we can create a stack here.  And by virtue of Microsoft’s deep relationships and workflow throughout the world, in terms of their enterprise customers, we can change the game in that regard.

And then lastly, this is one that I think Satya and I would rate pretty highly on the excitement scale.  And we’re both very passionate about learning and I think share a clear conviction and vision in terms of the fact that the days in which a professional or any member of the global workforce, for that matter, could acquire a skill or certification, have a job for the rest of their lives, that’s over if not coming to an end.  People are going to need–and that’s by virtue of the pace and acceleration of innovation–people need access to always-on learning and continuous education so they can be trained for the jobs that are and will be and not just the jobs that once were.

So how can we expand the LinkedIn footprint here?  Through our acquisition of Lynda we picked up a world-class entity in the creation of coursework that we believe could transform learning and development.  Now imagine that coursework deeply integrated throughout Microsoft’s ecosystem.  And one example specifically we’re excited about is integrating learning alongside some of the most popular productivity apps anywhere in the world: Excel, PowerPoint, and Word.  Now visualize a new tab added to Office called Learning.  And you’ll start to get a sense of the power of this.

The image that you’re seeing there is something we’re really excited about.  It’s actually a new proprietary technology that is a contextual overlay so that when you are in these Microsoft products you’re going to be able to see who you can tap within your network, within the entire broader ecosystem, freelancers, and the actual coursework itself.  And I’ll leave you with this, six of the top 25 courses on Lynda are related to Microsoft products, so excited about this opportunity.

SATYA NADELLA:  That’s great, Jeff.  Thank you.

Hopefully that gives you a real feel for how between LinkedIn, Office 365 and Dynamics we can create a tremendous amount of value for the customers of each of these products by doing these tasteful integrations that bring together business process, productivity, collaboration and the professional network, and transform or reinvent productivity and business process.

But the value goes beyond that.  We are, of course, going to use the Microsoft field and distribution channel to scale the LinkedIn business, reach more audiences and customers.  We have a scaled cloud infrastructure; we fully expect LinkedIn to be able to use that stack.  Bing will have the best people search and professional search capabilities.  The LinkedIn feed insight of Windows done tastefully will also improve engagement.  And then also for developers there is a set of APIs out of LinkedIn that we will expose through Azure and our tools to drive even developer engagement, so plenty of other opportunities, as well.

So with that what I want to do is I want to really transition now to Brad to talk about the regulatory approach, as well as then later Amy to talk about the transaction overview.

So, Brad, over to you.

BRAD SMITH:  Thank you, Satya.

A few words on the regulatory situation.  First, as we noted in the slide, we plan to obtain regulatory approval in the United States, the European Union and Canada before we close the transaction.  There will be a small number of additional countries where we’ll need to obtain regulatory approval before implementing the transaction in those particular countries.  I did want to note that we’ve concluded that regulatory approval is not going to be required in Japan, South Korea or China.

And then second, as we noted in the slides, we’re confident about our prospects for obtaining regulatory approval by the end of this calendar year.  We’re really confident for three reasons.  No. 1, this merger is what antitrust lawyers would term highly complementary.  There’s not any significant overlap between the product and services of the two companies.  Indeed, LinkedIn’s strength, as you’ve heard, is in its professional network and related talent and marketing solutions.  Microsoft’s is in our productivity software, cloud platform and the like.  Second, it’s clear we have an opportunity at Microsoft to use our complementary assets to expand LinkedIn’s business.

And, third, there’s a real opportunity as you’ve heard to deliver strong benefits to consumers, really benefits through innovation and these new scenarios to the many hundreds of millions of people around the world who can get more in their lives out of this work together.

So that’s how we see that.  And let me pass this to Amy.

AMY HOOD:  Thanks, Brad.

As you’ve heard from Satya and Jeff, we’re excited about the new scenarios that are only possible as we connect the professional world.  And we’re confident that our joint product and go-to-market opportunities accelerate long-term growth and new complementary addressable markets.

Let me first speak to a few details of the transaction.  Under the terms of the definitive agreement, we’ve agreed to acquire LinkedIn for $196 per share in an all-cash transaction that is approximately $26 billion inclusive of LinkedIn’s net cash.

The transaction has been unanimously approved by the boards of directors of both Microsoft and LinkedIn.  And Reid Hoffman, the chairman, co-founder, and controlling shareholder of LinkedIn, has stated he will vote all his shares in accordance with their board’s recommendation.

We expect the transaction to close by the end of the calendar year during the second quarter of our Fiscal ’17 subject to approval by LinkedIn shareholders, and the satisfaction of certain regulatory approvals and other customary closing conditions.  We will finance this transaction primarily through new debt issued prior to close, which we intend to raise opportunistically during favorable market windows.

Our primary objective with the combination is to accelerate our top line growth across LinkedIn’s core business as well as Office 365 and Dynamics.  Additionally, we expect at least $150 million annually in cost synergies as we naturally combine two public company entities.

Near-term in Microsoft’s Fiscal ’17 and ’18, we anticipate this transaction will be slightly dilutive, about 1 percent, to non-GAAP EPS based on the expected close date.  By FY ’19, and less than two years after close, we expect the transaction to be accretive to non-GAAP EPS.  In this context, non-GAAP does include stock-based compensation expense consistent with Microsoft’s reporting treatment, but excludes the anticipated impact of purchase accounting adjustments, as well as integration- and transaction-related expenses.  We’ll provide an update on the EPS impact after the transaction closes.

Now let me turn to the topic of capital allocation.  We will continue with our approach, which is to balance our high-priority investments to drive our long-term growth and to meet our commitment to return cash to our shareholders.  We will continue our share repurchase plan, and today reiterate our intention to complete the current $40 billion authorization by the end of the calendar year on the same time frame as previously committed.

We currently plan our reporting results for LinkedIn post acquisition in our Productivity and Business Processes segment.  Additionally, we will introduce relevant key performance indicators nearer to the close consistent with our treatment of other businesses.

As both Satya and I have said consistently, we evaluate new markets and opportunities through three lenses.  First, we ask ourselves whether an opportunity will expand our addressable market, and does that TAM have structural tailwind?  Second, does this then align with our core business and overall sense of purpose where we can take a leadership role?  And, finally, with our ownership, can we generate meaningful revenue and profit growth?  The addition of LinkedIn to Microsoft meets this high bar.

With that, let me turn it back to Satya.

SATYA NADELLA:  Thank you, Amy.

Today is an exciting day.  It’s the bringing together of the world’s professional cloud and the world’s professional network.  Jeff and I are looking forward to what we can do together to make a bigger difference in the world together for our customers.