LAURA LEDERMAN: Good morning. For those of you that don’t know me, my name is Laura Lederman. I’m one of the technology analysts here at William Blair. And this morning it’s my distinct pleasure to have Doug Burgum, who is the Senior Vice President of the Business Solutions Division at Microsoft and it’s an area, I think, that’s going to be a high growth one for Microsoft. It’s basically the applications space, ERP, HR, CRM. Doug came from Great Plains where he had been CEO of the company and they also recently bought a company, Navision, out of Europe that added to the broad suite.

And without further ado I thought I’d hand it over to Doug and let him talk about his business, but real quickly the breakout session follows this presentation in boardroom number 3204. Thanks.

DOUG BURGUM: Thank you, Laura, and good morning, everyone. I would want to say welcome and thank you for making a choice this morning to come and learn more about the Microsoft Corporation. And as sort of a morning quiz, I’ve been off the circuit a while, but as CEO of Great Plains I had a chance to attend a lot of conferences. I was wondering, are there any people in the room that were Great Plains shareholders?

One brave soul, okay. A couple over here. Thank you. So thank you to the Great Plains shareholders and, of course, again thank you, I’m sure most of you are Microsoft shareholders and appreciate your time here this morning.

We’re going to quickly zip through some high level slides and then, as Laura said, we’ve got a breakout where we’ll try to leave a little time for questions here and then we can handle more of those in the breakout session.

Is everyone in this group familiar with this particular disclaimer, which I don’t think I need to read you, which I’m sure you’re familiar with. In spite of all the things we say here then I’ll engage you in 20 minutes of making forward-looking statements.

We’ve got four core things we want to talk about here today. We want to talk high level about Microsoft and I don’t want to call it the new Microsoft but there are some strong new mission and core tenets that are being rolled out this summer through a series of presentations by Steve Ballmer, his first just last week, which we’ll touch on. Well talk about the new Microsoft focus on seven key opportunities. We’ll spend a little bit talking about the segment, which myself and the team that I work with is responsible for, which is Microsoft Business Solutions, and well talk a little bit about the vision for that as we drive towards an interconnected community.

Microsoft, as you know, for the last 25 years has had a number of vision statements, talking about things like a computer in every home and on every desk, phrases like connected everywhere, any time, any place, but those were vision statements, not really clearly articulated missions.

And so through a lot of work across the senior executive team, led by Steve and Bill through the last year, there was a real focus of saying, look, as Microsoft enters its second 25 years we need to be real clear about what the mission is. And I think that this mission really reflects a lot of what Microsoft does, it reflects what a lot of the senior executives and the broad 50,000 team members across Microsoft want to do when they come to work every day, and that is enable people and businesses throughout the world to realize their full potential.

And while you may say, “Well, gee, how significant is this, Microsoft the technology company, Microsoft the product company,” I think this is very significant because I think this reflects a maturation of Microsoft as an organization, it reflects a focus that Microsoft is in a position of responsibility, it is in a position where Microsoft has an opportunity to really influence in a positive way the way business is conducted and the people that work in those businesses, their lives, and we have an opportunity to sort of improve the lives and business success of individuals through the great work that we do.

In addition to the mission, Microsoft has had a set of values, that the set of values has been sort of reworked and re-articulated in a very strong way and so that these values are not just sort of something that gets shuffled under the shelf. Actually, for the first time ever this values set is being driven through the performance management system across the whole company. So all 50,000 team members within Microsoft when they receive their reviews, their annual reviews, which affect compensation, bonus and stock option grants, have an opportunity to rate themselves and be rated by managers and peers around how well they’re focusing against these values.

And again I think that as you take a look at this, I mean, some of these are obviously sort of just core basic human principles that you would need to engage in a relationship with customers, partners, suppliers where you can build lasting relationships that have value for both sides, and I think that some of that sort of is very obvious. But in the world that we live in today with the kind of headlines that we have, the headlines we’ve had this week, I think a corporation that is taking time at the senior executive level, focusing on values, driving values down the organization, I think this is a big important step — for any organization it’s a big important step — for Microsoft.

Some of these things that Steve in particular, these are slides pulled right out of his presentation to what’s called the Partner Group, which is sort of the top 500 executives within Microsoft, which he delivered last week, is passionate about are certainly things like developing an organization where people are dedicated to making others better both inside the organization and outside which speaks to the focus on partnering.

I think that Microsoft has always been good at sort of the self-critical questioning aspect of it, but there is a new emphasis on the second part of that bullet point, the fifth one down that talks about personal excellence and self-improvement and sort of excellence in everything we do, and then, of course, obviously as shareholders there’s an expectation that you have against any organization that they’re going to be accountable for results but Microsoft wants to be accountable to its shareholders, its partners, to its customers, to the industry and I think again this focus on values is a big, strong, important step by Microsoft.

Along with those values there are six core tenets that Steve outlined in his e-mail to the entire corporation, and I’m going to spend a little bit on each one of those.

And the first one again has to do with customer trust. There are a number of initiatives under each one of these. These aren’t, again, just sort of superlatives that would be put up on a wall. There’s spending, there’s investment, there’s teams, there’s leaders that are responsible for each of these. And I think if you look at a couple of these, again the first and the third one in many ways go together, customer trust and innovative and responsible platform leadership.

But there has been an initiative, driven again by Craig Mundie, who’s one of the co-CTOs, and Bill Gates, around trustworthy computing. And of course in these days there certainly is, when you think about the hundreds of millions of individuals and companies who have placed their trust in Microsoft products to run their businesses, an enormous amount of responsibility that Microsoft has to have these solutions be secure, to have them work the way people want them to work, and for Microsoft to be responsive if there are any issues. Again, there are big initiatives going across all of these areas.

Broad customer connection is also another, I think, important point here because when you think about what’s really driven a lot of the market cap value over the last 20 years in our industry it’s been when trends have been really, really broad. The PC revolution was really a bottoms-up driver that drove that and a lot of the innovation. Of course there was a lot of valuation, ups and downs during the dot-com era, but there was a lot of innovation that was driven on a broad-base basis during the whole Internet era, and as we’re going to see another cycle in tech innovation and market cap creation in this decade it’s going to have to come from a very, very broad base situation, Microsoft is really committed to having technologies be low-cost, widely accessible and we really want to think about addressing millions of customers and segments of customers in a deep way where we can increase value for not only existing customers but for those many customers around the world who haven’t yet experienced the benefits of IT automation.

Enabling people to do new things. This relates in a number of different ways. There’s a recent article out, a cover story about the great work that Bill Gates is having an opportunity to do as Chief Software Architect. Part of that again is the word scenario: thinking not just about products, but how products are going to be used and the kinds of things that people want to do, and the kinds of things that people haven’t thought about doing yet and how can Microsoft’s substantial research dollars be applied in a way that allow people to do new things.

This also talks about Microsoft entering new categories like business applications as it did with the acquisition of Great Plains or the acquisition of Navision.

And then again in terms of a global inclusive approach, of course you know that Microsoft is extremely diversified across global markets as well with technology markets and Microsoft is driving very hard to make sure that the diversity associated with a global approach is represented across our systems, across our management, across our thinking and across our product development.

And lastly, of course, again as part of those values there’s a big focus on excellence in everything we do in terms of product quality, customer service, in terms of even our thinking that we’re doing every day.

I won’t spend much time here. This is almost a year old piece of data, which I’m sure you’re all familiar with, but there may be a question that some might have later on, which is where is the revenue for the Business Solutions Group included in this and it is included in the desktop applications. A year ago that only represented a few months of Great Plains revenue but going forward that’s the group that will be reported in, and as I said, a strong diversity across geographies.

And again also I think the other piece is again, because the focus of the group, the Business Solutions Group that I’m having an opportunity to lead, our focus is on small and medium. Microsoft does have a very strong multi-billion dollar small and medium business, which is largely centered around products like Office and operating systems and we have an opportunity to work with that existing base of Microsoft customers in a way to add more value to their lives.

Seven key opportunities that Microsoft is focusing on: Again, as you hear more from Microsoft and hear more top-down direction from Steve and Bill and others as they talk, this is a framework that Microsoft is going to be using going forward. This is a result of several years of strategic work in terms of narrowing in and sort of saying, “Hey, what does Microsoft really want to be when it grows up?”

And I think what’s represented in this slide also represents sort of the essential nature of the strategy, because while Microsoft is moving towards businesses that have leadership, that have clear accountability around that business area, as you see the leaders that are here, at the center of all that is the Microsoft platform, and again this responsible and innovative platform leadership and the research associated into that platform does tie all these seven businesses together and allows Microsoft to gain some synergies. Microsoft is not going down a path of having sort of independent, separate PNL standalone businesses, sort of like a conglomerate: Microsoft is run in a way where there is going to again be increasing accountability for these businesses and clear leadership and decision-making that Steve and Bill are driving down to the seven leaders, as they have been tasked with making sure that there’s a sharing that’s going on around the platform that allows all of us to work better together is the phrase that we’re using.

And so again some of these folks you probably know: Jim Allchin, been at Microsoft since 1990. He’s the top — some of you remember him from the 1980s as one of the leaders who helped drive the success of Banyan and has driven all of the Windows work.

Jeff Raikes, coming around clockwise, Group Vice President in charge of the i-worker business, which includes all the Office business. Jeff has been at Microsoft for over 20 years and one of the key senior leaders in the company.

And then as we go around David Cole with MSN, Robbie Bach with home and entertainment, Pieter Knook with the mobility, Paul Flessner with servers and tools and myself with Business Solutions sort of round it out, but again you’ve got a group of executives here that again represent many, many years, I think David, Robbie and Pieter all probably with 15 plus years or more of experience. Robbie and Pieter both have got substantial experience working outside the U.S. and Paul Flessner, of course, is the exec who’s responsible for driving the great success around SQL Server and the database business. And then the new kid on the block.

When we think about Business Solutions we have a strong vision for what we want to have within the piece that we’re going to drive, the business applications piece, and that is we want to be the leader in providing high value, interconnected business solutions to small and mid-market businesses through a global network of partners dedicated to lasting customer relationships.

Now, there’s a big mouthful there but there’s meaning in all of that. We do have the clear focus on small and mid market. We’re not about selling into the enterprise, have no intention of going to the enterprise, do not want to have a direct sales force that sells up in the enterprise. We believe that the small and mid markets are vastly underserved, they’re high fragmented and there’s a great opportunity for us to pursue success and partnerships there.

And when we’re successful in selling business solutions we do drive server business into small and medium, we drive platform business, we drive Office business in there, and of course all of those will work better together under the platform leadership or the .NET connections that we can drive across that.

So again part of the strategy of Microsoft isn’t just the business applications but it’s the pull through of its other platform and sever and tools and desktop apps that really make this a smart strategy from Microsoft.

When we think about sort of what is Business Solutions there are three major components that sort of drive this. And if you want to think about Microsoft not being in the business applications business 15 months ago and today Microsoft has an organization in business applications with over 3,500 team members, over 4,000 partners. We’ve got a substantial global customer base today and we do have it with Navision, a combination of Great Plains plus Navision plus bCentral. We do have existing customers today in more than 132 companies.

So again this may come as a bit of a surprise to some people because it’s very quickly that Microsoft — I mean, if you can’t see the large company as being agile, Microsoft has been very agile in terms of its entry into this market.

Now, the Navision acquisition, which we announced earlier this spring, will close this summer. bCentral was a substantial investment that Microsoft had made during the sort of late ’90s, early 2000 in terms of driving an online portal for small business and all of that has come together as one single organization inside Microsoft called Business Solutions.

Again, when we think about the market, very quickly, on the far left hand side, again emphasizing the Business Solutions reach, which is that we reach from small business up through the upper mid market, just sort of touching the bottom end of what in the Microsoft taxonomy is called corporate, but keeping a clear distance away from the enterprise. And again if you’re familiar with the Microsoft taxonomy of global major strategic accounts we’re not working or selling into those.

In terms of a sales force the Business Solutions organization does sell through its own channel partner organizations so these products are not sold through the Microsoft direct sales force.

In terms of the market structures you can see there’s obviously a big opportunity in enterprise and a lot of key players and a number of those key players are strong partners of Microsoft, companies like Siebel and SAP and PeopleSoft and others where there’s still lots of partnering opportunities for Microsoft to do on the platform and database side.

When we get into the mid market there has been a lot of talk about the enterprise players moving down into that market so there is a level of competition. We partner with them at the enterprise. We compete with them in the mid-market space, but that is again highly fragmented.

Depending on which surveys and which studies you look at, you can come up close to a thousand different substantial companies that are trying to provide services into the mid market. Another survey said that there were 285 very significant software companies trying to serve that market. And then if you take the thousands of little ISVs and verticals and niche players you just have a very, very fragmented situation; no one, including ourselves, with a very high market share. Even Microsoft Business Solutions, while Great Plains may have been viewed as a leader I the U.S. and Navision in Europe, you take our combined market share, the market share is very low in that market because the market is large and fragmented.

In terms of small business, again there is some consolidation around existing business here with some people like Intuit in the U.S. or Sage, who’s done close to 20 acquisitions across the U.S. and Europe. There is some consolidation there but our view is this market is really underserved insomuch that small business even on a PC basis, per PC or on a per person basis that the IT spending by small companies is very low compared to large companies and in many cases those small organizations can get great benefit from that IT spending but obviously as an industry we haven’t served them well in terms of demonstrating the value to them in a way that they would want to make those investments. So we think that we can transform that market and increase the spending by companies if we can demonstrate value going forward.

In terms of the reach that we’re going to be delivering across Microsoft Business Solutions, again the broad categories, we are going to have a broad footprint and we do have these solutions today across ERP and the supply chain and Customer Relations Management. I won’t go through the additional solution categories. Laura mentioned some of those. But again today we do have solutions that serve all of this with the idea again that we have an opportunity to help going forward empower employees, connect customers and integrate trading partners.

And again between Navision and Great Plains on these solutions we’ve got over several hundred thousand customers that are implementing these solutions today.

We do sell through a global network of partners. It’s not an eye test; you’re not meant to be able to read each of these companies. But suffice it to say that part of the demonstration is that you won’t know these names but there is a broad base of VAR partners. This is not the Big Five. This is small organizations anywhere from maybe 10 to 100 team members that they actually act in many cases as the IT department for small and mid-sized businesses. And in small and mid-size you guys hear about the trend of outsourcing as being a big trend. Well, small and mid-size companies have been doing that for decades and they’ve been essentially outsourcing their work to Value Added Resellers often in their local communities and again we think this is the most effective and economical way to reach and serve and support the hundreds of thousands or millions of customers in this segment.

Just to help people get a sense of what are the kinds of customers that we would have within Microsoft Business Solutions, we’ve picked a few from the Chicago area that are very fun. I’m not sure people get excited about chocolate at breakfast, but Boomer Chocolate is a worldwide supplier of quality chocolates. They’re based here in Chicago with 300 employees. They’ve been a longtime and very satisfied customer using a broad suite of our applications.

AmeriKing, which manages 361 Burger King restaurants, they’ve got over 13,000 crew members. They’re using our HR and payroll type products, but again with the turnover you see at the front lines in fast food restaurants I think in some years that they’ve printed out over 30,000 W2s. And so again we do have a lot of scalability with our products, because they’re running on these strong Microsoft platforms, but again we’re still focusing on these small and mid-size customers.

The Shedd Aquarium, which maybe some of you have had a chance to visit here or with your kids down here in Chicago, a great facility is using our stuff on their purchasing side.

And, of course, the American Red Cross here in Chicago also has been a longtime, happy, satisfied customer.

But these are just a few samples of the hundreds of thousands of mid-market type customers that we have.

In terms of things that we see in terms of vision going forward, some of you have probably seen the Microsoft advertising around one degree of separation, and I want to spend a second describing that. The pictures on the bottom are supposed to be two shots represented from one of the television ads. The one on the left there, if you can’t tell, that’s a wine rack that’s been knocked over by a forklift I guess and is crashing all of the vintner’s good inventory, and then the wine there says there’s one degree separation with what moves these and moves them, which is the implication here that you had an accident sort of at the warehouse and it drives up prices and that they’re quickly able to update the price of your inventory based on this dramatic change of supply is sort of the little twist of that.

While that may seem somewhat futuristic, I mean today Microsoft Business Solutions, we have about 40 wineries already that are already using our stuff. Do they have this kind of real time capability to update inventory? Today, no they wouldn’t. So this is again sort of a picture that would say here’s the kind of future that we would see for customers.

But we’re not that far away. This is not some sort of Jetsons type world, because with the core capability that we have through the solutions that we have, for example, in those existing customers with the technology that comes with .NET, with the new solutions we’re going to deliver, we are going to help deliver on what I call some of the dot-com promises, because as we all got excited both as people in the technology business, as vendors and as investors part of the excitement and part of what drove the valuations during the dot-com era was that those promises up there were real. I mean, there was real excitement around enhancing customer service or being able to deliver stuff on 7 by 24, getting real time information to people that didn’t have it, lowering transaction costs and taking friction out of the economy and having small businesses have a global reach.

Those were big ideas that deserved attention that did drive values but when the values crashed I think that some people sort of said, “Well, gee, all those ideas are out the door too,” but the reality is that those ideas are still valid, there still will be huge economic value creation around that; it’s just going to take a long time. It could take us a decade to fully realize that and it’s also going to take a lot of R & D dollars. And so that’s why I say Microsoft is in a unique position because Microsoft still believes in these big ideas, Microsoft does have the R & D dollars to drive it and so we’re in a position to sort of go out and try to deliver on these dot-com promises but perhaps just in a different timeframe than was set around the turn of the century there.

So in this interconnected world when we think about sort of inside the box where you’ve got employees within an organization that was the target of who do we want to automate. And this is sort of meant to represent a medium sized business that any business has got it’s own community. They have small businesses that may be smaller than them that act as suppliers. They have large businesses that they’d like to sell to. They’ve got mobile employees today that have got all variety of different devices. They’ve got again their own customers. And to the degree that everybody can be connected and the information can all come together in a way, this drives enormous value.

And just go visit a small business today and they might have a separate database for where they track potential perspective customers, it may or may not be a CRM system, they may have a separate inventory system, they may have a separate financial system and they may have a separate reporting system, and if you go into them and say, “Gee, I’m here from Microsoft; how can I help you,” I mean the first thing they’re going to say is, “Make it all work together. I’m spending way too much money on all these different things. Can’t it all be connected? I bought a bunch of laptops and my people in the field aren’t connected back to information back here.” Even very small companies desire to have it all work together and have their information where they want it, when they want it, on the devices they want it.

And so this isn’t some theoretical thing: There’s not just demand; there’s like almost an insistence by customers of why doesnt it work this way today. So we’re not chasing some theoretical demand theory. This is customer pain that needs to be solved and when we solve it there will be purchases.

In terms of how we want to drive that, we know we can’t do it all ourselves. We know we can’t deliver all the functionality around all the different verticals. And so in addition to the Microsoft .NET R & D, in the yellow components there is part of what we’re delivering from our Business Solutions division, which is the business framework, which provides additional components and logic on top of the Microsoft .NET, which allows ISVs to build systems faster, business components, think about those as some of the core functionality that you might have in a general ledger or an accounts receivable package.

We’re not just developing that for ourselves; we’re also going to make those available to other ISVs. So whatever we’re using to build applications solutions will be available to anybody — competitors, whoever wants it, you go have it.

And then as you see in the green there, the green represents sort of what is the available development capacity among tens of thousands of small ISVs. We were an ISV partner of Microsoft for years and years and years. We wasted a lot of our own best talent working on the stuff that was close to the platform. If you go all the way over to the left there was sort of the Windows DNA strategy. We had to develop our own proprietary platform on top of that before we could write the domain logic, which is sort of the specific business logic, before we could get to the verticals, and then customers could never figure out well why isn’t this feature in your software. Well, it’s because we were spending all of our energy on the stuff that was too close to the platform.

And to the degree that we can raise the level of commonality, then you can take that fixed amount of ISV development capacity and push it up the scale towards the customer edge of the problem, and in that sense if we can raise the platform everyone who has this idea that if Microsoft adds stuff to platforms that somehow it takes away opportunity; in my view as an ISV, and Im not talking as someone who’s part of Microsoft — I’ve been there 15 months — but as an ISV I loved it when Microsoft added stuff to the platform because that allowed us to take our scarce resources and solve more customer problems.

And so the key here is that as we drive this up as a business group, Microsoft Business Solutions, make it available to thousands of ISVs we can increase the total value to customers and that’s great for the whole industry.

So we have a strong product pipeline coming, which I won’t drive through here. I will just pull out a couple of things, which is again Microsoft Customer Relationship Management Manager, which again is targeted at small and medium organizations. It’s going to be shipping before the end of this calendar year. We’re excited about that release, as well as a number of the other releases we have, major enhancements to our existing stuff, but as a division we do have a strong product cycle ahead of us.

And again, wrapping up here, in terms of Business Solutions this is a core business for Microsoft and success in this business will drive strong growth across the servers, the tools and the platform business. Interconnection is the key. .NET is strategic to the delivery of that and the R & D that Microsoft is spending on it. The year ahead, the next year we’re going to focus on growth, solution expansion and synergies with Navision as we bring them into the fold.

And in the last slide here, concluding is that Microsoft itself, in addition to helping people and businesses around the world realize their potential, I think is going through a strong, powerful introspective period where from the very senior leadership right down to the front line is getting focused around a strong mission, around great people with great values. We do have a compelling platform that gets even stronger in the years ahead.

I think that with Steve driving management teams and systems and Bill focusing on the architecture side is that the management, which has always been strong, is getting even more crisp and more agile in terms of making fast decisions.

There is an increasingly clear focus on the importance of serving customers. And certainly what I’ve seen in the 15 months that I’ve been there is Microsoft really stepping up to the plate in recognizing its responsibility as an industry leader.

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