Good afternoon and welcome to the Microsoft 2006 fiscal-year fourth-quarter earnings conference call. Your lines have been placed on listen-only until the question-and-answer session of today's conference. Please be advised this call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Colleen Healy, General Manager, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today. This afternoon, I am joined by Chris Liddell, Senior Vice President and Chief Financial Officer; Frank Brod, Corporate Vice President of Finance and Administration, and Chief Accounting Officer; and John Seethoff, Deputy General Counsel. Today's call will start with Chris providing some key takeaways for the fourth quarter of fiscal year 2006 and an overview of expectations for fiscal year 2007. I will then provide details around our fourth quarter results and then turn it back to Chris for a more detailed discussion of our guidance for the full year and first quarter of fiscal 2007. After that, we will take your questions. Our earnings release includes an addendum of financial highlights, which contains more detailed information about revenue, operating expenses and other items. We have also posted our quarterly financial summary slide deck, which is intended to follow the flow of our remarks today in order to assist you. The slide deck offers highlights from the quarter, outlines our guidance, and provides reconciliations of differences between GAAP and non-GAAP financial measures that we will talk about today. You can find the earnings release, the financial highlights and the quarterly financial summary slide deck on the investor relations website at www.microsoft.com/msft. Today's call will be recorded. Please be aware that if you decide to ask a question, it will be included in both our live transmission, as well as any future use of the recording. As always, shareholders and analysts can listen to a live webcast of today's call at the Microsoft investor relations website. A replay of the call will be available at this same site through the close of business on July 20, 2007. This conference call report is protected by copyright law and international treaties. Unauthorized reproduction or distribution of this report, or any portion of it, may result in civil and criminal penalties. Any recording or other use or transmission of the text or audio of today's call is not allowed without the express permission of Microsoft. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in today's earnings press release and the comments made during this conference call, and our 2005 Form 10-K, subsequent quarterly reports on 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. With that, let me now turn it over to Chris.

Thanks, Colleen, and good afternoon, everyone. We are pleased to be with you today to share our results and talk with you about how we see fiscal 2007 shaping up. I will start today’s call with highlights from last year’s performance and then give you an overview of our expectations for next year. Let me remind you that we will discuss quarter 4 and fiscal year ’06 results on the reporting structure of seven operating segments, and we will provide fiscal year 2007 guidance under the new reporting structure of five segments. You heard directly from Frank Brod on Monday of this week, when we provided you with a preview of our new reporting structure. I would like to say that I am delighted that Frank has joined our team during the quarter as Chief Accounting Officer. He brings a wealth of knowledge to the team with his prior work experience, plus his participation in the standard-setting process at the FASB. Looking at results, fiscal year 2006 marked our return to double-digit revenue growth, with top-line growth coming within our guidance provided at our last financial analyst meeting. Revenue growth accelerated throughout the year, resulting in 11% growth over fiscal year 2005. Not only did we benefit from better-than-expected PC demand and an overall healthy tech economy, we also enjoyed strong customer acceptance of our newly launched products. Our Home and Entertainment, Server and Tools and Business Solutions groups, which all had launches during the year, turned in a combined 20% plus year-over-year revenue growth. The Home and Entertainment division made significant progress, and sold 5 million Xbox 360 consoles for the year. Second, our core businesses turned in an excellent performance with double-digit bookings growth in both the quarter and full year. Unearned revenue finished the year growing 19%, which is a tremendous performance. We saw broad-based strength from business customers for not only our core Windows, Office and server products, but also increased demand for communications products and services. Third, you will see the both Business Solutions and Mobile Embedded Devices exceeded our original revenue guidance for the year, and achieved operating profitability, which we forecast to be sustainable going forward. We are particularly pleased about hitting this missed milestone, given the change in our reporting structure, and I want to give credit in particular to the teams working on those businesses. Finally, we made substantial progress on our strategy of returning cash to shareholders during fiscal year 2006. We have purchased over $6 billion of shares since I last talked with you, and we closed the year returning over $23 billion of cash to shareholders through dividend and stock repurchases. I am very pleased to announce on the second anniversary of our $30 billion stock buyback plan that we have completed that program in half the time originally authorized. With that program now completed, our Board of Directors has authorized a $20 billion tender offer to be completed over 20 business days, starting tomorrow. They have also given authorization to repurchase up to an additional $20 billion of company stock at management's discretion. This latter authorization expires in June, 2011. Moving to fiscal 2007 guidance, the coming year brings the second major installment on our multi-year product cycles and a period of improving revenue growth for the company. Let me make a couple of key points about the year. First, we are expecting continued double-digit revenue growth. The launches of Windows Vista and Office 2007 will drive significant revenue growth in the second half of the year. Combine that with the seasonally strong entertainment and devices revenue around the holiday, and you will see a very strong revenue growth in Q2 and beyond. Second, growth in operating income in the first half of the year will lag revenue growth due to increasing mix of Xbox 360 console revenue and related costs, coupled with significant investments and preparations for the launches of our flagship products. This trend should reverse in the second half of the year, when we expect operating income will grow faster than revenues. Third, we are making some big investments in key areas of long-term growth. You are going to hear more from me today on these subjects, with additional color and detail at the financial analyst meeting next week, about how these investments will help drive future growth for the company. Fiscal 2007 is going to be an important and exciting year for us. We are very pleased with our expected top-line growth and we believe we are making the right investments for our future. In particular, our announced tender buyback combined with our expected revenue performance lays the groundwork for strong EPS growth in fiscal 2007, while still investing in innovations to drive future long-term growth. With those high-level themes for 2006 and 2007, I am going to turn the call over to Colleen now for some more details on how the 2006 fiscal year closed out.

Thanks, Chris. In the interest of providing more time on today's call for Chris to discuss our fiscal year 2007 guidance, I am going to keep my remarks about our fiscal fourth quarter and fiscal 2006 performance brief. Overall, it was a strong finish to the year. Specifically, during the quarter: I will now provide more detail on our financial performance, starting with revenue. I will discuss top-line financial and business momentum points and then follow-up with revenue performance for each of the business units. All growth comparisons I mention relate to the comparable quarter of last year unless otherwise specified. Revenue growth for the quarter was 16%. That is the fastest quarterly growth rate in over two years and the highest Q4 growth rate in seven years. Strong results in Home and Entertainment, Server and Tools, and the Client businesses were the primary drivers, accounting for 85% of the absolute revenue growth in the quarter. Overall, five of our seven business groups recorded double-digit growth rates. Revenue growth for the year was 11%, with quarterly growth rates accelerating throughout the year, driven by strong product launches such as SQL Server 2005, Xbox 360, Dynamics CRM 3.0, and Visual Studio 2005. Our core businesses of Client, Information Worker and Server and Tools performed well. Taken together, they achieved double-digit revenue growth and exceeded our expectations of a year ago. Healthy PC and server hardware market growth were key contributors to our results, both during the quarter and during the year. The PC market was stronger than we expected, with an estimated growth rate of approximately 11% to 12% in Q4. The consumer segment growth rate outpaced that of the business segment by a factor of two and all regions registered double-digit growth, with the exception of North America and Japan. Our mix of product billings continued to evolve this quarter, with approximately 30% from the OEMs, 40% from multi-year licensing agreements, 15% from license-only sales, and the balance from our other businesses. Relative to prior year, our mix continues to highlight a noticeable swing from license-only sales to multi-year licensing agreements in front of flagship product launches such as Windows Vista and Office 2007, scheduled for later this year. As a result, we had a very strong quarter overall from a volume licensing perspective, with strong renewals on enterprise agreements in particular. We estimate that EA renewal experience is trending to the high-end of our historical range of 66% to 75%. In addition, select and open annuity growth significantly outpaced non-annuity licensing. Our unearned revenue balance ended the quarter at a record $10.9 billion, up 19% over the same period in the prior year, and a record $2 billion increase over the prior quarter. Our contracted not-billed balance at the end of June was also sequentially higher, and continues to exceed $9 billion. If you consider our reported revenue and changes in the unearned and contracted not-billed balances, you will find that bookings growth exceeded 25% for the quarter, and over 10% for the full fiscal year. We believe these results are indicative of not only strong customer acceptance of our recently launched products, but more importantly the compelling value proposition and growing customer demand for our future products. I want to also point out that our revenue results for the quarter include about $180 million, or 2 percentage points of growth, resulting from a change in the billing methodology for OEM distributors in our system builder channel. We now bill and record revenue for all of our OEM distributors regardless of their size when the product is delivered to them. Now I would like to provide revenue highlights by business segment. Client revenue grew 12%, driven by OEM revenue growth of 13%. OEM revenue growth resulted from 19% license unit growth. The 6 percentage point difference between OEM license unit growth and revenue growth this quarter was caused primarily by growing volume in emerging markets and the relative strength of the consumer segment of the market. We were particularly pleased with growth of 6% in Client's commercial and retail licensing products, driven primarily by strong growth in multi-year contract agreements. This is the first quarter of growth for Client's commercial and retail licensing business since Q1 of fiscal 2005. Server and Tools delivered double-digit revenue growth for the 16th consecutive quarter --18% revenue growth in the quarter was driven by strong momentum from new product launches earlier in the year, including SQL Server, which grew over 35%. Windows server performance also remained strong, with net deployment growth consistent with overall X86 server market growth. Information Worker revenue grew 6% to $3.1 billion, driven by strong growth in multi-year contract agreements for Office and momentum in our real-time communications business. The shift to annuity offerings for Office accelerated this quarter, signaling strong customer demand for our upcoming Office 2007 product. As a result, unearned revenue for Information Worker was up 28% from the prior year. MBS revenue was up 16% from the prior year, resulting from continued strength in our Dynamics ERP products, as well as Dynamics CRM momentum. During the quarter, over 50,000 new Dynamics CRM users were added as the product grew rapidly across all segments, geographies and industry verticals. Strong revenue growth and efficiencies drove MBS operating profitability for both the quarter and for the first time ever, for the full year. MSN revenue was $580 million, and down 3% with flat advertising growth and a 13% decline in access revenue. Display revenue for the quarter grew in line with the market and we continue to make good progress in ramping our adCenter platform. Currently, we are servicing 100% of our U.S. search traffic on adCenter, along with traffic in select countries internationally. MED capped off a very strong year and its fifth consecutive quarter of revenue growth in excess of 40%. During fiscal 2006, license growth for Windows mobile-based phones was 90% and the division achieved operating profitability for the first time ever. Lastly, Home and Entertainment growth of 94% during the quarter was driven by strong performance across all of its businesses. Xbox grew over 125% as a result of 1.8 million Xbox 360 unit shipments during the quarter. With an installed base of 5 million consoles and growing, key profit drivers such as Xbox 360 software and accessory attach, remain very strong relative to previous console launches from competitors. Now for the rest of the income statement. While revenue increased 16% for the quarter and 11% for the year, cost of revenue increased 53% and 27% respectively, due primarily to Xbox 360 console volumes. As a result, gross margin relative to the prior year was down 4 percentage points for the quarter and 2 percentage points for fiscal 2006. Q4 operating expenses, other than cost of revenue, increase $414 million, or 8% excluding legal charges. Aside from cost of revenue, operating expenses excluding legal charges in fiscal 2006 increased 11%. Operating income for the quarter was $4.2 billion, excluding legal charges, up 13% or $487 million. If you set aside legal charges in the Home and Entertainment results, which were disproportionately impacted by negative margin console sales, operating margins in Q4 improved by 2 percentage points over the prior year. Looking at the full fiscal year, operating income was $17.6 billion, excluding legal charges, up 6% or $960 million from the prior year. Operating margins in fiscal 2006 were also negatively impacted by strong Xbox 360 console sales. If you normalize for legal charges and Home and Entertainment results, you will find that operating income grew slightly faster than revenue and operating margins were consistent with the prior year. Investment income and other totaled $317 million during the quarter, and our effective tax rate was 34% as a result of non-deductible legal charges. The effective tax rate for the quarter and the year, excluding non-recurring items, was 31%. Diluted shares outstanding were 10.3 billion for the quarter and 10.5 billion for the year, down 5% and 3% respectively from the prior year as a result of execution against our share repurchase program. Boiling it all down, earnings per share, excluding legal charges for the quarter, were $0.31. For the full year, we delivered earnings per share, excluding legal charges and tax benefits, of $1.27, which is in line with the guidance we provided to you a year ago. Chris will now provide you with our expectations for Q1 and fiscal year 2007.

Thanks, Colleen. I am going to spend my remaining time on the call talking about what we see coming for the full year and the first quarter, and then close with my comments with some color on today's stock buyback announcement. Before we get into specific guidance, let me outline some of our key assumptions. The fiscal 2007 forecast assumes a broad continuation in the economic conditions and demand from where we exited in 2006, and our forecast does not include any significant impacts from foreign exchange movements. We expect PC unit demand to continue to remain healthy but to moderate from the growth rates we saw in 2006, particularly in our fiscal second quarter, ahead of the launch of Windows Vista. Specifically, we expect PC unit growth for fiscal 2007 to be 8% to 10% for the year and between 9% and 11% for the first quarter. We estimate that PC unit growth rates will be higher in consumer segments than in business segments, and higher in emerging markets than in mature markets. On the server hardware front, we estimate the total market should grow 10% to 12% for the year. Let me go through some detailed guidance. For the full year, we expect our revenue to come in between $49.7 billion to $50.7 billion, growing 12% to 14%. This is in line with the guidance we gave you in April and is actually a little better on dollar terms, given our stronger finish to fiscal year 2006. Our growth is driven by broad-based revenue growth across all of our five segments. For the first quarter, we expect revenue of $10.6 billion to $10.8 billion, which represents a growth rate of 9% to 11%. There are a couple items to note when you consider our first-quarter revenue: When thinking about the shape of the year, given the timing of our key product launches, you should expect revenue growth to be strong, beginning in the second quarter, driven in part by revenue growth from our Entertainment and Devices divisions. Furthermore, we expect an increase in the seasonality of our total expenses in the first half due to increased product costs associated with EDD console shipments. Revenue guidance in our recently announced five business units reporting structure is as follows: for Client, we expect full-year growth to be 8% to 10% and Q1 growth to be 5% to 6%. That guidance includes improvement in the commercial and retail portion of our business due to our launch of Windows Vista, targeted to go to businesses in November and consumers in January. For the OEM portion of the business, we expect revenue to grow slower than the PC hardware market, due to increased concentration amongst larger OEMs, consumer hardware shipments growing faster than business shipments, and relatively faster growth in emerging markets. Server and Tools revenue should grow 14% to 15% for the year and 12% to 14% for the first quarter. Coming off the impressive growth in last year, Server and Tools will continue to show double-digit growth throughout the year from the sustained momentum of SQL Server and Visual Studio, combined with growth in Windows Server, our security and management products, and enterprise services. We forecast revenue in the Online Services group to grow between 7% and 11% for the year and be flat to down 4% in Q1. Growth in the first half of fiscal 2007 will be negatively impacted on a year-over-year comparison due to the transition to our adCenter platform in the U.S., and our upcoming transition to adCenter in the U.K. slated to begin in August. We are pleased with the non-financial results from adCenter, such as 100% of our U.S. search traffic running through the platform and the positive feedback from advertisers on the ROI of their advertising programs. Microsoft Business division revenue should grow 9% to 10% for the year, and about 3% to 5% for the first quarter. Revenue growth in Q1 will be tempered by customers' preference to purchase annuity contracts, as well as a decrease in the rate of license-only purchases in front of the launch of Office 2007, expected later in the calendar year. We are expecting strong revenue growth in the second half of the fiscal year. We feel that our customers' continued preference to purchase annuity contracts indicates their excitement about Office 2007. We also expect continued strong demand from our Dynamics products, building upon the momentum in fiscal 2006. For the Entertainment and Devices Division, we are forecasting another strong year with full-year revenue growth of 31% to 46%, and first-quarter growth of 53% to 60%. The yearly guidance implies by the end of the fiscal year we will have sold 13 million to 15 million Xbox 360 consoles since launch. The EDD team is carrying good momentum into fiscal year ‘07 and growth will benefit from holiday sales of Xbox 360, increased commercial rollouts of IPTV, and continued introductions of devices running Windows Mobile 5.0 with Direct Push technology. Operating income for the year is expected to be between $18.9 billion and $19.4 billion, growing at 8% to 10%, excluding legal charges. For the quarter, we expect operating income to be between $4.0 billion and $4.2 billion. Quarter 1 operating income includes the impact of a higher overall mix of lower-margin revenues for Xbox 360, increased costs associated with the Online Services group, as well as operating costs in preparation for the launch of Windows Vista and Office 2007. On today's call, with our planning process now complete, I would like to give you some additional color and guidance on expenses that we do not usually give in our earnings call. We do not expect to give this level of detail going forward, but know there is a lot of interest in the area for next year. Because of our evolving mix of businesses and given the wide range of COGS estimates in the financial community, I want to provide you with some guidance here on how we think about it going into our fiscal year. Cost of goods sold as a percentage of revenue should increase between 1 to 2 points for the year, and should be up 3 points in Q1, resulting from an increase in the number of Xbox 360 consoles we will sell, additional costs associated with infrastructure and content costs in our Online Services group, and support and packaging costs for the retail launches of Windows Vista and Office 2007. Also, as we discussed in our third-quarter earnings call, we will be increasing our operating expenses to fund a variety of investments and activities in fiscal 2007. I would like to provide additional color on the size of that spending today and you will hear more about the strategic nature of these investments next week at our financial analyst meeting. On our last earnings call, you will recall that I categorized our spending into four general areas, which were the following: In regard to the first group, Xbox products costs, we have now given you guidance on the number of units we are forecasting to sell by the end of fiscal year and have provided company-wide growth estimates for our cost of revenue, which was expressed as a percentage of revenue. This information should help you quantify the impact of Xbox. The second group, marketing and field sales costs, contains two distinct pools of spend. The first pool is what I consider launch costs, and totals approximately $450 million of increased spending in fiscal year ‘07 over fiscal year ‘06. That is the amount we will spend in various areas, such as creating awareness for Office 2007, Windows Vista and marketing for Xbox during the holidays. The second pool contains investments we will make in our sales force to ensure we have the appropriate level of resources to successfully execute in taking all of our new products to market and serve customers. The second pool represents roughly $450 million. Combined, this marketing and field sales category is in the range of a $900 million investment next year. The total increase in spending also reflects general increases in salaries and costs in that area, and will help us deliver our record $5 billion to $6 billion sale increase forecasted for the coming fiscal year. The third group is developing either current high-growth products or developing new products and services to lay the groundwork for future growth. This group includes both announced products, such as our efforts in unified communications, mobility, business intelligence, security, high-performance computing, web servers, management, IPTV and also unannounced products and services that we believe are likely during the year. It also includes spending on our long-term research efforts. This is by far the largest amount of incremental investment for the company in fiscal year ‘07 compared to fiscal year ‘06, and totals approximately $1 billion across all of our business groups and corporate research staff. Our $1 billion consists of $200 million to $300 million in each of the following four groups: MBD, Server and Tools, EDD, and our Corporate Research group. These efforts in general are much longer-term and therefore drive modest amounts of revenue in the coming fiscal year. The fourth and final group of expenses is the incremental amount we will be spending on our services strategy. We intend to grow operating expenses in total in this area by approximately $500 million in fiscal year ‘07. This will be spread across developing and acquiring content to fuel our display advertising, continuing to build out and improve our search offerings and ad platforms, and funding increases in our infrastructure for data centers and equipment. The return on this spend is to some extent in fiscal year 2007, but also further out to support our MSN and large strategies. This group also includes spending on our Office Live and CRM Live products. All told, adding up these four buckets should amount to approximately $2.4 billion of incremental investments in fiscal year ‘07. As you can see by our guidance, total operating expenses excluding cost of goods sold are growing by about $2.7 billion and that maps to the presentations by company management to investors during the quarter, adjusted for our assumptions around foreign exchange rates. The remaining $300 million of operating cost growth is largely due to general increases in costs and unallocated acquisition amounts that we may do during the year. These acquisitions generally have a high year one accounting cost. Diluted earnings per share for the year are expected to come in at $1.43 to $1.47, and $0.30 to $0.32 for the first quarter. These numbers assume the full completion of our announced tender offer, which we estimate will have an impact of between $0.05 to $0.06 for the full fiscal year, and $0.01 in quarter 1. These earnings also assume an effective tax rate of 30.5%. From a balance sheet perspective, we expect unearned revenue to finish fiscal 2007 up 4% to 6%. Contracted not-billed should also finish 2007 up from current levels. When thinking about sequential changes in unearned revenue from the fourth quarter of fiscal year ‘06 to the first quarter of fiscal year ‘07, we expect the sequential decrease to be significantly greater than what you have seen in the last two years. This decline will be due to the absolute size of our fiscal fourth quarter annuity billings, relative to what we are projecting for quarter 1, as well as the relatively small amount of contract value that is up for renewal. Also, when looking at our full-year unearned revenue guidance, we are modeling a moderation in the recent annuity mix of our billings as both Office 2007 and Windows Vista will be available to customers in the second half of the year. I am asked by investors about areas of upside opportunities and downside risks to our guidance. Aside from our normal competitive, legal and general market risks -- in particular PC and server growth rates -- we have our share of execution risks in the next year. Our plan relies on execution on product launches and our ability to connect with customers once the products are in the market. There is also uncertainty around timing, supply and consumer response to upcoming game console launches by major competitors. Finally, as management has stated previously, the cost of acquiring and serving customers in our online businesses could increase. Specifically in terms of EPS guidance, our guidance assumes successful completion of the announced tender, with the resulting reduction in shares more than offsetting the loss of investment income from the cash used in the tender. Some potential upside to our guidance includes: Before moving to the Q&A, I would like to make a couple of comments regarding the specifics of the share repurchase plan we announced today. The first component of today's buyback announcement is a $20 billion tender offer that, assuming it is fully completed inside the tender range, will reduce our outstanding share count by approximately 8%. The period for people to tender their shares will begin tomorrow, July 21st, and is scheduled to expire on or about August 17th of this year. The tender offer is priced between $22.50 and $24.75 per share. Our executive officers and directors have advised that they will not be tendering any shares. The second component of the announcement is an authorization for a $20 billion stock repurchase plan to be completed at a pace and size to be decided upon by management, and with an authorization expiry date of June, [2011]. I would like to reemphasize the amount that we purchased under this program could vary throughout the term of the plan and there is likely to be quarters where we have little or no activity against it. It is also important to note that this is simply an authorization, not a commitment. We will always report our activity of any quarterly [arrears], but I do not intend to comment on any potential forecast activity. So to wrap up, the fourth quarter served as a strong close to what turned out to be a good year. Full year revenue growth of accelerated to double-digits, gaining momentum throughout the year, helped by customer acceptance of our newly launched products and continued robust PC and server hardware sales. 2007 is shaping up well. We are looking to generate another year of double-digit revenue and EPS growth as we deliver new releases of our two flagships products, Windows Vista and Office 2007, and build upon the momentum in Server and Tools and Entertainment and Devices. We will make significant investments in a variety of areas to build the next wave of growth for the company, and we will continue to execute on a strategy of returning cash to shareholders. That wraps up my financial comments. I am looking forward to catching up with a number of you next week at our financial analyst meeting. You will hear then from our business leaders and receive further insight on the topics we have discussed today, and our thoughts for 2007 and beyond. So we have some time for questions. I will hand the call over to Colleen so we can get started, and thank you.

Great. Let’s now proceed to questions. We want to accommodate questions from as many people as possible, so please avoid multi-part questions and limit yourself to just one question. Operator, will you please repeat your instructions?

Thank you. (Operator Instructions) Our first question comes from Heather Bellini with UBS.

Great, thank you, good afternoon. I was wondering, Chris, if you could give us an idea what Vista release assumptions are embedded into your guidance for fiscal year ‘07 in terms of timing? Then I just have a follow-up to that, if possible.

Sure, Heather. Embedded in that in Vista is the November release to business and January to consumers. On the Office side, by the end of the year for business and the beginning of next year for consumers, so it is the same base case as we have previously talked about.

Okay, and I guess the granularity that I was looking for is if so many people are moving to annuity agreements as a result of Vista, as evidenced by your strong bookings growth this quarter, even if it did slip from the January consumer release out for let's just say a month or two, would it really impact your guidance that much, given that the enterprise customers have basically paid you already and you are just recognizing that revenue on a systematic basis?

Yes, that is a good observation and you are correct. There will be a relatively modest impact. There will obviously be some FTP sales that we would lose if it was to be deferred. To give you a sense of order of magnitude, and obviously this depends on the shape of the year as much as anything else, but if we were to see a slip let's say of a quarter, to give you a financial magnitude, we think that would have an impact of around $200 million to $400 million. Obviously, revenue that we would like to see but not significant in the overall guidance.

Okay, great. I appreciate it. Thank you.

Thanks, Heather. Next question, please.

Thank you. Our next question comes from Kash Rangan with Merrill Lynch.

Thank you very much. Just a couple of questions. One, if you could just talk about when you expect to actually do your launch-related spending? In other words, Bill Gates I think was mentioned in the press talking about an 80% probability of release of Vista on time in January. I am wondering how you are going to be timing the actual launch activities surrounding what still seems to be sort of a moving target. Secondly, if you could give us a little bit more color on how this Dutch auction process will actually work mechanically? Not to expect too much on it, but if you could just give us a little more bit more color on how you can accomplish the range of $22.50, $24.70, that will be useful perspective as well. Thank you.

In terms of spending, obviously we will time that around the launch date. As we get more and more closer to that and more certain of that, we will start to work that in. We have embedded some plans already and that is characterized inside not only our first-quarter guidance but for the year overall. Some of the decisions, we will wait until we have the absolute date locked in. At this stage, we have some flexibility around that. At this stage, it is not going to be a significant difference in [pattern] of spending, but as when we lock the date in we will certainly press the button on the total spending overall. In terms of the Dutch auction, just to go back to basics, it will open tomorrow and close on August 17th, as I mentioned. People will be able to sell or offer to sell shares inside the range that we have bid during that period. In essence, they will be able to offer a certain number of shares at price points inside the range. So X shares at Y price, X plus Z at Y, at different price points. So we will have a schedule of prices at which people are willing to sell shares. We will add up the aggregate of all of those offers and strike a price which clears the market. The price at which we can buy $20 billion of value of shares, that price is the price that we will pay to everyone who has bid whether they have bid below that or not. We will play the clearing price then to all successful sellers. It is like an auction system. It is a Dutch auction in the sense that people will bid at different price points against us, and then we will take a clearing price on the market inside the range.

So the clearing price ought to be somewhere between that range you are talking about? In a best case scenario, it would be $24.70, but maybe not exactly at that level?

There are $0.10 increments inside the range. It clearly could obviously be at the absolute bottom or the absolute top of the range. It does not have to be inside the range. It could be inside or equal to the range limits.

Great, thank you.

Thanks, Kash. Next question, please.

Thank you. Our next question comes from Rick Sherlund with Goldman Sachs.

Thank you. Just to follow up on Kash's comment, for clarification, you would expect one date where you will have a clearing price, so there is only one date within that range where the transaction will take place?

Yes, that is correct. That is the last day. Up until that time, people can offer to tender but we will not strike the price until the very last day, by which time all offers to sell will be collected. We strike it on, if you like, the last minute of the last day. Any offers made before that will just simply be aggregated into that timing.

Will there be an advantage to offering earlier, or would you sense that people would wait until the last couple of days to submit their offers?

Well, there is no advantage from a seller's point of view because we are not legally able to buy early. We are constrained by the rules of tender, which we are obviously following totally. People can logistically get some advantage, if they want to but it is entirely up to them. We do not want to influence behavior at all. We just want to stick inside the rules but the rules specify that we cannot accept offers until the final.

Okay. On the Online Services group, the guidance for the year was revenue growth of 7% to 11%, which looks pretty encouraging. I am wondering if you can offer any insight into how much of this is coming from Windows Live, MSN? Are you assuming that MSN, when adCenter begins to gain traction, I wonder if you can just give us a little more granularity on what is behind those numbers?

From a revenue growth point of view, Windows Live is not a significant contributor in fiscal year ‘07. It obviously helps to drive some traffic but we are not seeing that has a big increment in this year. That is an investment in future years. adCenter will certainly help. What you have year over year is quite different shapes, so we came out of last fiscal year with our revenue for search effectively going down as we moved off, over to and onto adCenter, through the shape of this year, we are now fully on adCenter in the U.S., and as we start to get better comparables as we go through the year, you will see much better quarter-on-quarter comparison. As we scale up adCenter, it will also help, clearly. During the course of the year you will see an improvement and that is certainly embedded in the numbers that you see. Also, obviously the Access business is still decreasing, but it is becoming less significant in terms of the decrease. We are looking forward to a good continued year on the display side and a transition year on the search side.

Thanks a lot, Rick. Next question, please.

Thank you. Our next question comes from Charlie DiBona with Sanford Bernstein.

I would actually like to follow up on Rick's question here around MSN, because if we look at that guidance, how should we evaluate adCenter? When can we start to see you start to turn the corner and at least track towards the overall search ad market here? We would expect obviously access to be declining and display to be sort of in line with the market. Just those two things could get you to the guidance you have here. Could you give us some more granularity on how we can evaluate your progress with adCenter?

Yes, I think there is two ways, Charlie. One is, if you like, qualitative and through the year, we will share as much visibility as we can. I know Kevin and Ray are certainly intending to talk about it next week, just about some of the kind of qualitative metrics as we transition adCenter. The number of advertisers on us, for example, the general level of acceptance. That will give you some leading indicators of how we see the health of it. In terms of lagging indicators, the bottom line, you will be able to see our overall revenue growth. You will obviously be able to make some assumptions about what is happening on the display side because generally speaking, we are tracking in line with markets there. The access will be progressively less of a factor, so the delta will be the search side and you will be able to see, as the year goes on, on a quarter-by-quarter basis when you compare it both sequentially and also to the previous quarter, you will be able to see some of the adCenter impact directly from a financial output point of view.

Thanks, Charlie. Next question, please.

Thank you. Our next question comes from Adam Holt with JP Morgan.

Good afternoon. My question is about the detail on the expenses for fiscal ‘07, which was very helpful. Historically, you said that some of the Xbox ramp expenses are effectively going to be one-time in nature. Presumably, some of the marketing and launch-related costs for Vista and Office are also going to be one-time oriented. As you think about the long-term spending profile for the company, if you could detail what you view as sort of a moment-in-time set of expenses versus what we should expect to see on an ongoing basis?

We have tried to give you visibility in that by talking about launch spending -- launch and marketing spending as a category. I will not describe it as entirely one-off because there are other launches that happen year by year, but we bracketed that, and that is the $450 million. In terms of Vista, Office 2007 and Xbox launch-related spending, that is in the category of 450, so that gives you some visibility as to, on a year-by-year basis, what you might consider as one-off. In terms of the other areas of spending, they are more ongoing in nature. Clearly in some of the businesses, we are building the business up so it is not necessarily continuous at that level. But they are not, if you like, one-off in nature, in particular when we are hiring R&D and salespeople who are continuous there afterwards.

If I could ask a follow-up on the bookings strength in the quarter, you noted that renewal rates were tracking towards the high-end of historical levels. Does that imply that renewals were primarily behind the strength in unearned in the quarter, or did you also see an up-tick in new customer billings? Thank you.

It was a bit of both. Certainly the renewals was very strong, as you point out, and that was -- I think that was the majority of it, but also we saw good acceptance on the new side as well. The field did a fabulous job in the fourth quarter and really got out there. They had some visibility and some good products to sell and they took the opportunity to do a great job, both with existing and new customers.

Thank you very much.

Thanks, Adam. Next question, please.

Thank you. Our next question comes from Jason Maynard with Credit Suisse.

Good afternoon. I had one follow-up question on spending for FY07. I wanted to get a little bit more color on what your expectations are around for cap-ex. Specifically, over a couple-year period, should we see a material change in terms of how you look at cap-ex as you build out data center infrastructure for a lot of your online services?

Yes, cap-ex is going up, and we certainly talked about that externally. We will see an increase year over year of around $600 million to $700 million on cap-ex, but that covering cap-ex of all nature, so it is not only in the MSN area, which is probably the one that people are most interested in. It is also general facilities cap-ex. In the MSN area, year on year we are probably looking at an increase, depending on some of the decisions we are going to make, around $200 million to $300 million year on year. That is building the infrastructure that we believe is necessary for the future of the business, so we will be building capacity that we not only need next year but also starting to build capacity for future years there afterward, as well.

I have one quick follow-up on Server and Tools, just to try to get a little bit more color around your expectations for Windows Server growth. Specifically, any commentary you are seeing about growth rates relative to the Linux growth rate opportunity as well.

We are happy with the trends there. As I mentioned, we have grown, broadly speaking, in line with the market. We now have a product that can compete in the high-performance area so we think that is a good opportunity. Some of the spending we are looking at, some of the incremental spending that I bucketed into the growing and new areas, is targeted at the Windows Server area, in particular in some of the markets where Linux is strong. You are not necessarily going to see a benefit from that in fiscal year ‘07 for the reasons we talked about, but certainly that is an area where we think there is a fabulous opportunity for us and it is hence one of the reasons why we are investing in it.

Thank you.

Thank you. We may have time just for one or two other questions. Next question, please, Operator.

Thank you. Our next question comes from Brendan Barnicle with Pacific Crest Securities.

I was wondering, Chris, if you could give us any kind of breakdown in terms of your Client -- for guidance achieving -- on the benefits from China, particularly with Acer and Lenovo now standardizing on the Microsoft products.

We saw good growth in OEM units relative to PC units in the quarter, and we are predicting that general trend is not necessarily to be as strong as it is out of the quarter, but going forward. It is too early to really say there is a substantial difference as a result of those contracts but our efforts aimed at anti-piracy generally we believe adds let's say 1 to 2 percentage points on our year-by-year basis -- it might move around in the quarter -- between OEM units and PC units. Clearly the price point for some of those sales is lower so it does drag down our average price, but in terms of our growth rate, it generally helps by about 1% to 2%.

Great, thank you.

Great, thanks. Next question, please, Operator.

Thank you. Our next question comes from Brent Thill with Citigroup.

Good afternoon. Regarding MSN, how should we think about the return to profitability? Is that more of a ‘08 timeframe? If you could also just follow up regarding adCenter. You mentioned it is online now in the U.S. The rest of the world, your timing on when you expect that initiative will be fully up?

In terms of MSN, it is full-on the U.S. It is in the U.K. in August. It is in France now. It is in Singapore now. We are not giving a particular schedule for when we will be 100% in the year but clearly it is in our line of sight. It is not far off that we are going to have 100% of our business anyway on adCenter. What was the other half of your question? Sorry.

Regarding profitability in MSN.

Profitability, yes. We have said, as I said in the previous quarter, that we do not expect MSN to be profitable in this fiscal year. By definition, therefore, it is later out than that. Based on the revenue guidance that we have given and some of the expense guidance that we have given, I imagine people will be able to get some shape of what we are looking at. We see for MSN that fiscal year ‘07 will be an investment year.

Thank you.

Thank you. We have time for one last question please, Operator.

Thank you. Our final question comes from Laura Lederman with William Blair.

Saved by the bell. Real quickly, can you talk about SQL Server growth? Is that going to be in line with the Server and Tools growth, or higher? You have done so great in the database market for several years. Also, when you talk about the 50,000 new users for CRM, could you talk about how much of that was hosted in the quarter versus how much was on premise? Thank you.

On the SQL Server side, we are looking at 35% growth. It has been extremely successful and is growing faster than the Server and Tools business overall. I am not sure I want to put a number out for what that will look like going forward but embedded inside our guidance is what we consider to be very good growth. We still think from a price point of view, a quality point of view, it is a great product relative to its competitors -- all the reason why we have been able to achieve market share growth in the past. There is no reason to assume they are not going to continue in the future.

Laura, could you repeat your hosted question? We just did not hear it.

Sure. The 50,000 new users added for the CRM last quarter, can you give us a sense how much of that was hosted, how much of that was on premise? What is going on there in the mix?

Yes, we are delighted with that figure, even stacking against competitors. It is a nice volume for us. It is good momentum. It really does represent the choices that we are giving customers, Laura. It is not just hosted. It is not just a license from Microsoft. As you know, currently you can buy a license from Microsoft, host it yourself. You can go to our partners -- they will host it for you. The 50,000 is inclusive of both of those. We are looking forward to being able to offer additional choice to consumers by hosting ourselves, really starting second quarter of calendar year 2007.

Final question, if you look at the Business division growth of 9% to 10% for ‘07, can you talk a little bit about what you see driving that, and the components as well? Just a little bit of granularity.

Sure, that is for the division overall. Obviously with Office 2007 coming along, that is a big driver, although that is more of the second half of the year. Also, as we see some of these enterprise agreements that we are signing flowing through the accounts, that will certainly help. Growth in the CRM and ERP products, so the old MBD segment will continue to grow very strongly and that will help the overall division as well. In particular in the second half of the year, but general strength across all of those areas.

Thank you.

Great.

We are going to have to cut off now, but I appreciate all of your questions. I will hand it back to Colleen. Look forward to seeing a number of you in a week's time.

Thank you, everybody, for your participation in today's call. If you have any further questions, please feel free to call me or my team directly. As I mentioned at the beginning of this call, this conference call will be available on replay at our investor relations website through close of business July 20, 2007. In addition, you can hear the replay by dialing 866-455-0436 or, for international calls, dial 203-369-1258. The dial-in replay will be available through the close of business July 28, 2006. Thanks again for joining us today.

Thank you. This does conclude today's Microsoft conference call. We thank you for your participation. You may now disconnect.