Government Employment at Post War Low

As the market ponders what effect a government shutdown could have on the economy, below is one data point to consider.  There’s a tendency to think of the Federal bureaucracy as a Leviathan; however from an employment perspective, that’s not exactly the case.  The Federal Government directly employs 2.7 million Americans, which is 1.76% of the US labor force, and the lowest percentage going back to 1948.  The low percentage seems to support an argument that the economic effects of a government shutdown could be relatively contained.

Percent Employed by Government

Accenture 4Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“For the full year…We delivered new bookings of $33.3 billion…We generated revenues of $28.6 billion, a 4% increase in local currency…After adjusting to exclude tax and reorganization benefits in the second and third quarters, earnings per share for the year were $4.21, a 10% increase…operating margin of 14.2%, a 30 basis point expansion”

“All 3 components of our consulting bookings, management consulting, technology consulting and systems integration, were all at the low end of our book-to-bill range and very similar to our Q3 bookings level. And at the same time, we did see consulting bookings convert to revenue slightly faster than we expected.”

“we had bookings over $100 million at 11 clients, giving us a record 44 clients with bookings at this level”

“From a geographic standpoint, needless to say, we are living in an interesting world. A year ago, the big questions were around Europe and the sovereign debt issue. It now seems that Europe is stabilizing and even showing some early signs of improvement. And today, the question is around the emerging markets, where we’re seeing more volatility.”

“For the past 4 to 5 quarters, it’s clear that our addressable market has been in a cycle of lower growth, and this has certainly impacted our growth. As we look forward, we think it’s likely that our overall market conditions won’t change much in the near term. ”

“Overall, my assessment on the situation is Europe is stable with hopefully, early sign of improvement. But you know the overall economic condition, probably all Europe been moving from a slight recession to a slight growth, but more or less — being more or less the same plus”

“When you look at Japan, indeed, we mentioned last quarter that we were challenged with the EHT activity in Japan. And again, it’s more or less the same. We’re working hard in Japan. probably Japan is not totally out of the woods. We are still challenged, especially in the vertical you’re mentioning.”

“BPO is doing very well, and we are doing very well in BPO. So I’m pleased to have the opportunity to acknowledge our people and our leader driving the BPO business. I mean, why — I mean, first, there is a natural demand on BPO for the reason [ph] of cost management, productivity and efficiency and of course, business process outsourcing is a good response.”

“But what’s different with the BPO at Accenture? We invested a lot in BPO, first, and invested to create innovative services with a lot of analytics inside, what we’re calling BPO Generation 4 or 5. But forget about the generation. Just to mention that we are investing in bringing more capabilities and more innovation out of our BPO. So there is a strong demand. We have differentiated solutions and services.”

“what we’re in right now is no different than cycles that we’ve been in — many other cycles, where when you hit a period of low growth in our addressable market, even though we take share, the math is such that even taking share, our growth is going to be lower.”

“if you look in the prior ’08, the global economic growth has been in the range of 5%-ish. If you look at these last couple of years, the global economic growth has been in the range of 2%-ish. And at the end of the day, the addressable market is somewhat correlated to the global economic growth. I mean, that’s a kind of natural correlation at some point in time. So the reality is that today, we’re in a world growing at 2%. And as mentioned by David, the addressable market, the way we define, has been growing in that range. So we are executing against our commitment, which is anyway to grow more than the market and then deliver value to our clients and shareholders. But the world has changed.”

“ERPs are important, and they are important for all the industry. It’s the backbone of a lot of things our clients are doing in IT to build system and then in driving maintenance and so forth. But again, we are a very highly diversified company. We are doing ERP, and we are doing a lot of other things in our portfolio of business.”

“frankly, the one with the highest volatility and probably caught us by surprise to be honest will be Brazil. We had a very strong growth over many years. Brazil was, as you all know, a place where many of our clients have been investing for quite a long time. And what happened in Brazil probably caught our clients and ourselves a little bit by surprise with what’s happened now.”

“frankly, I’m very pleased with one country which is very important for Accenture but going to be extremely important for the future is China. I mean, China is going to be the second largest economy in the world. We all know how strong is China. And frankly, double-digit growth in China these last quarters, not to mention these last couple of years, I’m extremely pleased with what’s happening.”

“clearly in the mature markets today, you have a bias towards cost productivity, still efficiency for all sorts of reason we know, low economic growth. So a company to be more competitive, you need to be extremely mindful regarding your costs. And so you have this consequence around outsourcing and BPO being more in demand at consulting in that cycle. If you move to the emerging markets, they’re still in an environment where you need to build capabilities. And it’s not a surprise that we see some ERP work or build work or consulting work, for instance, in countries such as China, where you will see probably more consulting than outsourcing in countries such as China. So it’s probably fair indeed, David, to call that in emerging markets, it’s going to be more skewed towards consulting versus outsourcing and in mature markets, it’s going to be the other way around.”

Federal Credit Boom Nearly Matches 2000s Consumer Credit Boom

The Federal Reserve’s Flow of Funds report was released yesterday, and it showed that the US economy continues to re-leverage.  We never really saw a de-leveraging though, since the total amount of credit market debt outstanding never actually shrunk in any given year.  Consumers have de-levered modestly–we collectively carry $12.9 T worth of debt today versus a 2008 peak of $13.8 T.  However, the Federal Government has accumulated so much debt in place of consumer borrowing, that the total debt stock hasn’t gone down.

In fact, the amount of debt that the Federal Government has accumulated over the last 5.5 years is getting fairly close the the amount of debt that was accumulated during the consumer credit boom in the last cycle.  The Federal Government has borrowed $6.6 T worth of marketable debt in 5.5 years.  In comparison, consumers borrowed $7.3 T in the 8 years leading up to the financial crisis.

It’s tempting to think that there hasn’t been the same credit boom in this cycle as we’ve seen in previous cycles.  In a sense that’s true for consumers and businesses, but it’s not true for government.  There’s been a big credit boom this cycle, just not in a private economic sector.

Federal vs. Consumer Credit

 

Source: Federal Reserve Flow of Funds

Payrolls Not Too Far From All Time Peak

While the unemployment rate is still considerably higher than it was pre-recession, we’re actually not too far away from recovering all of the jobs that we lost during the recession.  Total non-farm payrolls are currently at 136 million, which is only 1.9 million fewer than the peak level hit in early 2008.  If we continue to grow payrolls at the same rate that they grew in 2011 and 2012, we’d hit a new peak in 2014.

Even though we’re about ~2 m jobs from regaining the peak, there are still 3.6 m more unemployed than there were in 2008.  That’s because despite a declining labor force participation rate, the labor force has grown by more than 1 million people in the last five years.

Payrolls Recovered

What’s the Correlation Between Unemployment and Inflation?

The relationship between unemployment and inflation is one that’s generally taken as a given in Wall Street economics.  Higher unemployment is supposed to lead to lower inflation, while low unemployment is expected to lead to higher inflation.

Looking at a regression of CPI and unemployment though, the relationship doesn’t appear so clear cut.  If you compare the monthly unemployment rate to the monthly change in CPI over the last 65 years, there’s actually very limited correlation.  In fact, if anything there is a slightly positive relationship, meaning that CPI inflation has been slightly higher in periods of high unemployment.

This may run counter to what most securities analysts have been taught, but reflecting on international inflation episodes, it shouldn’t be too surprising.  There are many international examples of high inflation in societies with excess capacity in labor markets.

Low unemployment may be a precondition for the end of QE, but it is not necessarily a precondition for inflation.

Unemployment vs Inflation

Source: FRED Data

(Note that the Phillips curve studied the relationship between unemployment and wage growth, not CPI)

Comparing the Old Dow Components to the New

This morning, the Dow Jones Industrial Average got three new components.  The $DJIA’s selection committee kicked out $BAC, $HPQ and $AA in favor of $V, $GS and $NKE.  Below is a comparison of some fundamental metrics for the old components vs. the new components.  The combined market cap of the Dow is now $65 B (1.5%) higher, but its combined revenues and operating income are $155 B (5.1%) and $12.5 B (2.7%) lower respectively.

As for growth, the new components are actually expected to grow earnings slightly less in 2014 than the old components would have because all three old components are coming off still cyclically depressed operating years in 2013.  The new components come out on top in terms of long term growth expectations though.  They’ll need to live up to those expectations in order to justify their higher multiples.  If not, their relatively large weightings could create a noticeable drag on the Dow.

Old Dow New Dow FaceoffSource: Compustat Data

 

Company Notes Digest 9.20.13

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

Let Bernanke make himself very clear:

“The criterion for ending the asset purchases program is a substantial improvement in the outlook for the labor market.” ($FED)

Labor data is the key to Fed policy:

“Thus, the first increases in short-term rates might not occur until the unemployment rate is considerably below 6-1/2 percent” ($FED)

It’s not his fault if the market doesn’t listen:

“I don’t recall stating that we would do any particular thing in this meeting.” ($FED)

On the one hand, the weak housing market necessitates low rates:

“the slow recovery of the housing sector, continued fiscal drag, perhaps continued effects from the financial crisis may still prove to be headwinds to the recovery.” ($FED)

On the other hand, the strong housing market demonstrates how effective QE has been:

“My own assessment is that [QE] has been effective. If you look at the recovery, you see that some of the strongest sectors, the leading sectors like housing and autos, have an interest sensitive sectors” ($FED)

The Fed may be comfortable testing rising rates:

“we do want to see the effects of higher interest rates on the economy, particularly in mortgage rates on housing” ($FED)

Meanwhile in the real economy…

Railroad KSU seeing an uptick in volumes:

“end of August, early September, we saw real uptick in various things… I think there is reason to be cautiously optimistic that we’re kind of seeing some growth in the economy” ($KSU)

FedEx battling rising fuel costs:

“I can tell you it was significant. If you just think about how the fuel prices ran up towards the end of the quarter, and our fuel surcharge lags by six weeks, it’s pretty evident that we were paying a lot higher for jet fuel and not able to pass along the surcharge” ($FDX)

General Mills doing just fine in emerging markets:

“while many of you have commented on the softening in emerging market economies overall. I mean I do want to point out that our business continues to be very strong in emerging markets.” ($GIS)

Praxair is another company arguing that Mexico is gaining an advantage over China:

“Chinese wages have skyrocketed, and transportation cost is affected by higher fuel prices, began to rise extremely fast. So in this direction, total land and manufacturing costs for goods made in Mexico are currently lower than in China. In this sense, manufacturers are very optimistic about the future of Mexico” ($PX)

Consumer

Cereal dominates breakfast:

“cereal is the most popular breakfast food at home by far, featured in a commanding 32% of these morning meals…one out of every eight boxes of cereals sold in the U.S. is a variety of Cheerios.” ($GIS)

But even dominant and seemingly sleepy staples go through periods of negative sentiment:

“In my 21 years at General Mills, I’ve seen growth in the cereal category written-off a couple different times. I will just bring up a couple of examples. The first one is when bagels become phenomenon in the U.S. And everyone has got to move to bagels and no one was going to eat cereal anymore. And then low and behold we innovated on cereal and brought some new taste varieties and new textures into the category and the category rebounded.The second time is when Atkins diet craze came a long and again everyone was going to move away from carbohydrates at that point. And then we brought whole grains to the category. We brought fibers to the category. We tend to be able to innovate our way out of this.” ($GIS)

Companies with small market share shouldn’t be allowed to blame the macro for sloppy execution:

“we have a small market share in a very fragmented market. Unless things are horrific, as they were 5 years ago, we should be able to do all we need to do to grow our business…if we’d executed 100% flawlessly and we were really confident in everything we’ve done and we’d still had a 3.5% comp, I’d say to you, we did a great job, it’s just the macro. But I can’t say that, so I can’t blame the macro.” ($PIR)

Be aware of seafood inflation over the next few quarters:

“Seafood inflation was nominal, but we now expect double-digit inflation in the second, third and fourth quarters primarily related to the shrimp production issues in Asia” ($DRI)

Small changes can have big effects on operations:

“When you change every point of sale or POS terminal inside a restaurant, there is a distraction to every single employee. And until they become unconsciously confident with that, your service standards will drop a little bit.” ($DRI)

Technology

I have never been a fan of Steve Ballmer, but I must admit, I was pretty impressed by what he had to say at MSFT’s analyst day:

Smart-phones are not the final frontier:

“The PC was a new user interface and a new form factor. And Intel and Microsoft made a lot of money. If you will, touch and low power was a huge change in the way the user interface paradigm worked. And Apple and Samsung and Qualcomm made a huge amount of money. We are not done seeing fundamental shifts in the user interface and kind of hardware approach to devices. And I believe that too represents a form of high value activity.” ($MSFT)

The future will be about how well companies can integrate hardware and software. There are only two, maybe three players who have invested in all the pieces:

“Hardware and software will need to kind of evolve together, somebody whether it’s wearables or what’s going on with screen or input technology without the right hardware and software skills, without the right machine learning and cloud infrastructure, without the right focus on applications and platforms, without the right appreciation of consumer and enterprise, I think it’s hard to do. And when you write down the list of companies that have the capabilities that I listed, you would certainly put Microsoft, you probably put Google. We all have certain different strengths. And then after that you might say, hey, Apple is there in many dimensions, but they don’t have the investment in cloud infrastructure, they don’t have the investment in machine learning, and then it just starts to slide from there” ($MSFT)

Building cloud infrastructure takes more than just capital. Only three players are investing:

“Cloud infrastructure to me, and this has become clear really over the last 4 years or 5 years, it’s a pretty fundamental investment and it’s not as simple as saying, let’s go build a bunch of datacenters. It’s really learning how you architect these things to be low cost and at scale… there is sort of this almost Dr. Strangelove kind of arms race that goes on at least amongst people who operate datacenters…And in a sense there is only really a couple or 3 companies that are really pursuing that at scale. Amazon is, we are, and of course Google is.” ($MSFT)

There are three categories where you can make money in tech, Consumer services is the toughest:

“devices, consumer services, and enterprise services. The two that are most easily monetized, in fact, are devices and enterprise services. Consumer services, as we say, are tough. Other than phone companies, there really aren’t many technology, large subscription consumer services, and outside of Google and maybe Facebook it is hard to find a business that is significant that is ad funded” ($MSFT)

Consumers don’t want to pay for services:

“consumers just don’t spend the lot of money after the device and the subscription with the operator. Consumers never did. If you look at our Office business today, our Office business is 15% maybe from the consumer 20%. So maybe 20% of our Office business kind of looking back into a licensing world, maybe 15% to 20% came from the consumer, despite the fact that the consumer buys 67% of the systems” ($MSFT)

Apple and Microsoft make money from devices, Google from ads. Nobody knows how Amazon intends to make money:

“Google happens to say let’s not have any profit be in the device. Let’s move it all into search. We and Apple kind of have a different view of the world. Amazon, I don’t know where they want to put market profit. They don’t seem to put the profit anywhere and that’s not a shot. It’s just I can’t tell you what profit stream is important to them the way we can about us or Apple or Google.” ($MSFT)

Google deserves some scrutiny from the justice department:

“I do believe that Google’s practices are worthy of discussion with competition authority, and we have certainly discussed them with competition authorities…suffice it to say that I think they need pressure from competition authority.” ($MSFT)

Materials, Industrials, Energy

KSU sees slowing automotive volumes on their rails:

“I would imagine that our growth will be somewhat muted in our carload standpoint in automotive for the rest of the year. Should be positive, but not anywhere near the double digit that we’ve been used to” ($KSU)

The grain harvest is going to be healthy though:

“The real good news is the grain. The harvest — we knew two or three weeks ago that no matter what happened at this point, no matter what numbers came out USDA, the crops in our area were there” ($KSU)

Joy Global thinks we may have seen the worst for mining CapEx:

“I think we’ve seen the worst of the equipment CapEx reductions and I think that we’ll slowly start to see improvement in CapEx” ($JOYG)

New mining projects are starting to tick back up:

“we track the prospects that our customers are working on and we put that on our prospect list of those projects that we expect to come to equipment selection in the next 12 months. And in that list, that list has ticked up more recently. So we’re seeing some projects being taken off the list as those projects get reevaluated, but we’re seeing new projects come on the list. And more recently we’re seeing more projects come on the list that have been taken off the list” ($JOYG)

Miscellaneous Nuggets of Wisdom

Know what you’re good at and stick to it:

“We’re strictly a mining equipment company. We’re not going to be diversified industrial. We may broaden our exposure in the mining space, but we’re not going to be, you know, we do one thing really well and we sell and support mining equipment. We’re going to continue to do that because we do it well.” ($JOYG)

Develop a culture of continuous improvement:

“We simply cannot achieve the type of productivity that we achieve year in and year out without a strong commitment to continuous improvement” ($PX)

Improved productivity comes from the sum of thousands of little projects, it has to be in your DNA:

“to use the baseball analogy, it really is a game of singles…We have thousands of people doing thousands of projects, delivering the productivity. And it’s really that granular approach that we believe is the differentiator. We don’t have a special name for our productivity program. We don’t even call it a program, it’s just what we do. It’s part of the DNA of the company” ($PX)

Ballmer gets the final word.  Real money comes from providing really important services:

“look the place you create real money is when you do something that is really important to your customer. If you are not doing something that’s really important to your customer, there is probably not a chance to make a lot of money” ($MSFT)

Darden FY 1Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“From a same-restaurant sales prospective, this was a difficult quarter for the restaurant industry generally, in casual dining in particular, and obviously, was a difficult quarter for us. This summer’s sharp spike down in comparable sales within casual dining follows, I think we all know, were some pronounced spikes up and down this past winter and spring.”

“Darden’s total sales from continuing operations increased 6.1% to $2.16 billion. On a blended same-restaurant sales basis, the results for Red Lobster, Olive Garden and LongHorn Steakhouse declined 3.3%”

“Food inflation in the first quarter was approximately 2%, with beef and chicken inflation in the mid-single-digit range and dairy inflation in the low double-digit range. Seafood inflation was nominal, but we now expect double-digit inflation in the second, third and fourth quarters primarily related to the shrimp production [ph] issues in Asia”

“When you change every point of sale or POS terminal inside a restaurant, there is a distraction to every single employee. And until they become unconsciously confident with that, your service standards will drop a little bit.”

“We have to address affordability. We also have to address the need of the consumer who can afford to spend more. And we need to make sure that we continue to improve that part of what we deliver to each and every guest.”

” if you look back to the beginning of this calendar year, we’ve seen some pretty — more pronounced volatility than we’ve been seeing before. So some pretty big downward spikes, February comes to mind, followed by some reasonably big up spikes and then we saw the down spike this summer. ”

“from a industry perspective, this first quarter was really an outlier in terms of the spike down. And so we do hope and expect that that’s the case, and that we would see it, as I think Brad said, bounce back from — it looks a little bit more flat for the balance of the year. ”

Pier 1 FY 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“we are very disappointed with the performance of our Pier 1 Imports stores for the quarter, which clearly fell short of everyone’s expectations.”

“Although total sales increased 7.6%, helped by a better-than-anticipated contribution from e-Commerce, comp store sales were lower than we planned at 3.5%. Much of the sales weakness in stores was due to soft traffic in July.”

“We know that we could and should have produced better performance from our Pier 1 Imports stores and believe our less-than-flawless decision-making occurred because we did not strike the right balance between short-term execution and long-term planning.”

“During the second quarter, we opened 8 stores and closed 7, ending the period with 1,066 Pier 1 Imports stores. That includes 985 locations in the U.S. and 81 in Canada, for a total of 8.4 million retail square feet.”

“because our clearance is so low, it does allow us to be somewhat more aggressive in terms of the timing when we take clearance. So what it means is we’re marking down something sooner than we would have done historically”

“if you take the month of July, specifically, we did not have a very strong clearance or sale message, either in our stores or in our marketing. We were still focused on more full-price selling. And with the wonderful benefits of hindsight in the current environment, which is you alluded to is slightly weak, that was the wrong message. And we think that impacted our store traffic. When the customers got to the stores, those who made it across the threshold, I mean, we had really no issues. Our conversion rates were at the levels we expected and our average ticket was at the levels we expected. So it really was a traffic issue, pure and simple.”

“the headcount in the stores, the — that headcount will certainly be up on last year. We’ve got some big numbers to do in the second half. But we have very sophisticated labor modeling programs. And so we constantly look at the number of hours, the number of heads, and we forward model it.”

“we placed our Christmas orders in February, March, and they are all in the distribution centers. We’ve now received somewhere in the region of 98% of our Christmas orders, and they’ll be going out to the stores very soon. Hey, listen, we’re really good at holiday and Christmas. That’s — with all the things that we have to think about and be concerned about, our holiday assortments is pretty low on the list.”

“In terms of the TV spend, don’t forget that we mentioned that we’re going back on network TV, but we’re going to continue to be on cable television as well. So we feel the buy is very efficient and effective, and we’ll go from there. In terms of the amount, I’ll call it 30%, 40% of the spend.”

“Yes, so what happens in the first half of the year, we’re very focused on our outdoor furniture, and it gets a very prominent position in the store. And over the last few years, we have extended that selling season quite considerably, and it’s been hugely successful and hugely profitable. I think, this year, we kind of overdid that. And so what happened is we really just kept the floor looking too similar at the front for too long. We were delivering new products all the way through the season, as we always do, but what we failed to do was to appropriately merchandise it, particularly at the front of the store, and put it exactly in our customers’ line of sight when she came into the store. So that’s really what we meant by all of that. It’s — in the second half, it really isn’t an issue, because the floor set just changes so naturally anyway. We have harvest and Halloween, and then we go into holiday, and then we go into clearance, and then we’re into our early spring set. So we get lots and lots of movement in the second half of the year just because of the way the calendar is.”

“there’s obviously a lot of talk and speculation about the macro and how that’s playing out in traffic and sales. Here’s the thing, Brian, we’ve always taken the view, rightly or wrongly, that we have a small market share in a very fragmented market. Unless things are horrific, as they were 5 years ago, we should be able to do all we need to do to grow our business. So I don’t like to sort of place the blame anywhere else than on our sales other than ourselves but I — we recognize that those thoughts are out there. And yes, we’ve seen some regional variances throughout the quarter and those are very, very noticeable. But if we’d executed 100% flawlessly and we were really confident in everything we’ve done and we’d still had a 3.5% comp, I’d say to you, we did a great job, it’s just the macro. But I can’t say that, so I can’t blame the macro.”

Microsoft Analyst Day Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“CEO succession and search plan. While I know you have lots of questions on that, I wanted to go ahead and let you know there will be no further update on that today.”

“the Office Division is the biggest division in the company at 35% of our overall total; Server and Tools is second at 26%; Windows is third now at 25%; Entertainment and Devices at 13%; Bing and Online at 4%.”

“Gartner says that the public cloud market by 2015 is a $180 billion opportunity. ”

“the capabilities that Nokia brings with us on distribution, supply chain, the ability to continue to leverage the economies of scale that they bring, we are very excited…But I also want to stress the fact that we remain very open with our phone system and we have phones available from HTC, Samsung, Huawei, TCL, Alcatel, we want to continue to have that opening existing.”

“I haven’t been as excited as I am in a very long time around Haswell and the potential for Haswell devices and BEETLE devices and what they can do in the marketplace. Haswell from Intel gives us the capability to have a fan-less device on an X86 platform, which means thinner, lighter, better battery life. And so that is going to open up a whole plethora of new devices, new styles, new form factors in the marketplace.”

“we have got to improve the retail buying experience. It hasn’t been what any of us would have liked.”

“we really should bring – we should have one silicon interface for all of our devices. We should have one set of developer APIs on all of our devices. And all of the apps we bring to end users should be available on all of our devices. The second belief was that all of our devices are becoming more cloud-powered. So whether we are branding them Windows or Xbox, we really need one core service which is enabling all of our devices. And the third belief was that each of our devices require a tailored experience to be really special for the customer. Whether that’s a three-inch phone, or it’s a 9-inch tablet, or a 14-inch clamshell, or a 60-inch television playing Xbox games, we want to facilitate the creation of a common, a familiar experience across all of those devices, but a fundamentally tailored and unique experience for each device.”

“Dynamics CRM also pioneered our approach to the cloud, where essentially our customers can run the same solution, from fully multi-tenant Microsoft cloud partner hosted also deployed on their own services and private cloud on-premises. Now, today two out of three new customers choose Microsoft cloud as their preferred deployment option, but those customers also tell us that, that choice is very important to them, especially those customers who got burned by salesforce.com and switched to Dynamics CRM tell us that. Now overall Dynamics CRM business has been tremendous growth story, 36 consecutive quarters of double-digit growth, over 40,000 customers, 3.5 million users”

“our company’s focus is to deliver high value scenarios, to enable our customers, our users to do things that really they care about, of high value to them. And that central theme is to enable our customers to be able to get more done. Do more is the theme.”

“I have been at Microsoft for 20 years, and one thing that is different is just the leadership team that is up here and how we are working together. And so we are all invested in each other’s success and need to work together to deliver these high value experiences across a set of devices to our customers. And so we are working in a new way.”

“capital return, earlier this week, we announced a 22% increase in our dividend and a $40 billion buyback program. I think you will continue to see that as a key focus. I know it’s a priority for you. It is certainly a priority for me and for the board and for the company.”

“The model we are already shifting to which Kevin really talked a lot about this presentation was moving to a device business that’s still royalty-based, but also gross margin based, an enterprise service business that’s licensing and subscription and a consumer service space that’s advertising and subscription based.’

Steve Ballmer:

“we understand the shift that’s going on in the market. We understand the superior value that a PC brings to other devices in many forms of use. And we understand that there are reasons why people also like and appreciate tablets and phones, and those devices will continue to proliferate.”

“Google does it. They have this incredible, amazing, dare I say monopoly that we are the only person left on the planet trying to compete with.’

“So we said, look the place you create real money is when you do something that is really important to your customer. If you are not doing something that’s really important to your customer, there is probably not a chance to make a lot of money.’

“he PC was a new user interface and a new form factor. And Intel and Microsoft made a lot of money. If you will, touch and low power was a huge change in the way the user interface paradigm worked. And Apple and Samsung and Qualcomm made a huge amount of money. We are not done seeing fundamental shifts in the user interface and kind of hardware approach to devices. And I believe that too represents a form of high value activity.”

“How do you monetize high value activities? Amy talked about the three bubbles: devices, consumer services, and enterprise services. The two that are most easily monetized, in fact, are devices and enterprise services. Consumer services, as we say, are tough. Other than phone companies, there really aren’t many technology, large subscription consumer services, and outside of Google and maybe Facebook it is hard to find a business that is significant that is ad funded. ”

“UI innovation is critical, because inventing the next hardware-software paradigm does create an opportunity to make a ton of money.”

“Machine learning, at scale, it’s hard to argue that, other than Google and Microsoft, anybody is making an at scale investment in helping develop technology that studies the world and studies the user and tries to help computers learn about people and serve them better. It is a scale game. It’s a moat. There are really only two people who are making the investment. The investment in the cloud infrastructure, the investment in the technology, and I think it will be one of the defining characteristics of the next generation of device and user interface.”

“. Cloud infrastructure to me, and this has become clear really over the last 4 years or 5 years, it’s a pretty fundamental investment and it’s not as simple as saying, let’s go build a bunch of datacenters. It’s really learning how you architect these things to be low cost and at scale. We used to design datacenters by thinking about servers. Now literally we designed the buildings as the unit of compute work in order to take cost and complexity out of the equation.”

“Google, there is sort of this almost Dr. Strangelove kind of arms race that goes on, at least amongst people who operate datacenters. How many megawatts are they buying this year, that’s sort of the way in which datacenters are rated. How many megawatts will Google put in? How many megawatts will we put in? And in a sense there is only really a couple or 3 companies that are really pursuing that at scale. Amazon is, we are, and of course Google is.”

“And it’s quite clear to me that by this time next year we will overwhelmingly have the most popular paid service in the enterprise, bar none. And we will have an engine really with Office 365 to which we can attach new services and new options”

“The second area of focus is Windows PCs. We must do the job to ensure that the PC stays the device of choice for people when they are trying to be productive in life. It doesn’t mean that people aren’t going to buy some tablets to be productive, but if you look at the bulk of the tablet market today, it’s moving actually to smaller tablets. Our OEMs in Asia oftentimes refer to those as entertainment tablets versus productivity tablets.”

“Mobile devices, we have almost no share. I don’t know whether to say that with enthusiasm or kind of uncomfortable tension, but I am an optimistic guy. Anything we have low market share sounds like upside opportunity to me.”

“If you look at the total base of consumer PCs that gets sold, about 60% of them get sold to consumers. Of that population, about 15% to 20% actually pay for Microsoft Office, some don’t use it and some don’t pay for it and I will be kind of silent as to what percentage is what, but let’s say, piracy is certainly quite high.”

“we still get plenty of customers for certain applications and workloads who are not prepared to fully embrace the cloud. So our ability to deliver on-premise private cloud and public cloud is very important.”

“Amazon is all about the public cloud and has really no on-premise solution. Google is relatively quiet outside of productivity. Even though they have solutions they are relatively quiet. And frankly we have been handing it to them pretty resoundingly in bigger accounts”

“then if you take a look at VMware and Oracle, they are playing primarily with on-premise solutions and not with public cloud solutions. So somehow magically there is this enormous opportunity for us to be the unique player who can bridge this world of the public and private cloud.”

“we don’t have our heads in the sand. We are working away on all the things you think we should be working away on.”

“We have surprisingly less religion than you would think we probably have.”

“The reorganization that we did was more than just let’s move some people around. It really was a fundamental shift from running a set of separate business units, where we tried to make connection points to running a company that is essentially one integrated entity. Now for those who wish that some of the units would go away that probably doesn’t sound very good, but for those of you who really want us to get more agile, more focused and in a sense simplify, it really forces that.”

“Hardware and software will need to kind of evolve together, somebody whether it’s wearables or what’s going on with screen or input technology without the right hardware and software skills, without the right machine learning and cloud infrastructure, without the right focus on applications and platforms, without the right appreciation of consumer and enterprise, I think it’s hard to do. And when you write down the list of companies that have the capabilities that I listed, you would certainly put Microsoft, you probably put Google. We all have certain different strengths. And then after that you might say, hey, Apple is there in many dimensions, but they don’t have the investment in cloud infrastructure, they don’t have the investment in machine learning, and then it just starts to slide from there”

“You will be able to use our services without our devices, but our devices will absolutely honor and respect our services.”

” device is – particularly to the consumer – particularly to the consumer, consumers just don’t spend the lot of money after the device and the subscription with the operator. Consumers never did. If you look at our Office business today, our Office business is 15% maybe from the consumer 20%. So maybe 20% of our Office business kind of looking back into a licensing world, maybe 15% to 20% came from the consumer, despite the fact that the consumer buys 67% of the systems.”

“ne of the key reasons, in fact, that we bought Skype was to have a high volume visible consumer service, we probably need – and its cross platform as could be and we probably should use it to capture more functionality. And I will remind you Apple kind of has rules in their stores. You can’t have suites. They know they have to avoid people getting too much traction with their services on their devices, but we are working away on it and it’s very, very important to us.”

“Google does which means they have more money to pay for distribution on Samsung devices or Apple. Rumor has it that they probably pay each of those guys $1 billion to $2 billion to $3 billion a year for distributing their search product.”

“I do believe that Google’s practices are worthy of discussion with competition authority, and we have certainly discussed them with competition authorities…suffice it to say that I think they need pressure from competition authority.”

“we have a high share of searches on Windows Phones. And it is a reminder, just take a look at the share Apple has of maps on their own phones and I know they had all the celebrated hullabaloo but if I remember the numbers correctly, about 65% of the map usage today on iPhones is Apple Maps. So in a sense, probably one of the best ways to get some share in search is to get some share in devices.”

“Google happens to say let’s not have any profit be in the device. Let’s move it all into search. We and Apple kind of have a different view of the world. Amazon, I don’t know where they want to put market profit. They don’t seem to put the profit anywhere and that’s not a shot. It’s just I can’t tell you what profit stream is important to them the way we can about us or Apple or Google.”

“If there is one thing I guess you would say I regret, I regret that there was a period in the early 2000s when we were so focused on what we had to do around Windows, that we weren’t able to redeploy talent to the new device form factor called the phone.”

“Apple was what essentially zero market cap in 1997? And now its enterprise value is close to – and I’ll use enterprise value because that’s kind of how I think. Enterprise value is close to $300 billion. That’s $300 billion a new market cap created on touch and microprocessors. And it happened to be created in that case is through a devices approach. But at the end of the day, if we are not investing in those new opportunities, then it is assured that we have no opportunity for that growth. So I think you should hold us accountable, and I certainly as a shareholder will hold us accountable for continuing to focus in on good short-term results, and at the same time making investments that give us an opportunity to generate someday another $10 billion, $15 billion, $20 billion, $25 billion of incremental profit, which would be great to be able to dream about and certainly a few companies have created those kinds of profit pools in the last 10 years, 15 years.”