Richard Williams, Analyst, Cross Research Inc

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RICHARD WILLIAMS, ANALYST, CROSS RESEARCH INC, IS INTERVIEWED AT BLOOMBERG SURVEILLANCE

MAY 10, 2011

SPEAKERS: TOM KEENE, BLOOMBERG SURVEILLANCE HOST

KEN PREWITT, BLOOMBERG SURVEILLANCE CO-HOST

RICHARD WILLIAMS, ANALYST, CROSS RESEARCH INC 9:21

TOM KEENE, BLOOMBERG SURVEILLANCE HOST: Richard William with us, Cross Research. Good morning, sir.

RICHARD WILLIAMS, ANALYST, CROSS RESEARCH INC.: Good morning, sir. How are you?

KEENE: Well, good. Was this expected? Has everybody been waiting around for Steve Ballmer to fall into bed with Tony Bates?

WILLIAMS: I certainly wasn't expecting it. I think some of the banker community may have anticipated that Skype was in play.

They filed for their IPO in the Fall I believe, a billion dollar IPO. About a year and change ago, E-bay sold 70 percent to Silver Lake Partners for about $2.8 billion.

So there has been some M&A activity going on. It just remains to be seen how this plays out.

KEENE: Right.

WILLIAMS: I think - we have heard rumors that Google was in play here as well though not Facebook. So it is interesting. It just seems like these ideas sort of aren't exciting until suddenly they become very exciting.

KEENE: Well, they become - I know, Ken, you want to jump in here - but TechCrunch has a nice income statement from 2010 where essentially they don't make any profit. They've got $264 million of EBITDA up the income statement with a little bit of balance sheet love. And, you know, they're making some revenues.

WILLIAMS: Yes.

KEENE: But what does this say about the frenzy, the techie, buzzy frenzy that is out there right now?

WILLIAMS: Well, I think a couple of key metrics are important to think about here.

One is that they make about $97 per user per year, which is up a lot since even last year. They spent we think about $1 billion on CapEx to build out their platform. They call it Ubiquity, which takes Skype to TVs, cellphones, mobile devices, everything. And Microsoft just paying about $50 a user.

So it isn't as expensive as you might think from the perspective of cellphone customer acquisition or cable customer acquisition. And I think with Microsoft's Xbox and connect combination, there are some interesting plays.

That, and also their Linked Server because obviously Xbox is the trojan into the home and in the (inaudible) because of the IP connection into the home. They may be able to supplant some of the local carriers in the internet - the voice over IP.

And on the other hand, Linked Server is intended to replace PBXs in small and mid-sized companies, PBX being the telephone switch -

KEENE: Right.

WILLIAMS: - most businesses. And it makes a very compelling economic argument that you can take a PBX and replace it with voice over IP for about a third of the cost.

KEENE: Well, let's come back and talk about that. Richard Williams with us, Cross Research, that $97 per user per year statistic a pretty big idea.

Ken, we've got to come back and talk to him about this. I know you've got a bunch of questions.

KEN PREWITT, BLOOMBERG SURVEILLANCE CO-HOST: Sure.

KEENE: And it's going to - corporations, it replaces traditional phone systems.

9:24

(BREAK)

9:27

PREWITT: As we've been reporting this morning, Microsoft is going to buy Skype for $8.5 billion in cash to gain the world's most popular internet calling service and its 663 million customers. On the line with us, Richard Williams of Cross Research.

Richard, Bloomberg BusinessWeek - not the current issue, but the one before - had a really well thought out piece by Robin Farzad about whether Microsoft is a value trap. Their stock really hasn't done anything. Does this jump start Microsoft shares here - this new business they are getting into?

WILLIAMS: I think what it does is force people to look at Microsoft in a different way. And one example might be that think of Windows Phone 7 where Microsoft has been very late to the mobile Smartphone party.

The big bet with Nokia is that they could try to capture ten or 20 percent of the user base using Windows Phone 7, which would be a big help to the overall valuation of the mobile segment. Now, with Skype, you're adding 170 million users, a lot of whom use other Smartphones.

So I think that the interesting possibilities from this deal is that it just raises the potential market share for a number of different Microsoft divisions. Xbox the same thing.

I think it just forces people to rethink Microsoft compared to the way they have thought of it, which is a stock that goes nowhere for a decade, and yet it is growing cash flow at 20 percent quarter after quarter beating expectations. We have it about as cheap as we've seen it short of the March '09 lows, and one of the cheapest software stocks around certainly with that kind of growth potential.

PREWITT: Sure. And, of course, they are paying $8.5 billion in cash, which is - what - the interest on the interest for Microsoft, right?

WILLIAMS: They have $50 million in cash; $38 million net cash, but that debt I think is down more because interest rates are so low.

They buy back a fair bit of stock every year, usually in the neighborhood of $10 billion to $20 billion. But I've seen years go by where it is even as high as $40 billion.

So they are generating so much cash that they can replace any purchase very quickly.

KEENE: You mentioned earlier the $97 per user per year from Skype. Facebook building up their revenue as well, even with their supposed valuations.

Where does Twitter fit into this? Do they have the revenue stream? Do you have to compete with these people?

WILLIAMS: I think that is a key question. And the thing about Twitter is that it has captured the business community's attention in a big way. And you have to think with so many people using it in the business world that there are going to be nice times.

I think the same thing with LinkedIn. That is part of the reason LinkedIn looks as hot as it does going into an IPO.

KEENE: Well, Richard, stay with us. Don't move.

9:30:29.5

(BREAK)

9:30:43.8

KEENE: Richard Williams with us. Let's get in one more question here. Does this signal a management change at Microsoft, a change rather in attitude at Microsoft where they are trying to become more hip? I mean nobody ever was going to make a social media movie about Microsoft, were they?

WILLIAMS: Well, the movie is an open question. But when I think about where Microsoft has been going for a number of years, I mean Linked Server is an excellent example. They have been planning for three years or more to go in and replace the PBX switches in millions of businesses.

And I think when you look at Office 365, there is another incredibly interesting possibility where they could end up having significant share on every mobile device that is used for business purposes. So I think there is a lot more credit that management deserves than it is getting at the moment.

Then again, if you think back to Apple, five, six years ago, it was not getting a whole lot of favorable press either.

KEENE: Right, interesting.

WILLIAMS: So there are cycles that these stocks go through and the same with management teams.

KEENE: Do you - quickly, ten seconds - do you use Skype?

WILLIAMS: I have and my kids use it.

KEENE: Your kids use it. My kids use it like crazy.

WILLIAMS: Yes.

KEENE: I don't get it. What am I missing?

WILLIAMS: I think just video chat. And Xbox can do the same thing. I just don't think many people have figured it out.

KEENE: Okay, Richard, thank you so much. Richard Williams, Cross Research.

***END OF TRANSCRIPT***

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