Detailed Scenario Analysis of Microsoft's Acquisition of Skype

J. Stephen Castellano Ascendere Associates LLC [email protected] Page 1 www.ascenderellc.com

Ascendere Associates LLC

Stock Commentary: May 16, 2011

Valuing Microsoft Corp.'s Skype Acquisition This past Tuesday May 10 Microsoft Corp. (MSFT) generated quite a bit of buzz with its announcement that it intends to purchase Skype for $8.5b in cash. A transcript of the online conference discussing the deal is also available and The Wall Street Journal posted a comprehensive write-up of the deal. According to a prospectus dated April 13, 2011, Skype generated revenue of $860 million, company-adjusted EBITDA of $264 million. By our estimates, recurring operating profit in 2010 was $41m and free cash flow was $157m. In 2005 eBay, Inc. (EBAY) purchased Skype for $2.6b and sold a 70% interest to various investors in 2009. For our investment research clients we tend to focus on companies with solid operating momentum, defined by cash flow growth and ROIC expansion. While Microsoft was making some progress with generating higher returns on capital through its September 2010 quarter, that trend had since turned down. Adding $8.5b in intangibles to fixed assets with presumably negative accompanying free cash flow is going will simply just reaffirm that new declining trend that was already in place. As a result Microsoft stock will not be appearing on our buy lists any time soon. Of course, Microsoft must know that a Skype acquisition negatively impacts ROIC in the short term, so this implies that this acquisition is more of a long-term defensive play. There are a number of qualitative reasons why buying high-quality video, voice and chat connectivity makes sense in a bid to stay relevant as software productivity applications and Internet-driven social media are increasingly overlapping:

Product synergies that may help retain existing Microsoft customers and drive new product innovation.

Acquire a large installed base of customers that has taken nearly a decade to assemble.

Save time and effort in building out its own VoIP infrastructure.

Force competitors to waste time and money to build out their own VoIP solutions. But how does the Skype acquisition figure within a financial valuation context based on long-term projected cash flow scenarios? Based on our detailed analysis, we Microsoft's purchase of Skype was a reasonable move. We see little downside impact to Microsoft as a result of this deal, and while it seems unlikely there is still a chance for considerable for valuation upside. This report summarizes our valuation analysis.

http://www.microsoft.com/Presspass/press/2011/may11/05-10CorpNewsPR.mspx

http://www.microsoft.com/presspass/exec/steve/2011/05-10Skype.mspx

http://online.wsj.com/article/SB10001424052748703730804576314854222820260.html

http://www.sec.gov/Archives/edgar/data/1498209/000119312511096544/ds1a.htm

http://www.ascenderellc.com/ascendere-associates-llc/


Scenario Analysis In summary, our detailed analysis supports our initial view which we posted a few hours after the acquisition was announced -- namely that this acquisition has no immediate impact on Microsoft's valuation. That is, the quantifiable value we find from the weighted average of all possible scenarios is an incremental $379m, or $0.04/share to Microsoft. In our opinion, our Base Case forecast scenario is the most reasonable so we have assigned this a 60% probability of occurring. For the Good Case and Bad Case scenarios we assign a 15% probability and for the extreme Worst Case and Best Case scenarios we assign 5% probabilities. Why then did Microsoft go ahead with the deal? Even though we think the impact of the acquisition is negligible, as time goes on Microsoft has a chance of realizing about $15b in incremental value with little risk beyond the $8.5b cash it spent to acquire the company. In addition, should MSFT fail to capitalize on its Skype acquisition, it seems likely it would be able to sell it to another investor thereby mitigating its loss somewhat. The possibilities from the Skype acquisition, no matter how remote they seem at the time, are much more attractive than spending the cash on a dividend payout or share repurchase. Note that these forecasts, with their various growth rates, margins, discount rates and probabilities of project failure completely embed the strategic value of Skype to Microsoft. That is, all qualitative valuation considerations (e.g., time and cost for competitors like Google (GOOG) and Facebook to start their own app-based video and voice network) are completely embedded in our analysis. In the report that follows, we detail how we generated our base case, best case and worst case forecasts.

Microsoft Acquisition of Skype

Equity Value Scenario Analysis($ millions)

Scenario

Probability

Skype

Standalone

Value

Benefit of

MSFT

Market

Benefit of

MSFT

Synergies

Benefit of

MSFT

Capital

Value of

Skype

Division

to MSFT

Skype

Cash

Cost

Net Value

of Skype

Realized by

MSFT

Net Value

of Skype

Realized by

MSFT

Worst Case 5% 284 94 (558) 345 165 (8,500) (8,335) (0.99)

Bad Case 15% 879 288 35 1,708 2,910 (8,500) (5,590) (0.66)

Base Case 60% 2,072 + 683 + 1,510 + 3,243 = 7,507 + (8,500) = (993) (0.12)

Good Case 15% 4,389 1,656 1,525 8,615 16,185 (8,500) 7,685 0.91

Best Case 5% 8,952 3,220 2,450 16,752 31,373 (8,500) 22,873 2.71

All Scenarios 100% Net Value of Acquisition 445 0.05$

Source: Ascendere Associates estimates MSFT shares outstanding 8,432.8

http://jstephencastellano.com/microsoft-corp-skype-acquisition-a-low-risk-defensive-bid-to-stay-relevant/


Base Case Skype Stand Alone On a stand-alone basis, we estimate Skype sales growth at a 10.6% CAGR from $860m in 2010 to $2.5b in 2021. This assumes that the number of average monthly paying subscribers grows by nearly 5 times from 8.8m in 2010 to 43.3m in 2021 while monthly average revenue per paying user (ARPU) declines from $8.08 in 2010 to $5.11 in 2021. Our forecasts assume that the growth rate of paying users and their minutes of use increases from 120 minutes each month to 148 minutes per month by 2021 while revenue per billing minute declines -7% year through 2021. We think gross margins will eventually peak at 60% from 52% currently and that Operating Margins will peak in 2017 years at 34.2% and subsequently come under pressure and decline to 31.5% by 2021 as Sales & Marketing and Product Development spending is upped to counter what is likely to be then an increasing amount of competitive pressure. We have been generous with our Capital Spending and associated Depreciation assumptions, keeping them fixed as a percentage of revenue throughout our forecasts at about 4.4% and 5.5%, respectively (excluding amortization of acquired intangible assets). We feel we are being generous with assumed investments in infrastructure given the telecom industry's ongoing history of announcing "unexpected" and "temporary" huge surges in capital spending projects as players try to maintain and improve quality all the while keeping up with the latest technological enhancements. $2.78b Enterprise Value Given all of these assumptions, we think free cash flow has a reasonable chance of steadily increasing each year and reaching $713m by 2021. At this point, we assume that Skype can generate free cash flow grows perpetually at a 2.5% annual rate generating a terminal value of $5.04b at a 17% discount rate. Discounting the forecast cash flows and terminal value at this 17% discount rate provides us with a $2.77b present value of the unlevered firm. Taking into account interest tax shields and the potential for possible default at what we assume is consistent with other B+ credit ratings we arrive at an enterprise value of $2.69b. We use a 17% discount rate because that is what the company assumed to estimate the fair value of its shares on page 130 of its original August 2009 prospectus, and we use a 7% pretax cost of debt in keeping with its credit agreement in the same prospectus. $2.07b Equity Value To get to an equity value we add back cash of $142m listed in its prospectus as of 12/31/2010 and subtract debt of $760m that Standard & Poor's noted was outstanding on its balance sheet as of 3/31/2011. This generates an equity value of $2.07b. Interestingly, this independently generated value is exactly in line with the $2.07b valuation that was implied by eBay, Inc.'s (EBAY) fair value estimate of $620m for its 30% equity stake as noted in Note 4 of its 10K filed in April 2011. All in all, we think this is a reasonable base case forecast and valuation assumptions as they takes into account what we think will be the inevitable and rapid ascent of competition in the app-driven VoIP space.

http://www.sec.gov/Archives/edgar/data/1498209/000119312511096544/ds1a.htm#rom83085_12

http://www.standardandpoors.com/prot/ratings/articles/en/us/?assetID=1245304269567

http://www.sec.gov/Archives/edgar/data/1065088/000106508811000003/ebay10k20101231.htm


Base Case Skype as a Division of Microsoft As a division of Microsoft, Skype will benefit in three key ways: 1) a larger addressable market; 2) revenue synergies; and 3) a stronger capital structure. We note up front that by far the largest positive impact to valuation is generated by the stronger capital Microsoft brings. This is not simply spreadsheet magic; Microsoft can drastically lower internal hurdle rates and funding costs for Skype related projects and when compounded over years this has a huge positive impact. Larger Addressable Market Provided by Microsoft Creates $683m in Equity Value The impact of a larger addressable market is straight forward enough. Assuming that there are 1.0-1.5b Microsoft Office product licenses in the world plus millions of other Microsoft products, we think Skype has a reasonable chance of growing its registered base by at least a portion of that. For this base case forecast, we conservatively assume registered users grows to 1.46b by 2013 versus the 1.364b we were forecasting for Skype standalone -- about only a 100m difference. After that, we assume rate of annual growth for registered users, as well as the same proportion of paying users to connected users and registered users. Revenue Synergies Adds an Estimated $1.5b in Equity Value In addition to being able to address a larger market, we think there degree of synergies will be realized with regards to "stickiness" factors. That is, we think there is some amount of sales Microsoft will keep that otherwise would have been lost as a result of Skype integration, and interestingly vice versa as well. We estimate such synergies as 0.0125% of MSFT sales in 2011, growing to 0.1% of sales by 2014 and moving to 0.5% by 2021. What we have done here is to simply recognize that there is an obvious and naturally incremental benefit to sales for the combined companies. Stronger Capital Structure Generates an Estimated $3.2b in Equity Value We estimate Microsoft's cost of capital at about 8.4%, with a cost of equity at 8.8% and pretax cost of debt at 3.7%. This is drastically better than the 17% discount rate Skype itself in its August 2009 prospectus. Assuming the 17% as the cost of Skype equity and 7% as the cost of debt, and a debt-to-capital ratio of 8.9%, we estimate Skype's weighted average cost of capital was about 16%. Skype as a division of Microsoft may be able to realize an improved cost of equity, perhaps in line with Vonage (VG) which we estimate at 12%. Together with having access to low cost of debt of about 3.7% we think Skype's internal WACC will subsequently improve to 11.2%. This has a drastic immediate impact into implied valuations for Skype -- as much as $2.9b when incorporating the impact of a lower hurdle rate on internal projects and reduced risk of bankruptcy (or project failure). In summary, we think that by acquiring Skype, Microsoft can almost instantaneously lower the required rate of return for Skype related projects to rough 11% from 16%. This 5% benefit to Skype's capital structure would have a $3.2b positive impact to our base case forecast. By Virtue of Size and Scope, Microsoft Immediately Adds $5.4b of Value to Skype A Skype-Microsoft combination is worth about $7.5b on a base case forecast, or about $5.4b above a standalone value for the company. As a result, if our base case scenario comes to pass Microsoft will have found itself to have overpaid for the acquisition by about $1.0b.


Best Case Skype as a Division of Microsoft Our best case forecasts are extremely aggressive. We estimate Skype sales growth at a 32% CAGR, as average monthly paying subscribers jumps nearly 18 times to 155.6m in 2021 with monthly average revenue per user (ARPU) rising from $8.08 in 2010 to $9.29 in 2021, driven by increased minutes of use and eventual stability in revenue per minute. This scenario is extremely aggressive but conceivable. Our best case gross margin and operating margin assumptions are aggressive but within the realm of possibility at 64% and 38.5%, respectively. We do not see such margins occurring unless the competitive landscape stays fairly wide open. We are still a bit conservative with regards to possible synergies as far as a best-case estimate entails. By 2021 we are only assuming $1.3b in incremental operating profit from synergies related to sales stickiness. There is no change to the ratios used to forecast Capital Spending and associated Depreciation. $31.4b Equity Value Given all of these assumptions, we think free cash flow has a reasonable chance of reaching $6.4b by 2021 and growing at a 2.5% terminal growth rate thereafter. Applying an unlevered cost of equity of 12% and a pretax interest rate of 3.7% to this cash flow stream generates a $31.6b value. Minor other adjustments for interest tax shields, probability of project failure and backing out cash and debt gets us to a $31.4b equity value or $3.83/share to Microsoft. Net of the $8.5b cash Microsoft paid for Skype, the net value creation would be $22.8b or about $2.71/share.

Worst Case Skype as a Division of Microsoft Our worst case forecasts are also extremely aggressive, and probably in line with much of the collective market's initial analysis conducted within minutes of the Skype acquisition announcement. In this scenario, we estimate Skype sales growth declining at a -2.1% CAGR despite average monthly paying subscribers growing 2.6 times to 22.9m in 2021 as we embed a sharp ARPU decline from $8.08 in 2010 to $2.33 in 2021. The decline in ARPU assumes slowing minutes of use and sharply revenue per minute declining at a mid-teen rate near the end of the forecast period to $0.02/minute in 2021. In keeping with its reputation for destroying every acquisition it touches (we are still personally bitter about the little-known Onfolio acquisition in 2006), we assume Microsoft realizes no synergies from the acquisition and in fact sales suffers adversely from the negative perception and customer experience of its Skype service. There is no change to the ratios used to forecast Capital Spending and associated Depreciation. Negative Equity Value In this adverse scenario, we think free cash flow may turn negative in the last year of the forecast period to -$68m in 2021. Discounting the stream of cash flows and adding a negative terminal value gets us to a $373m value for the unlevered firm and negative -$165m for the equity stake. Net of the $8.5b cash Microsoft paid for Skype, the net value lost to Microsoft would be about -$8.4b or -$0.99/share.


Appendix

Ranking Data as of May 6, 2011

Microsoft Corporation

NasdaqGS:MSFT

Information Technology

Systems Software

Ascendere Ranking Price 05/10/11 25.49 Cash (48,717) EV/LTM EBITDA 6.1

Shares 8,433 Debt 13,165 Price/Book 4.1

Market Cap 217,818 Other -

5 = Best Rank Enterprise Value 182,266

Relative Value 5

Operating Momentum 1 CY1 Consensus EPS Est. 2.59$ CY1 PE 9.8 Total Capital 66,617$

Analyst Revisions Momentum 1 CY2 Consensus EPS Est. 2.97$ CY2 PE 8.6 Debt/Capital -53%

Fundamental Quality 5 Latest Annualized Dividend 0.64$ Div Yield 2.5% Debt/Enterprise Value 7%

Source: Capital IQ data and estimates, and Ascendere Associates LLC data and estimates.


05/10/11

Microsoft CorporationInformation Technology

Systems Software

NasdaqGS:MSFT $25.49 $0.64 / 2.5% Stock price 25.49$

Shares outstanding 8,433

Market value 217,818

EPS EPS PE PEG Cash & equivalents 48,717

CY +1 estimate 2.59$ 9.8 0.8 Total debt 13,165

CY +2 estimate 2.98$ 8.6 0.7 Preferred equity - Debt / Capital 22.0%

Minority interest - Debt / Op Capital 17.3%

BPVM Adjusted = (31.8+17.4)/(3.6+2.0) 8.7 Other 1,524 Debt / EV 8.0%

Next 5yr EPS growth estimate 12.0% Enterprise Value 183,790 EV / Op Capital 216.2%

NasdaqGS:MSFT EBIT/ Cap

EBITDA/

Cap ROIC NasdaqGS:MSFT

Next 5 Qtrs

LTM

LTM

Trend

Qtr

Trend*

Next year estimate 37.3% 41.0% 31.3% Revenue growth (5) 1 1

Next quarter estimate 44.1% 48.7% 30.0% Gross margin (1) (2) 1

Latest 47.7% 52.2% 30.7% SG&A margin 1 (4) 2

Year ago 47.9% 53.0% 24.6% EBITDA margin (2) (2) (2)

9 qtr avg 52.2% 56.6% 27.4% EBIT margin (or EBT) (3) (2) (2)

Recurring Earnings 5 (2) (2)

Growth

Next yr, y/y estimate -15.5% -15.7% 4.5% NOPLAT (2) (2)

Next Q, y/y estimate -11.8% -11.7% 2.6% EP (2) (2)

Latest Q, y/y -0.5% -1.5% 24.8% Free Cash Flow 1 4

Last yr, y/y -21.2% -21.0% -8.9%

Lastest Q vs 9Q avg -8.6% -7.7% 12.0% LTM EBITDA/Capital (5) (2)

ROIC (2) (2)

BPVM Ratio 8.7 Total (15) (15) (2)

Source: Capital IQ data and estimates, Ascendere Associates data and estimates. Percent of total possible -27% -10% -3%

Implied by Consensus Average

Microsoft Corporation Estimate Estimate Estimate Estimate Estimate

NasdaqGS:MSFT 6/29/12 3/30/12 12/31/11 9/30/11 6/30/11 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10

NOPLAT 26,774 26,129 25,472 24,875 24,979 25,209 28,169 28,651 22,899 19,087

Operating Capital 85,683 85,541 85,360 85,299 85,255 84,991 83,648 82,565 79,940 79,397

ROIC (NOPLAT / Operating Capital)31.3% 30.6% 30.0% 29.5% 30.0% 30.7% 34.9% 36.0% 29.2% 24.6%

Sequential growth 2% 2% 2% -2% -2% -12% -3% 23% 19% 5%

# EBIT Forecasts 22 23 23 23 24

EBIAT Trailing 12 months 27,089 26,275 24,818 25,122 25,637 24,967 23,806 22,504 18,220 15,788

Depreciation 2,919 2,887 2,874 2,793 2,780 2,629 2,603 2,555 2,507 2,365

Capital Spending, recurring (2,741) (2,826) (2,723) (2,533) (2,511) (2,471) (2,221) (2,106) (1,977) (2,086)

Adjstd Working Capital Investment (606) (611) (730) (738) (1,036) (1,283) (1,132) (1,338) (572) 231

Free cash flow to the entity 26,662 25,725 24,238 24,644 24,869 23,842 23,056 21,615 18,178 16,298

Source: Capital IQ data and estimates, Ascendere Associates data and estimates.


Microsoft Corporation Price 25.56

MSFT NTM EPS 2.66$

Information Technology NTM PE 9.6

Systems Software R/R 4.7 to 1

Max up to ten years Three years One year One year historically implied target range

04/30/01 to 05/02/11 05/05/08 to 05/02/11 05/03/10 to 05/02/11 NTM EPS Target 25.56$

Max PE 38.7 06/11/01 Max PE 38.7 06/11/01 Max PE 14.1 05/03/10 Max EPS 2.90$ 41$ 59%

Average PE 19.5 Average PE 19.5 Average PE 10.8 Average EPS 2.66$ 29$ 13%

Min PE 8.5 03/09/09 Min PE 8.5 03/09/09 Min PE 9.6 04/18/11 Min EPS 2.33$ 22$ -13%

Source: Capital IQ data and estimates.

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Price / Earnings (NTM) vs. Stock Price

P/E Average +1 St. Dev. -1 St. Dev. Stock Price


Ticker: MSFT

Company: Microsoft Corporation

MSFT 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 5/10/2011 Last 5 years

TEV / NTM Total Revenue Average 4.8x 4.7x 3.5x 3.0x 3.1x 2.7x 3.5x

High 5.5x 5.4x 5.2x 4.0x 4.0x 3.1x 5.5x

Low 3.8x 4.2x 2.1x 1.9x 2.5x 2.5x 1.9x

Close 5.1x 5.2x 2.4x 3.9x 3.0x 2.5x 2.5x

TEV / NTM EBITDA Average 11.1x 11.2x 8.0x 7.6x 7.6x 6.4x 8.4x

High 12.7x 13.2x 12.4x 10.0x 10.1x 7.3x 13.2x

Low 9.0x 9.5x 5.1x 4.8x 5.9x 5.9x 4.8x

Close 12.5x 12.4x 5.7x 9.7x 7.0x 5.9x 5.9x

TEV / NTM EBIT Average 12.2x 12.0x 8.8x 8.7x 8.3x 7.0x 9.3x

High 13.7x 14.2x 13.2x 11.4x 11.3x 7.9x 14.2x

Low 10.1x 10.5x 5.6x 5.5x 6.5x 6.4x 5.5x

Close 13.6x 13.2x 6.4x 11.1x 7.6x 6.4x 6.4x

Price / NTM EPS Average 18.4x 18.0x 13.1x 12.9x 12.3x 10.3x 13.8x

High 20.4x 21.1x 19.4x 16.2x 16.0x 11.6x 21.1x

Low 16.1x 16.0x 8.5x 8.5x 10.0x 9.5x 8.5x

Close 20.2x 19.4x 9.6x 15.7x 11.3x 9.7x 9.7x

Source: Capital IQ


Skype-reported Adjustments to EBITDA 2008 2009 2010

Net (loss)/income 41,606 (417,547) (6,905)

Income tax (benefit)/ expense (8,447) (21,398) (49,787)

Interest expense - 89,644 68,645

Interest (income) and other expense, net (10,297) (2,943) (4,817)

Depreciation and amortization 75,534 156,543 161,297

Stock-based compensation 12,826 14,746 15,950

Realized loss on credit agreement - - 13,513

Management Services Agreements with shareholders - 14,177 14,835

Acquisition transaction fees - - 1,229

Skype Acquisition transaction bonuses - - -

Transition Services Agreement - 1,118 2,463

Excluded bonus and severance - 1,755 15,315

Joltid litigation settlement - 343,826 -

Other litigation settlements (410) 2,928 (784)

Separation costs - 2,054 11,312

Foreign exchange gains and losses (334) (8) 12,165

Dispute with payment service provider - - 9,247

Non-capitalizable expenses attributable to security offering - - 669

Skype-reported Adjusted EBITDA 110,478 184,895 264,347

As a percentage of revenue 20.0% 25.7% 30.7%

Ascendere Assumptions for Recurring EBIT 2008 2009 2010

Net (loss)/income 41,606 (417,547) (6,905)

Income tax (benefit)/ expense (8,447) (21,398) (49,787)

Interest expense - 89,644 68,645

Interest (income) and other expense, net (10,297) (2,943) (4,817)

Depreciation and amortization

Stock-based compensation

Realized loss on credit agreement

Management Services Agreements with shareholders - 14,177 14,835

Acquisition transaction fees - - 1,229

Skype Acquisition transaction bonuses - - -

Transition Services Agreement - 1,118 2,463

Excluded bonus and severance - 1,755 15,315

Joltid litigation settlement - 343,826 -

Other litigation settlements (410) 2,928 (784)

Separation costs

Foreign exchange gains and losses

Dispute with payment service provider

Non-capitalizable expenses attributable to security offering - - 669

Ascendere-estimated Recurring EBIT 22,452 11,560 40,863

As a percentage of revenue 4.1% 1.6% 4.8%

Source: SEC filings and Ascendere Associates assumptions

Skype S.à r.l.NasdaqGS:MSFTAdjusted Present Value Model

Skype as a Division of MicrosoftBase Case

Unlevered Cost of Equity 12.0%Pretax Cost of Debt 3.7%Terminal growth rate 2.5% Tax Rate 22%Current WACC 11.2%Debt to Capital 8.9%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm

Period 0.75 1.75 2.75 3.75 4.75 5.75 6.75 7.75 8.75 9.75 10.75 Adjusted Present Value 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Global population United Nations 6,454 6,528 6,602 6,677 6,753 6,830 6,918 6,987 7,056 7,126 7,197 7,265 7,332 7,401 7,470 7,540 7,611 Annual growth - 1.14% 1.14% 1.14% 1.14% 1.14% 1.28% 1.00% 1.00% 1.00% 1.00% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94%

Mobile broadband subscribers 73 159 307 458 703 940 1,100 1,260 1,424 1,572 1,674 1,735 1,797 1,861 1,925 1,991 2,057 Fixed broadband subscribers 216 283 351 413 471 555 649 744 841 928 988 1,024 1,061 1,099 1,137 1,175 1,215 Global broadband subcribers Historical data: ITU 289 442 658 871 1,174 1,495 1,749 2,004 2,264 2,500 2,662 2,760 2,859 2,960 3,062 3,166 3,272 BB subscriptions / global population 4.5% 6.8% 10.0% 13.0% 17.4% 21.9% 25.3% 28.7% 32.1% 35.1% 37.0% 38.0% 39.0% 40.0% 41.0% 42.0% 43.0%

Registered Skype users (millions) 217 325 474 663 862 1,120 1,457 1,704 1,909 2,081 2,247 2,404 2,549 2,676 2,796 Registered Skype Users, Annual Growth 0.0 49.8% 45.8% 39.9% 30.0% 30.0% 30.0% 17.0% 12.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.5%Skype % penetration of global population 3.3% 4.9% 7.0% 9.7% 12.5% 16.0% 20.6% 23.9% 26.5% 28.6% 30.6% 32.5% 34.1% 35.5% 36.7%Skype % penetration of BB subscriptions 33.0% 37.3% 40.4% 44.3% 49.3% 55.9% 64.3% 68.2% 71.7% 75.4% 78.6% 81.2% 83.2% 84.5% 85.5%

Average monthly Skype connected users (millions) 52 75 105 145 186 258 335 392 439 479 517 553 586 615 643 % of Skype registered users 24.0% 23.1% 22.2% 21.9% 21.6% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0%

Average monthly Skype paying users (millions) 4.6 5.8 7.3 8.8 11.2 15.7 21.4 27.8 33.4 38.8 44.4 50.3 55.7 60.9 66.2 % of Skype connected users 8.8% 7.7% 7.0% 6.1% 6.0% 6.1% 6.4% 7.1% 7.6% 8.1% 8.6% 9.1% 9.5% 9.9% 10.3%

Annual revenue per paying user 81 102 98 97 97 93 88 83 79 75 71 68 65 61 58 Monthly revenue per paying user (ARPU) 6.75 8.50 8.17 8.08 8.09 7.72 7.32 6.94 6.59 6.26 5.96 5.66 5.39 5.12 4.87 Annual growth 25.9% -3.9% -1.0% 0.1% -4.6% -5.1% -5.1% -5.1% -4.9% -4.9% -4.9% -4.9% -4.9% -4.9%

Billing minutes (billions) 4.1 6.9 10.7 12.8 16.1 23.1 32.1 42.5 51.9 61.7 72.3 83.7 94.7 106.0 117.8Annual billing minutes per paying user 891 1,190 1,466 1,455 1,445 1,467 1,496 1,526 1,556 1,591 1,627 1,664 1,701 1,740 1,779 Monthly billing minutes per paying user 74 99 122 121 120 122 125 127 130 133 136 139 142 145 148 Annual billing minute growth per user 33.5% 23.2% -0.8% -0.7% 1.5% 2.0% 2.0% 2.0% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%

Revenue per minute 0.093 0.080 0.067 0.067 0.067 0.063 0.059 0.055 0.051 0.047 0.044 0.041 0.038 0.035 0.033 Revenue per minute annual growth -14.1% -15.9% 0.0% 0.0% -6.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0%Source: Company reports, United Nations, ITU, Ascendere Associates estimates.

Skype as a Division of Microsoft -- Base Case 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Revenue 72 194 382 551 719 860 1,084 1,456 1,884 2,319 2,638 2,914 3,177 3,421 3,599 3,745 3,872 Sales Growth - 169% 97% 45% 30% 20% 26% 34% 29% 23% 14% 10% 9% 8% 5% 4% 3%

Gross Profit 20 54 152 258 375 444 574 786 1,036 1,299 1,503 1,690 1,874 2,052 2,160 2,247 2,323 Gross Margin 28% 28% 40% 47% 52% 52% 53% 54% 55% 56% 57% 58% 59% 60% 60% 60% 60%

Sales & Marketing 27 60 64 83 119 132 163 218 283 325 343 364 397 410 450 487 513 Product Development 12 39 23 34 45 72 87 116 151 162 171 182 200 222 243 281 300 General & Administrative 17 38 42 49 73 95 119 146 170 186 185 204 222 257 270 281 290 Amortization of Intangible Assets 14 60 66 70 114 114 114 114 114 114 114 66 - - - - - Operating Expenses 70 197 195 235 351 414 483 595 717 787 813 816 820 889 963 1,049 1,104

Skype Reported Operating Profit (50) (143) (43) 23 24 21 92 191 319 512 690 873 1,055 1,163 1,197 1,198 1,220

Sales & Marketing 38.0% 30.9% 16.9% 15.1% 16.6% 15.3% 15.0% 15.0% 15.0% 14.0% 13.0% 12.5% 12.5% 12.0% 12.5% 13.0% 13.3% Product Development 16.1% 20.1% 6.0% 6.1% 6.3% 8.4% 8.0% 8.0% 8.0% 7.0% 6.5% 6.3% 6.3% 6.5% 6.8% 7.5% 7.8% General & Administrative 24.2% 19.5% 11.1% 8.8% 10.1% 11.1% 11.0% 10.0% 9.0% 8.0% 7.0% 7.0% 7.0% 7.5% 7.5% 7.5% 7.5% Amortization of Intangible Assets 19.0% 31.1% 17.2% 12.7% 15.9% 13.3% 10.5% 7.9% 6.1% 4.9% 4.3% 2.3% 0.0% 0.0% 0.0% 0.0% 0.0%Operating Margin -69.0% -73.9% -11.3% 4.1% 3.3% 2.4% 8.5% 13.1% 16.9% 22.1% 26.2% 30.0% 33.2% 34.0% 33.3% 32.0% 31.5%

MSFT Base Revenue 39,788 44,282 51,122 60,420 58,437 62,484 68,732 73,544 66,189 72,808 77,905 70,114 77,126 82,525 74,272 81,699 87,418 MSFT Base Sales Growth 11.3% 15.4% 18.2% -3.3% 6.9% 10.0% 7.0% -10.0% 10.0% 7.0% -10.0% 10.0% 7.0% -10.0% 10.0% 7.0%

% MSFT Base Sales "saved" by Skype 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.100% 0.1% 0.2% 0.2% 0.2% 0.3% 0.4% 0.5%Skype-MSFT Synergies - - - - - - 9 18 33 73 97 110 151 201 227 312 417

Adjusted Operating Profit (50) (143) (43) 23 24 21 100 210 352 585 788 983 1,205 1,364 1,423 1,510 1,637

Cash tax rate nmf nmf nmf nmf nmf nmf 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22%Cash income taxes - - - - - - 22 46 77 129 173 216 265 300 313 332 360 Earnings Before Interest After Taxes (50) (143) (43) 23 24 21 87 164 275 456 614 767 940 1,064 1,110 1,178 1,277

plus Depreciation & Amortization - - 76 79 157 161 174 194 217 241 258 225 174 187 197 205 212 less Capital Spending, recurring - - - (5) (12) (35) (44) (59) (77) (94) (107) (119) (129) (139) (147) (153) (158) less Adj Working Capital Investment - 44 26 (116) 200 11 (50) (134) (174) (49) (56) (56) (56) (56) (56) (56) (56) less Free cash flow to the entity (50) (99) 59 (19) 368 157 166 164 241 553 709 818 928 1,056 1,104 1,174 1,274

Residual value of free cash flows 13,750 Free cash flow plus residual value - - - - - - 166 164 241 553 709 818 928 1,056 1,104 1,174 15,025

Present value of future cash flows - - - - - - 114 134 177 362 414 426 432 439 410 389 4,443

Value of unlevered firm 7,740

Memo: Adjusted working capital 55 10 (16) 100 (100) (110) (60) 74 248 297 353 409 465 521 577 633 689 % cash estimated used in WC 100%

Gross intangible assets 341 806 806 806 806 806 806 806 806 806 806 806 806 806 Net intangible assets 263 236 188 113 788 638 523 409 295 180 66 - - - - - -

Source: Company reports, United Nations, ITU, Ascendere Associates estimates.

Discount interest tax shields at cost of debt to determine value of interest tax shields

Skype as a Division of Microsoft -- Base Case 0.75 1.75 2.75 3.75 4.75 5.75 6.75 7.75 8.75 9.75 10.75 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Total Debt 777 686$ 760$ 760$ 760$ 760$ 760$ 760$ 760$ 760$ 760$ 760$ 760$ Cash interest expense as % of Debt 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7%Cash interest expense - - - - - 27 27 28 28 28 28 28 28 28 28 28 28 Interest tax shield - - - - - - 6 6 6 6 6 6 6 6 6 6 6 Residual value of interest tax shields 528 Interest tax shields plus residual value - - - - - - 6 6 6 6 6 6 6 6 6 6 535

Cost of debt - - - - - - 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7%Present value of future cash flows - - - - - - 4 6 6 5 5 5 5 5 5 4 362

Value of interest tax shields 411

Cost of Potential BankruptcyProbability of bankruptcy 1.0%Negative impact to PV 35.0%Unlevered firm value 7,740 Expected bankruptcy costs (27)

ValuationValue of unlelvered firm 7,740 Value of interest tax shields 411 Expected bankruptcy costs (27) Current ValueEnterprise value 8,125 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shieldCash 142 Current ValueSkype as a Division of Microsoft0.11511.5% 0.92$ 0.96$ 1.05$ 3.5%Other non-operating assets - Current ValueSkype as a Division of Microsoft0.1212.0% 0.85$ 0.89$ 0.95$ 3.7%Debt (760) Current ValueSkype as a Division of Microsoft0.12512.5% 0.79$ 0.83$ 0.87$ 3.9%Preferred - Minority Interest - Other non operating liabilities - Value 12+ monthsValue of equity 7,507 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shieldValue 12+ monthsSkype as a Division of Microsoft0.11511.5% 0.99$ 1.04$ 1.13$ 3.5%

Shares outstanding 8,432.8 Value 12+ monthsSkype as a Division of Microsoft0.1212.0% 0.92$ 0.96$ 1.03$ 3.7%Value per share 0.89 Value 12+ monthsSkype as a Division of Microsoft0.12512.5% 0.86$ 0.90$ 0.95$ 3.9%

Source: Ascendere Associates LLC


Skype Stand-AloneBase Case

Unlevered Cost of Equity 17.0%Pretax Cost of Debt 7.0%Terminal growth rate 2.5% Tax Rate 22%Current WACC 16.0% Debt to Capital 8.9%


Period 0.75 1.75 2.75 3.75 4.75 5.75 6.75 7.75 8.75 9.75 10.75 Adjusted Present Value Model 2010 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Revenue 72 194 382 551 719 860 1,023 1,223 1,459 1,757 1,944 2,107 2,252 2,374 2,443 2,496 2,533 Sales Growth 169% 97% 45% 30% 20% 19% 20% 19% 20% 11% 8% 7% 5% 3% 2% 1%

Skype Reported Operating Profit (50) (143) (43) 23 24 21 80 155 251 413 537 655 770 807 812 799 798 Operating Margin -69.0% -73.9% -11.3% 4.1% 3.3% 2.4% 7.8% 12.7% 17.2% 23.5% 27.6% 31.1% 34.2% 34.0% 33.3% 32.0% 31.5%

Skype-MSFT Synergies - - - - - - - - - - - Adjusted Operating Profit (50) (143) (43) 23 24 21 80 155 251 413 537 655 770 807 812 799 798

Cash tax rate nmf nmf nmf nmf nmf nmf 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22%Cash income taxes (benefit) - - - - - - 18 34 55 91 118 144 169 178 179 176 176 Earnings Before Interest After Taxes (50) (143) (43) 23 24 21 62 121 195 322 419 511 601 630 634 623 622

plus Depreciation & Amortization 76 79 157 161 170 181 194 210 221 181 123 130 134 136 138 less Capital Spending, recurring (5) (12) (35) (42) (50) (59) (72) (79) (86) (92) (97) (100) (102) (103) less Adj Working Capital Investment - 44 26 (116) 200 11 (50) (120) (143) (48) (53) (53) (53) (53) (53) 54 55 less Free cash flow to the entity (50) (99) 59 (19) 368 157 141 132 187 413 507 553 579 609 614 712 713

Residual value of free cash flows 5,040 Free cash flow plus residual value 141 132 187 413 507 553 579 609 614 712 5,752

Present value of future cash flows 94 101 122 229 240 224 201 180 156 154 1,064


Equity 2.0% 2.5% 3.0% Tax shieldCash 142 Current ValueSkype Stand-Alone0.16516.5% 0.25$ 0.26$ 0.27$ 6.8%Other non-operating assets - Current ValueSkype Stand-Alone0.1717.0% 0.24$ 0.25$ 0.25$ 7.0%Debt (760) Current ValueSkype Stand-Alone0.17517.5% 0.23$ 0.23$ 0.24$ 7.2%Preferred - Minority Interest - Other non operating liabilities - Value 12+ monthsValue of equity 2,072 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shieldValue 12+ monthsSkype Stand-Alone0.16516.5% 0.27$ 0.28$ 0.29$ 6.8%

Shares outstanding 8,432.8 8432.8 Value 12+ monthsSkype Stand-Alone0.1717.0% 0.26$ 0.26$ 0.27$ 7.0%Value per share 0.25 Value 12+ monthsSkype Stand-Alone0.17517.5% 0.24$ 0.25$ 0.26$ 7.2%



Skype owned by MSFTWorst Case

Unlevered Cost of Equity 12.0%Pretax Cost of Debt 3.7%Terminal growth rate 2.5% Tax Rate 22.0%Current WACC 11.2% Debt to Capital8.9%


Period 0.75 1.75 2.75 3.75 4.75 5.75 6.75 7.75 8.75 9.75 10.75 Adjusted Present Value 2010 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Revenue 72 194 382 551 719 860 1,062 1,291 1,377 1,604 1,602 1,452 1,280 1,110 933 776 642 Sales Growth 169% 97% 45% 30% 20% 23% 22% 7% 17% 0% -9% -12% -13% -16% -17% -17%


Skype-MSFT Synergies - - - - - - (128) (127) (96) (69) (55) (28) (3) 32 (61) (151) (234) Adjusted Operating Profit (50) (143) (43) 23 24 21 (62) (22) 23 121 184 243 294 310 147 (3) (128)

Cash tax rate nmf nmf nmf nmf nmf nmf 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Cash income taxes (benefit) - - - - - - (14) (5) 5 27 40 54 65 68 32 (1) (28) Earnings Before Interest After Taxes (50) (143) (43) 23 24 21 (177) (17) 18 94 143 190 229 241 115 (3) (100)

plus Depreciation & Amortization - - 76 79 157 161 172 185 190 202 202 146 70 61 51 42 35 less Capital Spending, recurring - - - (5) (12) (35) (43) (53) (56) (65) (65) (59) (52) (45) (38) (32) (26) less Adj Working Capital Investment - 44 26 (116) 200 11 (50) (122) (130) (47) (47) (47) (47) 40 34 28 23 less Free cash flow to the entity (50) (99) 59 (19) 368 157 (98) (6) 22 185 233 230 200 297 162 36 (68)

Residual value of free cash flows (731) Free cash flow plus residual value - - - - - - (98) (6) 22 185 233 230 200 297 162 36 (799)

Present value of future cash flows - - - - - - (67) (5) 16 121 136 120 93 124 60 12 (236)

ValuationValue of unlelvered firm 373 Value of interest tax shields 411 Expected bankruptcy costs (2) Current ValueEnterprise value 782 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shieldCash 142 Current ValueSkype owned by MSFT0.11511.5% 0.01$ 0.03$ 0.08$ 3.5%Other non-operating assets - Current ValueSkype owned by MSFT0.1212.0% 0.01$ 0.02$ 0.05$ 3.7%Debt (760) Current ValueSkype owned by MSFT0.12512.5% 0.00$ 0.01$ 0.03$ 3.9%Preferred - Minority Interest - Other non operating liabilities - Value 12+ monthsValue of equity 165 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shieldValue 12+ monthsSkype owned by MSFT0.11511.5% 0.01$ 0.03$ 0.08$ 3.5%

Shares outstanding 8,432.8 8432.8 Value 12+ monthsSkype owned by MSFT0.1212.0% 0.01$ 0.02$ 0.05$ 3.7%Value per share 0.02 Value 12+ monthsSkype owned by MSFT0.12512.5% 0.00$ 0.01$ 0.03$ 3.9%



Skype owned by MSFTBad Case




Skype Revenue 72 194 382 551 719 860 1,073 1,371 1,549 1,907 2,035 2,043 2,013 1,956 1,853 1,737 1,620 Sales Growth 169% 97% 45% 30% 20% 25% 28% 13% 23% 7% 0% -1% -3% -5% -6% -7%


Skype-MSFT Synergies - - - - - - (60) (55) (33) - 19 38 70 112 72 61 61 Adjusted Operating Profit (50) (143) (43) 23 24 21 19 92 163 324 439 539 637 689 587 504 450

Cash tax rate nmf nmf nmf nmf nmf nmf 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Cash income taxes (benefit) - - - - - - 4 20 36 71 97 118 140 152 129 111 99 Earnings Before Interest After Taxes (50) (143) (43) 23 24 21 (45) 71 127 253 342 420 497 537 458 393 351

plus Depreciation & Amortization - - 76 79 157 161 173 189 199 219 226 178 110 107 101 95 89 less Capital Spending, recurring - - - (5) (12) (35) (44) (56) (63) (78) (83) (83) (82) (80) (75) (71) (66) less Adj Working Capital Investment - 44 26 (116) 200 11 (50) (128) (144) (49) (53) (53) (53) (53) 50 47 44 less Free cash flow to the entity (50) (99) 59 (19) 368 157 34 77 119 345 432 462 473 512 533 464 417

Residual value of free cash flows 4,500 Free cash flow plus residual value - - - - - - 34 77 119 345 432 462 473 512 533 464 4,917



Equity 2.0% 2.5% 3.0% Tax shieldCash 142 Current ValueSkype owned by MSFT0.11511.5% 0.35$ 0.38$ 0.44$ 3.5%Other non-operating assets - Current ValueSkype owned by MSFT0.1212.0% 0.32$ 0.35$ 0.39$ 3.7%Debt (760) Current ValueSkype owned by MSFT0.12512.5% 0.30$ 0.32$ 0.35$ 3.9%Preferred - Minority Interest - Other non operating liabilities - Value 12+ monthsValue of equity 2,910 Terminal Growth





Skype as a Division of MicrosoftBase Case

Unlevered Cost of Equity 12.0%Pretax Cost of Debt 3.7%Terminal growth rate 2.5% Tax Rate 22%Current WACC 11.2% Debt to Capital 8.9%



Skype Revenue 72 194 382 551 719 860 1,084 1,456 1,884 2,319 2,638 2,914 3,177 3,421 3,599 3,745 3,872 Sales Growth - 169% 97% 45% 30% 20% 26% 34% 29% 23% 14% 10% 9% 8% 5% 4% 3%

Skype Reported Operating Profit (50) (143) (43) 23 24 21 92 191 319 512 690 873 1,055 1,163 1,197 1,198 1,220 Operating Margin -69.0% -73.9% -11.3% 4.1% 3.3% 2.4% 8.5% 13.1% 16.9% 22.1% 26.2% 30.0% 33.2% 34.0% 33.3% 32.0% 31.5%

Skype-MSFT Synergies - - - - - - 9 18 33 73 97 110 151 201 227 312 417 Adjusted Operating Profit (50) (143) (43) 23 24 21 100 210 352 585 788 983 1,205 1,364 1,423 1,510 1,637

Cash tax rate nmf nmf nmf nmf nmf nmf 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22%Cash income taxes - - - - - - 22 46 77 129 173 216 265 300 313 332 360 Earnings Before Interest After Taxes (50) (143) (43) 23 24 21 87 164 275 456 614 767 940 1,064 1,110 1,178 1,277

plus Depreciation & Amortization - - 76 79 157 161 174 194 217 241 258 225 174 187 197 205 212 less Capital Spending, recurring - - - (5) (12) (35) (44) (59) (77) (94) (107) (119) (129) (139) (147) (153) (158) less Adj Working Capital Investment - 44 26 (116) 200 11 (50) (134) (174) (49) (56) (56) (56) (56) (56) (56) (56) less Free cash flow to the entity (50) (99) 59 (19) 368 157 166 164 241 553 709 818 928 1,056 1,104 1,174 1,274

Residual value of free cash flows 13,750 Free cash flow plus residual value - - - - - - 166 164 241 553 709 818 928 1,056 1,104 1,174 15,025



Equity 2.0% 2.5% 3.0% Tax shieldCash 142 Current ValueSkype as a Division of Microsoft0.11511.5% 0.92$ 0.96$ 1.05$ 3.5%Other non-operating assets - Current ValueSkype as a Division of Microsoft0.1212.0% 0.85$ 0.89$ 0.95$ 3.7%Debt (760) Current ValueSkype as a Division of Microsoft0.12512.5% 0.79$ 0.83$ 0.87$ 3.9%Preferred - Minority Interest - Other non operating liabilities - Value 12+ monthsValue of equity 7,507 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shieldValue 12+ monthsSkype as a Division of Microsoft0.11511.5% 0.99$ 1.04$ 1.13$ 3.5%

Shares outstanding 8,432.8 8432.8 Value 12+ monthsSkype as a Division of Microsoft0.1212.0% 0.92$ 0.96$ 1.03$ 3.7%Value per share 0.89 Value 12+ monthsSkype as a Division of Microsoft0.12512.5% 0.86$ 0.90$ 0.95$ 3.9%



Skype owned by MSFTGood Case





Skype Reported Operating Profit (50) (143) (43) 23 24 21 105 241 391 710 1,003 1,361 1,777 2,119 2,470 2,733 3,059 Operating Margin -69.0% -73.9% -11.3% 4.1% 3.3% 2.4% 9.6% 15.6% 20.1% 26.7% 31.2% 35.0% 38.2% 38.5% 38.8% 37.5% 37.0%

Skype-MSFT Synergies - - - - - - 77 93 101 149 181 188 240 302 404 605 841 Adjusted Operating Profit (50) (143) (43) 23 24 21 182 333 492 859 1,184 1,549 2,018 2,421 2,874 3,338 3,900

Cash tax rate nmf nmf nmf nmf nmf nmf 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Cash income taxes (benefit) - - - - - - 40 73 108 189 260 341 444 533 632 734 858 Earnings Before Interest After Taxes (50) (143) (43) 23 24 21 220 260 384 670 923 1,208 1,574 1,889 2,242 2,604 3,042

plus Depreciation & Amortization - - 76 79 157 161 174 199 221 260 290 278 254 301 348 398 452 less Capital Spending, recurring - - - (5) (12) (35) (45) (63) (79) (108) (131) (158) (190) (224) (260) (297) (337) less Adj Working Capital Investment - 44 26 (116) 200 11 (50) (141) (178) (55) (66) (66) (66) (66) (66) (66) (66) less Free cash flow to the entity (50) (99) 59 (19) 368 157 299 255 348 767 1,016 1,262 1,573 1,899 2,265 2,639 3,091

Residual value of free cash flows 33,350 Free cash flow plus residual value - - - - - - 299 255 348 767 1,016 1,262 1,573 1,899 2,265 2,639 36,441








Skype owned by MSFTBest Case





Skype Reported Operating Profit (50) (143) (43) 23 24 21 118 295 516 978 1,446 2,105 2,975 3,646 4,532 5,478 6,682 Operating Margin -69.0% -73.9% -11.3% 4.1% 3.3% 2.4% 10.7% 18.0% 23.7% 31.3% 36.1% 40.0% 43.2% 41.0% 40.3% 39.0% 38.5%

Skype-MSFT Synergies - - - - - - 147 168 171 229 271 273 339 416 607 946 1,342 Adjusted Operating Profit (50) (143) (43) 23 24 21 265 463 686 1,207 1,717 2,378 3,314 4,062 5,139 6,424 8,024

Cash tax rate nmf nmf nmf nmf nmf nmf 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Cash income taxes (benefit) - - - - - - 58 102 151 266 378 523 729 894 1,130 1,413 1,765 Earnings Before Interest After Taxes (50) (143) (43) 23 24 21 353 361 535 942 1,339 1,855 2,585 3,168 4,008 5,011 6,259

plus Depreciation & Amortization - - 76 79 157 161 175 204 233 285 333 354 376 486 615 768 949 less Capital Spending, recurring - - - (5) (12) (35) (45) (67) (88) (127) (163) (214) (281) (362) (459) (572) (707) less Adj Working Capital Investment - 44 26 (116) 200 11 (50) (148) (196) (57) (74) (74) (74) (74) (74) (74) (74) less Free cash flow to the entity (50) (99) 59 (19) 368 157 433 350 483 1,042 1,436 1,920 2,607 3,218 4,091 5,133 6,427

Residual value of free cash flows 69,341 Free cash flow plus residual value - - - - - - 433 350 483 1,042 1,436 1,920 2,607 3,218 4,091 5,133 75,768

Present value of future cash flows - - - - - - 298 287 354 681 838 1,001 1,213 1,337 1,518 1,700 22,407






Skype S.à r.l.Base Case Key Driver Assumptions

Ascendere Associates LLCStephen [email protected]

Unlevered Cost of EquitySkype Standalone 17.0%Skype owned by MSFT 12.0%

Pretax Cost of DebtSkype Standalone 7.0%Skype owned by MSFT 3.7%

Weighted Average Cost of CapitalSkype Standalone 16.0%Skype owned by MSFT 11.2%

Terminal Growth RateSkype Standalone 2.5%Skype owned by MSFT 2.5%

Probability of BankruptcySkype Standalone 30.0%Skype owned by MSFT 1.0%



Global Population Growth 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 1.14% 1.28% 1.00% 1.00% 1.00% 1.00% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94%Skype owned by MSFT 1.14% 1.28% 1.00% 1.00% 1.00% 1.00% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94%

Global Population 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 6,830 6,918 6,987 7,056 7,126 7,197 7,265 7,332 7,401 7,470 7,540 7,611 Skype owned by MSFT 6,830 6,918 6,987 7,056 7,126 7,197 7,265 7,332 7,401 7,470 7,540 7,611

BB subscriptions % of global population 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 22% 25% 29% 32% 35% 37% 38% 39% 40% 41% 42% 43%Skype owned by MSFT 22% 25% 29% 32% 35% 37% 38% 39% 40% 41% 42% 43%

Global Broadband Subscriptions 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 1,495 1,749 2,004 2,264 2,500 2,662 2,760 2,859 2,960 3,062 3,166 3,272 Skype owned by MSFT 1,495 1,749 2,004 2,264 2,500 2,662 2,760 2,859 2,960 3,062 3,166 3,272



Registered Skype Users, Annual Growth 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 39.9% 33.9% 27.0% 21.0% 16.0% 11.0% 8.0% 7.0% 6.0% 5.0% 4.5% 4.0%Skype owned by MSFT 39.9% 30.0% 30.0% 30.0% 17.0% 12.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.5%

Registered Skype Users 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 663 888 1,127 1,364 1,582 1,756 1,897 2,029 2,151 2,259 2,360 2,455 Skype owned by MSFT 663 862 1,120 1,457 1,704 1,909 2,081 2,247 2,404 2,549 2,676 2,796

Connected Skype Users, Avg per Month, % of Registered Users 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 21.9% 21.6% 21.3% 21.0% 20.5% 20.0% 19.7% 19.4% 19.1% 18.8% 18.5% 18.2%Skype owned by MSFT 21.9% 21.6% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0%

Connected Skype Users, Avg per Month 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 145 192 240 286 324 351 374 394 411 425 437 447 Skype owned by MSFT 145 186 258 335 392 439 479 517 553 586 615 643

Avg Monthly Skype-Paying Users as % of Registered Users 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 6.1% 5.5% 5.5% 5.8% 6.5% 7.0% 7.5% 8.0% 8.5% 8.9% 9.3% 9.7%Skype owned by MSFT 6.1% 6.0% 6.1% 6.4% 7.1% 7.6% 8.1% 8.6% 9.1% 9.5% 9.9% 10.3%

Paying Skype Users, Avg per Month 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 8.8 10.5 13.2 16.6 21.1 24.6 28.0 31.5 34.9 37.8 40.6 43.3 Skype owned by MSFT 8.8 11.2 15.7 21.4 27.8 33.4 38.8 44.4 50.3 55.7 60.9 66.2



Billing Minutes, Annual Growth per User 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone -0.8% -0.7% 1.5% 2.0% 2.0% 2.0% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%Skype owned by MSFT -0.8% -0.7% 1.5% 2.0% 2.0% 2.0% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%

Billing Minutes per User per Year 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype Standalone 1,455 1,445 1,467 1,496 1,526 1,556 1,591 1,627 1,664 1,701 1,740 1,779 Skype owned by MSFT 1,455 1,445 1,467 1,496 1,526 1,556 1,591 1,627 1,664 1,701 1,740 1,779

Revenue per billing minute annual growth 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 0.0% 0.0% -6.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0%Base Case Skype owned by MSFT 0.0% 0.0% -6.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0%

Revenue per Billing Minute 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 0.067 0.067 0.063 0.059 0.055 0.051 0.047 0.044 0.041 0.038 0.035 0.033 Base Case Skype owned by MSFT 0.067 0.067 0.063 0.059 0.055 0.051 0.047 0.044 0.041 0.038 0.035 0.033



Gross Margin 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 51.7% 53.0% 55.0% 57.0% 59.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0%Base Case Skype owned by MSFT 51.7% 53.0% 54.0% 55.0% 56.0% 57.0% 58.0% 59.0% 60.0% 60.0% 60.0% 60.0%

Sales & Marketing 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 15.3% 15.0% 15.0% 15.0% 14.0% 13.0% 12.5% 12.5% 12.0% 12.5% 13.0% 13.3%Base Case Skype owned by MSFT 15.3% 15.0% 15.0% 15.0% 14.0% 13.0% 12.5% 12.5% 12.0% 12.5% 13.0% 13.3%

Product Development 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 8.4% 8.0% 8.0% 8.0% 7.0% 6.5% 6.3% 6.3% 6.5% 6.8% 7.5% 7.8%Base Case Skype owned by MSFT 8.4% 8.0% 8.0% 8.0% 7.0% 6.5% 6.3% 6.3% 6.5% 6.8% 7.5% 7.8%

General & Administrative 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 11.1% 11.0% 10.0% 9.0% 8.0% 7.0% 7.0% 7.0% 7.5% 7.5% 7.5% 7.5%Base Case Skype owned by MSFT 11.1% 11.0% 10.0% 9.0% 8.0% 7.0% 7.0% 7.0% 7.5% 7.5% 7.5% 7.5%

Amortization of Intangible Assets 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 114 114 114 114 114 114 66 - - - - - Base Case Skype owned by MSFT 114 114 114 114 114 114 66 - - - - -



MSFT Base Sales Growth 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Base Case Skype owned by MSFT 6.9% 10.0% 7.0% -10.0% 10.0% 7.0% -10.0% 10.0% 7.0% -10.0% 10.0% 7.0%

% MSFT Base Sales "saved" by Skype 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Base Case Skype owned by MSFT 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.2% 0.2% 0.2% 0.3% 0.4% 0.5%

Skype-MSFT Synergies 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone - - - - - - - - - - - - Base Case Skype owned by MSFT - 9 18 33 73 97 110 151 201 227 312 417



Cash tax rate 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021EBase Case Skype Standalone 0.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Base Case Skype owned by MSFT 0.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%

Skype S.à r.l.Key Driver Assumptions


Unlevered Cost of Equity Terminal growth rate Probability of BankruptcySkype Standalone Skype Standalone Skype Standalone

Skype StandaloneUnlevered Cost of EquityBest Case 17.0% Skype StandaloneTerminal growth rateBest Case 2.5% Skype StandaloneProbability of BankruptcyBest Case 24.0%Skype StandaloneUnlevered Cost of EquityGood Case 17.0% Skype StandaloneTerminal growth rateGood Case 2.5% Skype StandaloneProbability of BankruptcyGood Case 27.0%Skype StandaloneUnlevered Cost of EquityBase Case 17.0% Skype StandaloneTerminal growth rateBase Case 2.5% Skype StandaloneProbability of BankruptcyBase Case 30.0%Skype StandaloneUnlevered Cost of EquityBad Case 17.0% Skype StandaloneTerminal growth rateBad Case 2.5% Skype StandaloneProbability of BankruptcyBad Case 33.0%Skype StandaloneUnlevered Cost of EquityWorst Case 17.0% Skype StandaloneTerminal growth rateWorst Case 2.5% Skype StandaloneProbability of BankruptcyWorst Case 36.0%

Increments 0.0% Increments 0.00% Increments -3.00%

Skype owned by MSFT Skype owned by MSFT Skype owned by MSFTSkype owned by MSFTUnlevered Cost of EquityBest Case 12.0% Skype owned by MSFTTerminal growth rateBest Case 2.5% Skype owned by MSFTProbability of BankruptcyBest Case 0.5%Skype owned by MSFTUnlevered Cost of EquityGood Case 12.0% Skype owned by MSFTTerminal growth rateGood Case 2.5% Skype owned by MSFTProbability of BankruptcyGood Case 0.8%Skype owned by MSFTUnlevered Cost of EquityBase Case 12.0% Skype owned by MSFTTerminal growth rateBase Case 2.5% Skype owned by MSFTProbability of BankruptcyBase Case 1.0%Skype owned by MSFTUnlevered Cost of EquityBad Case 12.0% Skype owned by MSFTTerminal growth rateBad Case 2.5% Skype owned by MSFTProbability of BankruptcyBad Case 1.3%Skype owned by MSFTUnlevered Cost of EquityWorst Case 12.0% Skype owned by MSFTTerminal growth rateWorst Case 2.5% Skype owned by MSFTProbability of BankruptcyWorst Case 1.5%

Increments 0.0% Increments 0.00% Increments -0.25%

Pretax Cost of Debt Weighted Average Cost of CapitalSkype Standalone Skype Standalone

Skype StandalonePretax Cost of DebtBest Case 7.0% Skype StandalonePretax Cost of DebtBest Case 16.0%Skype StandalonePretax Cost of DebtGood Case 7.0% Skype StandalonePretax Cost of DebtGood Case 16.0%Skype StandalonePretax Cost of DebtBase Case 7.0% Skype StandalonePretax Cost of DebtBase Case 16.0%Skype StandalonePretax Cost of DebtBad Case 7.0% Skype StandalonePretax Cost of DebtBad Case 16.0%Skype StandalonePretax Cost of DebtWorst Case 7.0% Skype StandalonePretax Cost of DebtWorst Case 16.0%

Increments 0.0% Increments 0.0%

Skype owned by MSFT Skype owned by MSFTSkype owned by MSFTPretax Cost of DebtBest Case 3.7% Skype owned by MSFTPretax Cost of DebtBest Case 11.2%Skype owned by MSFTPretax Cost of DebtGood Case 3.7% Skype owned by MSFTPretax Cost of DebtGood Case 11.2%Skype owned by MSFTPretax Cost of DebtBase Case 3.7% Skype owned by MSFTPretax Cost of DebtBase Case 11.2%Skype owned by MSFTPretax Cost of DebtBad Case 3.7% Skype owned by MSFTPretax Cost of DebtBad Case 11.2%Skype owned by MSFTPretax Cost of DebtWorst Case 3.7% Skype owned by MSFTPretax Cost of DebtWorst Case 11.2%

Increments 0.0% Increments 0.0%



Skype StandaloneGlobal pop annual growth

Global pop annual growthSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneGlobal pop annual growthBest Case 1.78% 1.50% 1.50% 1.50% 1.50% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44%Skype StandaloneGlobal pop annual growthGood Case 1.53% 1.25% 1.25% 1.25% 1.25% 1.19% 1.19% 1.19% 1.19% 1.19% 1.19%Skype StandaloneGlobal pop annual growthBase Case 1.14% 1.28% 1.00% 1.00% 1.00% 1.00% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94%Skype StandaloneGlobal pop annual growthBad Case 1.03% 0.75% 0.75% 0.75% 0.75% 0.69% 0.69% 0.69% 0.69% 0.69% 0.69%Skype StandaloneGlobal pop annual growthWorst Case 0.78% 0.50% 0.50% 0.50% 0.50% 0.44% 0.44% 0.44% 0.44% 0.44% 0.44%

Increments 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTGlobal pop annual growthBest Case 1.78% 1.50% 1.50% 1.50% 1.50% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44%Skype owned by MSFTGlobal pop annual growthGood Case 1.53% 1.25% 1.25% 1.25% 1.25% 1.19% 1.19% 1.19% 1.19% 1.19% 1.19%Skype owned by MSFTGlobal pop annual growthBase Case 1.14% 1.28% 1.00% 1.00% 1.00% 1.00% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94%Skype owned by MSFTGlobal pop annual growthBad Case 1.03% 0.75% 0.75% 0.75% 0.75% 0.69% 0.69% 0.69% 0.69% 0.69% 0.69%Skype owned by MSFTGlobal pop annual growthWorst Case 0.78% 0.50% 0.50% 0.50% 0.50% 0.44% 0.44% 0.44% 0.44% 0.44% 0.44%

Increments 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%

Global PopulationSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneGlobal PopulationBest Case 6,952 7,056 7,161 7,268 7,377 7,483 7,590 7,699 7,810 7,922 8,036 Skype StandaloneGlobal PopulationGood Case 6,935 7,021 7,109 7,197 7,287 7,373 7,460 7,549 7,638 7,729 7,820 Skype StandaloneGlobal PopulationBase Case 6,830 6,918 6,987 7,056 7,126 7,197 7,265 7,332 7,401 7,470 7,540 7,611 Skype StandaloneGlobal PopulationBad Case 6,901 6,952 7,004 7,056 7,109 7,157 7,206 7,256 7,305 7,356 7,406 Skype StandaloneGlobal PopulationWorst Case 6,884 6,918 6,952 6,986 7,021 7,052 7,082 7,113 7,144 7,175 7,206

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTGlobal PopulationBest Case 6,952 7,056 7,161 7,268 7,377 7,483 7,590 7,699 7,810 7,922 8,036 Skype owned by MSFTGlobal PopulationGood Case 6,935 7,021 7,109 7,197 7,287 7,373 7,460 7,549 7,638 7,729 7,820 Skype owned by MSFTGlobal PopulationBase Case 6,830 6,918 6,987 7,056 7,126 7,197 7,265 7,332 7,401 7,470 7,540 7,611 Skype owned by MSFTGlobal PopulationBad Case 6,901 6,952 7,004 7,056 7,109 7,157 7,206 7,256 7,305 7,356 7,406 Skype owned by MSFTGlobal PopulationWorst Case 6,884 6,918 6,952 6,986 7,021 7,052 7,082 7,113 7,144 7,175 7,206



BB subscriptions % of global populationSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneBB subscriptions % of global populationBest Case 25.49% 28.89% 32.29% 35.29% 37.19% 38.19% 39.19% 40.19% 41.19% 42.19% 43.19%Skype StandaloneBB subscriptions % of global populationGood Case 25.39% 28.79% 32.19% 35.19% 37.09% 38.09% 39.09% 40.09% 41.09% 42.09% 43.09%Skype StandaloneBB subscriptions % of global populationBase Case 21.9% 25.3% 28.7% 32.1% 35.1% 37.0% 38.0% 39.0% 40.0% 41.0% 42.0% 43.0%Skype StandaloneBB subscriptions % of global populationBad Case 25.19% 28.59% 31.99% 34.99% 36.89% 37.89% 38.89% 39.89% 40.89% 41.89% 42.89%Skype StandaloneBB subscriptions % of global populationWorst Case 25.09% 28.49% 31.89% 34.89% 36.79% 37.79% 38.79% 39.79% 40.79% 41.79% 42.79%

Increments 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTBB subscriptions % of global populationBest Case 25.49% 28.89% 32.29% 35.29% 37.19% 38.19% 39.19% 40.19% 41.19% 42.19% 43.19%Skype owned by MSFTBB subscriptions % of global populationGood Case 25.39% 28.79% 32.19% 35.19% 37.09% 38.09% 39.09% 40.09% 41.09% 42.09% 43.09%Skype owned by MSFTBB subscriptions % of global populationBase Case 21.9% 25.3% 28.7% 32.1% 35.1% 37.0% 38.0% 39.0% 40.0% 41.0% 42.0% 43.0%Skype owned by MSFTBB subscriptions % of global populationBad Case 25.19% 28.59% 31.99% 34.99% 36.89% 37.89% 38.89% 39.89% 40.89% 41.89% 42.89%Skype owned by MSFTBB subscriptions % of global populationWorst Case 25.09% 28.49% 31.89% 34.89% 36.79% 37.79% 38.79% 39.79% 40.79% 41.79% 42.79%

Increments 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%

Global Broadband SubscriptionsSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneGlobal Broadband SubscriptionsBest Case 1,772 2,038 2,312 2,565 2,743 2,858 2,974 3,094 3,217 3,342 3,470 Skype StandaloneGlobal Broadband SubscriptionsGood Case 1,761 2,021 2,288 2,533 2,702 2,808 2,916 3,026 3,138 3,253 3,370 Skype StandaloneGlobal Broadband SubscriptionsBase Case 1,495 1,749 2,004 2,264 2,500 2,662 2,760 2,859 2,960 3,062 3,166 3,272 Skype StandaloneGlobal Broadband SubscriptionsBad Case 1,738 1,987 2,240 2,469 2,622 2,712 2,802 2,894 2,987 3,081 3,176 Skype StandaloneGlobal Broadband SubscriptionsWorst Case 1,727 1,971 2,217 2,437 2,583 2,665 2,747 2,830 2,914 2,998 3,083

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTGlobal Broadband SubscriptionsBest Case 1,772 2,038 2,312 2,565 2,743 2,858 2,974 3,094 3,217 3,342 3,470 Skype owned by MSFTGlobal Broadband SubscriptionsGood Case 1,761 2,021 2,288 2,533 2,702 2,808 2,916 3,026 3,138 3,253 3,370 Skype owned by MSFTGlobal Broadband SubscriptionsBase Case 1,495 1,749 2,004 2,264 2,500 2,662 2,760 2,859 2,960 3,062 3,166 3,272 Skype owned by MSFTGlobal Broadband SubscriptionsBad Case 1,738 1,987 2,240 2,469 2,622 2,712 2,802 2,894 2,987 3,081 3,176 Skype owned by MSFTGlobal Broadband SubscriptionsWorst Case 1,727 1,971 2,217 2,437 2,583 2,665 2,747 2,830 2,914 2,998 3,083



Registered Skype Users, Annual GrowthSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneRegistered Skype Users, Annual GrowthBest Case 35.9% 31.0% 25.0% 20.0% 15.0% 12.0% 11.0% 10.0% 9.0% 8.5% 8.0%Skype StandaloneRegistered Skype Users, Annual GrowthGood Case 34.9% 29.0% 23.0% 18.0% 13.0% 10.0% 9.0% 8.0% 7.0% 6.5% 6.0%Skype StandaloneRegistered Skype Users, Annual GrowthBase Case 39.9% 33.9% 27.0% 21.0% 16.0% 11.0% 8.0% 7.0% 6.0% 5.0% 4.5% 4.0%Skype StandaloneRegistered Skype Users, Annual GrowthBad Case 32.9% 25.0% 19.0% 14.0% 9.0% 6.0% 5.0% 4.0% 3.0% 2.5% 2.0%Skype StandaloneRegistered Skype Users, Annual GrowthWorst Case 31.9% 23.0% 17.0% 12.0% 7.0% 4.0% 3.0% 2.0% 1.0% 0.5% 0.0%

Increments 1.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTRegistered Skype Users, Annual GrowthBest Case 32.0% 34.0% 34.0% 21.0% 16.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.5%Skype owned by MSFTRegistered Skype Users, Annual GrowthGood Case 31.0% 32.0% 32.0% 19.0% 14.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.5%Skype owned by MSFTRegistered Skype Users, Annual GrowthBase Case 39.9% 30.0% 30.0% 30.0% 17.0% 12.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.5%Skype owned by MSFTRegistered Skype Users, Annual GrowthBad Case 29.0% 28.0% 28.0% 15.0% 10.0% 7.0% 6.0% 5.0% 0.04$ 3.0% 2.5%Skype owned by MSFTRegistered Skype Users, Annual GrowthWorst Case 28.0% 26.0% 26.0% 13.0% 8.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.5%

Increments 1.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Registered Skype UsersSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneRegistered Skype UsersBest Case 901 1,180 1,475 1,770 2,036 2,280 2,531 2,784 3,034 3,292 3,556 Skype StandaloneRegistered Skype UsersGood Case 894 1,154 1,419 1,674 1,892 2,081 2,268 2,450 2,621 2,792 2,959 Skype StandaloneRegistered Skype UsersBase Case 663 888 1,127 1,364 1,582 1,756 1,897 2,029 2,151 2,259 2,360 2,455 Skype StandaloneRegistered Skype UsersBad Case 881 1,101 1,310 1,494 1,628 1,726 1,812 1,885 1,941 1,990 2,030 Skype StandaloneRegistered Skype UsersWorst Case 874 1,075 1,258 1,409 1,508 1,568 1,615 1,648 1,664 1,672 1,672

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTRegistered Skype UsersBest Case 875 1,173 1,571 1,901 2,206 2,492 2,791 3,099 3,408 3,715 4,031 Skype owned by MSFTRegistered Skype UsersGood Case 869 1,146 1,513 1,801 2,053 2,279 2,507 2,732 2,951 3,157 3,363 Skype owned by MSFTRegistered Skype UsersBase Case 663 862 1,120 1,457 1,704 1,909 2,081 2,247 2,404 2,549 2,676 2,796 Skype owned by MSFTRegistered Skype UsersBad Case 855 1,095 1,401 1,611 1,773 1,897 2,010 2,111 2,195 2,261 2,318 Skype owned by MSFTRegistered Skype UsersWorst Case 849 1,069 1,347 1,522 1,644 1,726 1,796 1,849 1,886 1,905 1,915



% of Skype registered usersSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Standalone% of Skype registered usersBest Case 21.6% 21.6% 21.5% 21.3% 21.0% 21.2% 21.4% 21.6% 21.8% 22.0% 22.2%Skype Standalone% of Skype registered usersGood Case 21.6% 21.4% 21.3% 20.9% 20.5% 20.5% 20.4% 20.4% 20.3% 20.3% 20.2%Skype Standalone% of Skype registered usersBase Case 21.9% 21.6% 21.3% 21.0% 20.5% 20.0% 19.7% 19.4% 19.1% 18.8% 18.5% 18.2%Skype Standalone% of Skype registered usersBad Case 21.6% 21.2% 20.8% 20.1% 19.5% 19.0% 18.4% 17.9% 17.3% 16.8% 16.2%Skype Standalone% of Skype registered usersWorst Case 21.6% 21.1% 20.5% 19.8% 19.0% 18.2% 17.4% 16.6% 15.8% 15.0% 14.2%

Increments 0.00% 0.13% 0.25% 0.38% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFT% of Skype registered usersBest Case 21.6% 23.3% 23.5% 23.8% 24.0% 24.5% 25.0% 25.5% 26.0% 26.5% 27.0%Skype owned by MSFT% of Skype registered usersGood Case 21.6% 23.1% 23.3% 23.4% 23.5% 23.8% 24.0% 24.3% 24.5% 24.8% 25.0%Skype owned by MSFT% of Skype registered usersBase Case 21.9% 21.6% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0%Skype owned by MSFT% of Skype registered usersBad Case 21.6% 22.9% 22.8% 22.6% 22.5% 22.3% 22.0% 21.8% 21.5% 21.3% 21.0%Skype owned by MSFT% of Skype registered usersWorst Case 21.6% 22.8% 22.5% 22.3% 22.0% 21.5% 21.0% 20.5% 20.0% 19.5% 19.0%

Increments 0.00% 0.13% 0.25% 0.38% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%

Connected Skype Users, Avg per MonthSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneConnected Skype Users, Avg per MonthBest Case 194 254 317 376 427 483 542 601 661 724 789 Skype StandaloneConnected Skype Users, Avg per MonthGood Case 193 247 302 349 388 426 463 499 532 565 598 Skype StandaloneConnected Skype Users, Avg per MonthBase Case 145 192 240 286 324 351 374 394 411 425 437 447 Skype StandaloneConnected Skype Users, Avg per MonthBad Case 190 233 272 301 318 327 333 336 336 333 329 Skype StandaloneConnected Skype Users, Avg per MonthWorst Case 189 226 258 278 286 285 281 273 263 251 237

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTConnected Skype Users, Avg per MonthBest Case 189 273 369 452 529 611 698 790 886 985 1,088 Skype owned by MSFTConnected Skype Users, Avg per MonthGood Case 188 265 352 421 482 541 602 663 723 781 841 Skype owned by MSFTConnected Skype Users, Avg per MonthBase Case 145 186 258 335 392 439 479 517 553 586 615 643 Skype owned by MSFTConnected Skype Users, Avg per MonthBad Case 185 250 319 365 399 422 442 459 472 481 487 Skype owned by MSFTConnected Skype Users, Avg per MonthWorst Case 183 243 303 339 362 371 377 379 377 372 364



% of Skype connected usersSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Standalone% of Skype connected usersBest Case 5.5% 5.8% 6.3% 7.3% 8.0% 9.0% 10.0% 11.0% 11.9% 12.8% 13.7%Skype Standalone% of Skype connected usersGood Case 5.5% 5.6% 6.1% 6.9% 7.5% 8.3% 9.0% 9.8% 10.4% 11.1% 11.7%Skype Standalone% of Skype connected usersBase Case 6.1% 5.5% 5.5% 5.8% 6.5% 7.0% 7.5% 8.0% 8.5% 8.9% 9.3% 9.7%Skype Standalone% of Skype connected usersBad Case 5.5% 5.4% 5.6% 6.1% 6.5% 6.8% 7.0% 7.3% 7.4% 7.6% 7.7%Skype Standalone% of Skype connected usersWorst Case 5.5% 5.3% 5.3% 5.8% 6.0% 6.0% 6.0% 6.0% 5.9% 5.8% 5.7%

Increments 0.00% 0.13% 0.25% 0.38% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFT% of Skype connected usersBest Case 6.0% 6.4% 6.6% 7.9% 8.6% 9.6% 10.6% 11.6% 12.5% 13.4% 14.3%Skype owned by MSFT% of Skype connected usersGood Case 6.0% 6.2% 6.3% 7.5% 8.1% 8.9% 9.6% 10.4% 11.0% 11.7% 12.3%Skype owned by MSFT% of Skype connected usersBase Case 6.1% 6.0% 6.1% 6.4% 7.1% 7.6% 8.1% 8.6% 9.1% 9.5% 9.9% 10.3%Skype owned by MSFT% of Skype connected usersBad Case 6.0% 6.0% 5.8% 6.7% 7.1% 7.4% 7.6% 7.9% 8.0% 8.2% 8.3%Skype owned by MSFT% of Skype connected usersWorst Case 6.0% 5.9% 5.6% 6.4% 6.6% 6.6% 6.6% 6.6% 6.5% 6.4% 6.3%

Increments 0.00% 0.13% 0.25% 0.38% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%

Paying Skype Users, Avg per MonthSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandalonePaying Skype Users, Avg per MonthBest Case 10.7 14.6 20.0 27.3 34.2 43.5 54.2 66.1 78.7 92.7 108.1 Skype StandalonePaying Skype Users, Avg per MonthGood Case 10.6 13.9 18.2 24.0 29.1 35.1 41.6 48.6 55.3 62.5 69.9 Skype StandalonePaying Skype Users, Avg per MonthBase Case 8.8 10.5 13.2 16.6 21.1 24.6 28.0 31.5 34.9 37.8 40.6 43.3 Skype StandalonePaying Skype Users, Avg per MonthBad Case 10.5 12.5 15.1 18.4 20.6 22.1 23.3 24.4 24.9 25.2 25.3 Skype StandalonePaying Skype Users, Avg per MonthWorst Case 10.4 11.9 13.7 16.0 17.2 17.1 16.9 16.4 15.5 14.5 13.5

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTPaying Skype Users, Avg per MonthBest Case 11.3 17.3 24.3 35.4 45.5 58.6 74.0 91.7 110.8 131.9 155.6 Skype owned by MSFTPaying Skype Users, Avg per MonthGood Case 11.3 16.5 22.2 31.5 39.1 47.9 57.8 68.6 79.5 91.0 103.4 Skype owned by MSFTPaying Skype Users, Avg per MonthBase Case 8.8 11.2 15.7 21.4 27.8 33.4 38.8 44.4 50.3 55.7 60.9 66.2 Skype owned by MSFTPaying Skype Users, Avg per MonthBad Case 11.1 15.0 18.6 24.5 28.3 31.0 33.6 36.0 37.8 39.2 40.4 Skype owned by MSFTPaying Skype Users, Avg per MonthWorst Case 11.0 14.2 16.9 21.5 23.9 24.5 24.9 25.0 24.5 23.8 22.9



Annual billing minute growth per userSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneAnnual billing minute growth per userBest Case -0.7% 2.0% 3.0% 3.5% 4.0% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8%Skype StandaloneAnnual billing minute growth per userGood Case -0.7% 1.8% 2.5% 2.8% 3.0% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%Skype StandaloneAnnual billing minute growth per userBase Case -0.8% -0.7% 1.5% 2.0% 2.0% 2.0% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%Skype StandaloneAnnual billing minute growth per userBad Case -0.7% 1.3% 1.5% 1.3% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Skype StandaloneAnnual billing minute growth per userWorst Case -0.7% 1.0% 1.0% 0.5% 0.0% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3%

Increments 0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTAnnual billing minute growth per userBest Case -0.7% 2.0% 0.2% 3.5% 4.0% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8%Skype owned by MSFTAnnual billing minute growth per userGood Case -0.7% 1.8% -0.3% 2.8% 3.0% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%Skype owned by MSFTAnnual billing minute growth per userBase Case -0.8% -0.7% 1.5% 2.0% 2.0% 2.0% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%Skype owned by MSFTAnnual billing minute growth per userBad Case -0.7% 1.3% -1.3% 1.3% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Skype owned by MSFTAnnual billing minute growth per userWorst Case -0.7% 1.0% -1.8% 0.5% 0.0% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3%

Increments 0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%

Billing Minutes per User per YearSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneBilling Minutes per User per YearBest Case 1,445 1,474 1,518 1,571 1,634 1,712 1,793 1,878 1,967 2,061 2,159 Skype StandaloneBilling Minutes per User per YearGood Case 1,445 1,470 1,507 1,548 1,595 1,651 1,709 1,768 1,830 1,894 1,961 Skype StandaloneBilling Minutes per User per YearBase Case 1,455 1,445 1,467 1,496 1,526 1,556 1,591 1,627 1,664 1,701 1,740 1,779 Skype StandaloneBilling Minutes per User per YearBad Case 1,445 1,463 1,485 1,504 1,519 1,534 1,549 1,565 1,580 1,596 1,612 Skype StandaloneBilling Minutes per User per YearWorst Case 1,445 1,459 1,474 1,481 1,481 1,478 1,474 1,470 1,467 1,463 1,459

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTBilling Minutes per User per YearBest Case 1,445 1,474 1,477 1,529 1,590 1,666 1,745 1,828 1,915 2,006 2,101 Skype owned by MSFTBilling Minutes per User per YearGood Case 1,445 1,470 1,466 1,507 1,552 1,606 1,662 1,721 1,781 1,843 1,908 Skype owned by MSFTBilling Minutes per User per YearBase Case 1,455 1,445 1,467 1,496 1,526 1,556 1,591 1,627 1,664 1,701 1,740 1,779 Skype owned by MSFTBilling Minutes per User per YearBad Case 1,445 1,463 1,445 1,463 1,477 1,492 1,507 1,522 1,537 1,553 1,568 Skype owned by MSFTBilling Minutes per User per YearWorst Case 1,445 1,459 1,434 1,441 1,441 1,437 1,434 1,430 1,427 1,423 1,419



Revenue per billing minute annual growthSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneRevenue per billing minute annual growthBest Case 0.5% -5.0% -5.5% -5.0% -4.0% -2.5% -1.0% -0.5% 0.0% 0.0% 0.0%Skype StandaloneRevenue per billing minute annual growthGood Case 0.3% -5.5% -6.3% -6.0% -5.5% -4.8% -4.0% -3.8% -3.5% -3.5% -3.5%Skype StandaloneRevenue per billing minute annual growthBase Case 0.0% 0.0% -6.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0%Skype StandaloneRevenue per billing minute annual growthBad Case -0.3% -6.5% -7.8% -8.0% -8.5% -9.3% -10.0% -10.3% -10.5% -10.5% -10.5%Skype StandaloneRevenue per billing minute annual growthWorst Case -0.5% -7.0% -8.5% -9.0% -10.0% -11.5% -13.0% -13.5% -14.0% -14.0% -14.0%

Increments 0.25% 0.50% 0.75% 1.00% 1.50% 2.25% 3.00% 3.25% 3.50% 3.50% 3.50%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTRevenue per billing minute annual growthBest Case 0.5% -5.0% -5.5% -5.0% -4.0% -2.5% -1.0% -0.5% 0.0% 0.0% 0.0%Skype owned by MSFTRevenue per billing minute annual growthGood Case 0.3% -5.5% -6.3% -6.0% -5.5% -4.8% -4.0% -3.8% -3.5% -3.5% -3.5%Skype owned by MSFTRevenue per billing minute annual growthBase Case 0.0% 0.0% -6.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0%Skype owned by MSFTRevenue per billing minute annual growthBad Case -0.3% -6.5% -7.8% -8.0% -8.5% -9.3% -10.0% -10.3% -10.5% -10.5% -10.5%Skype owned by MSFTRevenue per billing minute annual growthWorst Case -0.5% -7.0% -8.5% -9.0% -10.0% -11.5% -13.0% -13.5% -14.0% -14.0% -14.0%

Increments 0.25% 0.50% 0.75% 1.00% 1.50% 2.25% 3.00% 3.25% 3.50% 3.50% 3.50%

Revenue per Billing MinuteSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneRevenue per Billing MinuteBest Case 0.068 0.064 0.061 0.058 0.055 0.054 0.053 0.053 0.053 0.053 0.053 Skype StandaloneRevenue per Billing MinuteGood Case 0.067 0.064 0.060 0.056 0.053 0.050 0.048 0.047 0.045 0.043 0.042 Skype StandaloneRevenue per Billing MinuteBase Case 0.067 0.067 0.063 0.059 0.055 0.051 0.047 0.044 0.041 0.038 0.035 0.033 Skype StandaloneRevenue per Billing MinuteBad Case 0.067 0.063 0.058 0.053 0.049 0.044 0.040 0.036 0.032 0.029 0.026 Skype StandaloneRevenue per Billing MinuteWorst Case 0.067 0.062 0.057 0.052 0.047 0.041 0.036 0.031 0.027 0.023 0.020

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTRevenue per Billing MinuteBest Case 0.068 0.064 0.061 0.058 0.055 0.054 0.053 0.053 0.053 0.053 0.053 Skype owned by MSFTRevenue per Billing MinuteGood Case 0.067 0.064 0.060 0.056 0.053 0.050 0.048 0.047 0.045 0.043 0.042 Skype owned by MSFTRevenue per Billing MinuteBase Case 0.067 0.067 0.063 0.059 0.055 0.051 0.047 0.044 0.041 0.038 0.035 0.033 Skype owned by MSFTRevenue per Billing MinuteBad Case 0.067 0.063 0.058 0.053 0.049 0.044 0.040 0.036 0.032 0.029 0.026 Skype owned by MSFTRevenue per Billing MinuteWorst Case 0.067 0.062 0.057 0.052 0.047 0.041 0.036 0.031 0.027 0.023 0.020



Gross Margin 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64Skype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneGross Margin Best Case 53.5% 56.0% 58.5% 61.0% 62.5% 63.0% 64.0% 64.0% 64.0% 64.0% 64.0%Skype StandaloneGross Margin Good Case 53.3% 55.5% 57.8% 60.0% 61.3% 61.5% 62.0% 63.0% 64.0% 64.0% 64.0%Skype StandaloneGross Margin Base Case 51.7% 53.0% 55.0% 57.0% 59.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0%Skype StandaloneGross Margin Bad Case 52.8% 54.5% 56.3% 58.0% 58.8% 58.5% 58.0% 57.0% 56.0% 55.0% 54.0%Skype StandaloneGross Margin Worst Case 52.5% 54.0% 55.5% 57.0% 57.5% 57.0% 56.0% 54.0% 52.0% 50.0% 48.0%

Increments 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 2.00% 3.00% 4.00% 5.00% 6.00%0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTGross Margin Best Case 53.5% 55.0% 56.5% 58.0% 59.5% 61.0% 63.0% 64.0% 64.0% 64.0% 64.0%Skype owned by MSFTGross Margin Good Case 53.3% 54.5% 55.8% 57.0% 58.3% 59.5% 61.0% 63.0% 64.0% 64.0% 64.0%Skype owned by MSFTGross Margin Base Case 51.7% 53.0% 54.0% 55.0% 56.0% 57.0% 58.0% 59.0% 60.0% 60.0% 60.0% 60.0%Skype owned by MSFTGross Margin Bad Case 52.8% 53.5% 54.3% 55.0% 55.8% 56.5% 57.0% 57.0% 56.0% 55.0% 54.0%Skype owned by MSFTGross Margin Worst Case 52.5% 53.0% 53.5% 54.0% 54.5% 55.0% 55.0% 54.0% 52.0% 50.0% 48.0%

Increments 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 2.00% 3.00% 4.00% 5.00% 6.00%

Sales & MarketingSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Standalone Sales & MarketingBest Case 14.5% 14.0% 13.5% 12.0% 11.0% 10.5% 10.5% 11.0% 11.5% 12.0% 12.3%Skype Standalone Sales & MarketingGood Case 14.8% 14.5% 14.3% 13.0% 12.0% 11.5% 11.5% 11.5% 12.0% 12.5% 12.8%Skype Standalone Sales & MarketingBase Case 15.3% 15.0% 15.0% 15.0% 14.0% 13.0% 12.5% 12.5% 12.0% 12.5% 13.0% 13.3%Skype Standalone Sales & MarketingBad Case 15.3% 15.5% 15.8% 15.0% 14.0% 13.5% 13.5% 12.5% 13.0% 13.5% 13.8%Skype Standalone Sales & MarketingWorst Case 15.5% 16.0% 16.5% 16.0% 15.0% 14.5% 14.5% 13.0% 13.5% 14.0% 14.3%

Increments -0.25% -0.50% -0.75% -1.00% -1.00% -1.00% -1.00% -0.50% -0.50% -0.50% -0.50%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFT Sales & MarketingBest Case 14.5% 14.0% 13.5% 12.0% 11.0% 10.5% 10.5% 11.0% 11.5% 12.0% 12.3%Skype owned by MSFT Sales & MarketingGood Case 14.8% 14.5% 14.3% 13.0% 12.0% 11.5% 11.5% 11.5% 12.0% 12.5% 12.8%Skype owned by MSFT Sales & MarketingBase Case 15.3% 15.0% 15.0% 15.0% 14.0% 13.0% 12.5% 12.5% 12.0% 12.5% 13.0% 13.3%Skype owned by MSFT Sales & MarketingBad Case 15.3% 15.5% 15.8% 15.0% 14.0% 13.5% 13.5% 12.5% 13.0% 13.5% 13.8%Skype owned by MSFT Sales & MarketingWorst Case 15.5% 16.0% 16.5% 16.0% 15.0% 14.5% 14.5% 13.0% 13.5% 14.0% 14.3%

Increments -0.25% -0.50% -0.75% -1.00% -1.00% -1.00% -1.00% -0.50% -0.50% -0.50% -0.50%



Product DevelopmentSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Standalone Product DevelopmentBest Case 7.5% 7.0% 6.5% 5.0% 4.5% 4.3% 4.3% 5.5% 5.8% 6.5% 6.8%Skype Standalone Product DevelopmentGood Case 7.8% 7.5% 7.3% 6.0% 5.5% 5.3% 5.3% 6.0% 6.3% 7.0% 7.3%Skype Standalone Product DevelopmentBase Case 8.4% 8.0% 8.0% 8.0% 7.0% 6.5% 6.3% 6.3% 6.5% 6.8% 7.5% 7.8%Skype Standalone Product DevelopmentBad Case 8.3% 8.5% 8.8% 8.0% 7.5% 7.3% 7.3% 7.0% 7.3% 8.0% 8.3%Skype Standalone Product DevelopmentWorst Case 8.5% 9.0% 9.5% 9.0% 8.5% 8.3% 8.3% 7.5% 7.8% 8.5% 8.8%

Increments -0.25% -0.50% -0.75% -1.00% -1.00% -1.00% -1.00% -0.50% -0.50% -0.50% -0.50%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFT Product DevelopmentBest Case 7.5% 7.0% 6.5% 5.0% 4.5% 4.3% 4.3% 5.5% 5.8% 6.5% 6.8%Skype owned by MSFT Product DevelopmentGood Case 7.8% 7.5% 7.3% 6.0% 5.5% 5.3% 5.3% 6.0% 6.3% 7.0% 7.3%Skype owned by MSFT Product DevelopmentBase Case 8.4% 8.0% 8.0% 8.0% 7.0% 6.5% 6.3% 6.3% 6.5% 6.8% 7.5% 7.8%Skype owned by MSFT Product DevelopmentBad Case 8.3% 8.5% 8.8% 8.0% 7.5% 7.3% 7.3% 7.0% 7.3% 8.0% 8.3%Skype owned by MSFT Product DevelopmentWorst Case 8.5% 9.0% 9.5% 9.0% 8.5% 8.3% 8.3% 7.5% 7.8% 8.5% 8.8%

Increments -0.25% -0.50% -0.75% -1.00% -1.00% -1.00% -1.00% -0.50% -0.50% -0.50% -0.50%

General & AdministrativeSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Standalone General & AdministrativeBest Case 10.5% 9.0% 7.5% 6.0% 5.0% 5.0% 5.0% 6.5% 6.5% 6.5% 6.5%Skype Standalone General & AdministrativeGood Case 10.8% 9.5% 8.3% 7.0% 6.0% 6.0% 6.0% 7.0% 7.0% 7.0% 7.0%Skype Standalone General & AdministrativeBase Case 11.1% 11.0% 10.0% 9.0% 8.0% 7.0% 7.0% 7.0% 7.5% 7.5% 7.5% 7.5%Skype Standalone General & AdministrativeBad Case 11.3% 10.5% 9.8% 9.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%Skype Standalone General & AdministrativeWorst Case 11.5% 11.0% 10.5% 10.0% 9.0% 9.0% 9.0% 8.5% 8.5% 8.5% 8.5%

Increments -0.25% -0.50% -0.75% -1.00% -1.00% -1.00% -1.00% -0.50% -0.50% -0.50% -0.50%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFT General & AdministrativeBest Case 10.5% 9.0% 7.5% 6.0% 5.0% 5.0% 5.0% 6.5% 6.5% 6.5% 6.5%Skype owned by MSFT General & AdministrativeGood Case 10.8% 9.5% 8.3% 7.0% 6.0% 6.0% 6.0% 7.0% 7.0% 7.0% 7.0%Skype owned by MSFT General & AdministrativeBase Case 11.1% 11.0% 10.0% 9.0% 8.0% 7.0% 7.0% 7.0% 7.5% 7.5% 7.5% 7.5%Skype owned by MSFT General & AdministrativeBad Case 11.3% 10.5% 9.8% 9.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%Skype owned by MSFT General & AdministrativeWorst Case 11.5% 11.0% 10.5% 10.0% 9.0% 9.0% 9.0% 8.5% 8.5% 8.5% 8.5%

Increments -0.25% -0.50% -0.75% -1.00% -1.00% -1.00% -1.00% -0.50% -0.50% -0.50% -0.50%



Amortization of Intangible AssetsSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Standalone Amortization of Intangible AssetsBest Case 114 114 114 114 114 66 - - - - - Skype Standalone Amortization of Intangible AssetsGood Case 114 114 114 114 114 66 - - - - - Skype Standalone Amortization of Intangible AssetsBase Case 114 114 114 114 114 114 66 - - - - - Skype Standalone Amortization of Intangible AssetsBad Case 114 114 114 114 114 66 - - - - - Skype Standalone Amortization of Intangible AssetsWorst Case 114 114 114 114 114 66 - - - - -

Increments - - - - - -

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFT Amortization of Intangible AssetsBest Case 114 114 114 114 114 66 - - - - - Skype owned by MSFT Amortization of Intangible AssetsGood Case 114 114 114 114 114 66 - - - - - Skype owned by MSFT Amortization of Intangible AssetsBase Case 114 114 114 114 114 114 66 - - - - - Skype owned by MSFT Amortization of Intangible AssetsBad Case 114 114 114 114 114 66 - - - - - Skype owned by MSFT Amortization of Intangible AssetsWorst Case 114 114 114 114 114 66 - - - - -

Increments - - - - - -

MSFT Base Sales GrowthSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Standalone MSFT Base Sales GrowthBest Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Skype Standalone MSFT Base Sales GrowthGood Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Skype Standalone MSFT Base Sales GrowthBase Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Skype Standalone MSFT Base Sales GrowthBad Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Skype Standalone MSFT Base Sales GrowthWorst Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Increments 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFT MSFT Base Sales GrowthBest Case 10.5% 8.0% -8.5% 12.0% 9.0% -8.0% 12.0% 9.0% -8.0% 12.0% 9.0%Skype owned by MSFT MSFT Base Sales GrowthGood Case 10.3% 7.5% -9.3% 11.0% 8.0% -9.0% 11.0% 8.0% -9.0% 11.0% 8.0%Skype owned by MSFT MSFT Base Sales GrowthBase Case 6.9% 10.0% 7.0% -10.0% 10.0% 7.0% -10.0% 10.0% 7.0% -10.0% 10.0% 7.0%Skype owned by MSFT MSFT Base Sales GrowthBad Case 9.8% 6.5% -10.8% 9.0% 6.0% -11.0% 9.0% 6.0% -11.0% 9.0% 6.0%Skype owned by MSFT MSFT Base Sales GrowthWorst Case 9.5% 6.0% -11.5% 8.0% 5.0% -12.0% 8.0% 5.0% -12.0% 8.0% 5.0%

Increments 0.25% 0.50% 0.75% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%



MSFT Base RevenueSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Standalone MSFT Base RevenueBest Case - - - - - - - - - - - Skype Standalone MSFT Base RevenueGood Case - - - - - - - - - - - Skype Standalone MSFT Base RevenueBase Case - - - - - - - - - - - - Skype Standalone MSFT Base RevenueBad Case - - - - - - - - - - - Skype Standalone MSFT Base RevenueWorst Case - - - - - - - - - - -

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFT MSFT Base RevenueBest Case 69,045 74,568 68,230 76,418 83,295 76,632 85,827 93,552 86,068 96,396 105,072 Skype owned by MSFT MSFT Base RevenueGood Case 68,889 74,055 67,205 74,598 80,566 73,315 81,379 87,890 79,980 88,777 95,879 Skype owned by MSFT MSFT Base RevenueBase Case 62,484 68,732 73,544 66,189 72,808 77,905 70,114 77,126 82,525 74,272 81,699 87,418 Skype owned by MSFT MSFT Base RevenueBad Case 68,576 73,034 65,183 71,049 75,312 67,028 73,060 77,444 68,925 75,128 79,636 Skype owned by MSFT MSFT Base RevenueWorst Case 68,420 72,525 64,185 69,320 72,786 64,051 69,175 72,634 63,918 69,031 72,483

% MSFT Base Sales "saved" by SkypeSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype Standalone% MSFT Base Sales "saved" by SkypeBest Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Skype Standalone% MSFT Base Sales "saved" by SkypeGood Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Skype Standalone% MSFT Base Sales "saved" by SkypeBase Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Skype Standalone% MSFT Base Sales "saved" by SkypeBad Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Skype Standalone% MSFT Base Sales "saved" by SkypeWorst Case 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Increments 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFT% MSFT Base Sales "saved" by SkypeBest Case 0.2% 0.2% 0.3% 0.3% 0.3% 0.4% 0.4% 0.4% 0.7% 1.0% 1.3%Skype owned by MSFT% MSFT Base Sales "saved" by SkypeGood Case 0.1% 0.1% 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% 0.5% 0.7% 0.9%Skype owned by MSFT% MSFT Base Sales "saved" by SkypeBase Case 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.2% 0.2% 0.2% 0.3% 0.4% 0.5%Skype owned by MSFT% MSFT Base Sales "saved" by SkypeBad Case -0.1% -0.1% -0.1% 0.0% 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%Skype owned by MSFT% MSFT Base Sales "saved" by SkypeWorst Case -0.2% -0.2% -0.2% -0.1% -0.1% 0.0% 0.0% 0.0% -0.1% -0.2% -0.3%

Increments 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.20% 0.30% 0.40%



Skype-MSFT SynergiesSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneSkype-MSFT SynergiesBest Case - - - - - - - - - - - Skype StandaloneSkype-MSFT SynergiesGood Case - - - - - - - - - - - Skype StandaloneSkype-MSFT SynergiesBase Case - - - - - - - - - - - - Skype StandaloneSkype-MSFT SynergiesBad Case - - - - - - - - - - - Skype StandaloneSkype-MSFT SynergiesWorst Case - - - - - - - - - - -

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTSkype-MSFT SynergiesBest Case 147 168 171 229 271 273 339 416 607 946 1,342 Skype owned by MSFTSkype-MSFT SynergiesGood Case 77 93 101 149 181 188 240 302 404 605 841 Skype owned by MSFTSkype-MSFT SynergiesBase Case - 9 18 33 73 97 110 151 201 227 312 417 Skype owned by MSFTSkype-MSFT SynergiesBad Case (60) (55) (33) - 19 38 70 112 72 61 61 Skype owned by MSFTSkype-MSFT SynergiesWorst Case (128) (127) (96) (69) (55) (28) (3) 32 (61) (151) (234)

Cash tax rateSkype Standalone 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Skype StandaloneCash tax rate Best Case 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Skype StandaloneCash tax rate Good Case 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Skype StandaloneCash tax rate Base Case nmf 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Skype StandaloneCash tax rate Bad Case 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Skype StandaloneCash tax rate Worst Case 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%

Increments 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Skype owned by MSFT 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ESkype owned by MSFTCash tax rate Best Case 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Skype owned by MSFTCash tax rate Good Case 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Skype owned by MSFTCash tax rate Base Case nmf 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Skype owned by MSFTCash tax rate Bad Case 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Skype owned by MSFTCash tax rate Worst Case 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%

Increments 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Operating Profit Valuation Impact

Worst Case 2010 2011E 2012E 2013E 2014E 2015E 2016E 20119E 2018E 2019E 2020E 2021E WACC

Unlevered Firm

Value

Interest Tax

ShieldsPotential

BankruptcyEnterprise

value Cash DebtEquity Value

Value / MSFT Share

Skype Standalone 21 56 80 103 156 182 197 216 187 135 93 64 785 215 (99) 901 142 (760) 284 0.03 + Addressable Market Impact 12 37 68 99 153 218 285 356 385 400 422 209 (89) (26) 94 - - 94 0.01 + MSFT Product Stickiness Impact (128) (127) (96) (69) (55) (28) (3) 32 (61) (151) (234) (639) - 80 (558) - - (558) (0.07) Skype owned by MSFT 21 (62) (22) 23 121 184 243 294 310 147 (3) (128) 16.0% 356 126 (45) 437 142 (760) (181) (0.02)

+ Capital Structure Impact 17 285 43 345 - - 345 0.04 Impact to Microsoft Valuation 11.2% 373 411 (2) 782 142 (760) 165 0.02


Bad Case 2010 2011E 2012E 2013E 2014E 2015E 2016E 20119E 2018E 2019E 2020E 2021E WACC

Unlevered Firm

Value

Interest Tax

ShieldsPotential



Value / MSFT Share

Skype Standalone 21 68 115 171 268 332 379 420 402 348 293 250 1,449 215 (167) 1,496 142 (760) 879 0.10 + Addressable Market Impact 12 37 68 99 153 218 285 356 385 400 422 427 (89) (49) 288 - - 288 0.03 + MSFT Product Stickiness Impact (60) (55) (33) - 19 38 70 112 72 61 61 39 - (5) 35 - - 35 0.00 Skype owned by MSFT 21 19 92 163 324 439 539 637 689 587 504 450 16.0% 1,915 126 (221) 1,820 142 (760) 1,202 0.14

+ Capital Structure Impact 1,215 285 207 1,708 - - 1,708 0.20 Impact to Microsoft Valuation 11.2% 3,130 411 (14) 3,528 142 (760) 2,910 0.35


Base Case 2010 2011E 2012E 2013E 2014E 2015E 2016E 20119E 2018E 2019E 2020E 2021E WACC

Unlevered Firm

Value

Interest Tax

ShieldsPotential



Value / MSFT Share

Skype Standalone 21 80 155 251 413 537 655 770 807 812 799 798 2,765 215 (290) 2,689 142 (760) 2,072 0.25 + Addressable Market Impact 12 37 68 99 153 218 285 356 385 400 422 862 (89) (91) 683 - - 683 0.08 + MSFT Product Stickiness Impact 9 18 33 73 97 110 151 201 227 312 417 1,687 - (177) 1,510 - - 1,510 0.18 Skype owned by MSFT 21 100 210 352 585 788 983 1,205 1,364 1,423 1,510 1,637 16.0% 5,314 126 (558) 4,882 142 (760) 4,264 0.51



Good Case 2010 2011E 2012E 2013E 2014E 2015E 2016E 20119E 2018E 2019E 2020E 2021E WACC

Unlevered Firm

Value

Interest Tax

ShieldsPotential



Value / MSFT Share

Skype Standalone 21 92 198 345 595 814 1,068 1,352 1,544 1,767 1,927 2,126 5,291 215 (500) 5,006 142 (760) 4,389 0.52 + Addressable Market Impact 12 37 68 99 153 218 285 356 385 400 422 1,927 (89) (182) 1,656 - - 1,656 0.20 + MSFT Product Stickiness Impact 77 93 101 149 181 188 240 302 404 605 841 1,684 - (159) 1,525 - - 1,525 0.18 Skype owned by MSFT 21 182 333 492 859 1,184 1,549 2,018 2,421 2,874 3,338 3,900 16.0% 8,902 126 (841) 8,187 142 (760) 7,570 0.90



Best Case 2010 2011E 2012E 2013E 2014E 2015E 2016E 20119E 2018E 2019E 2020E 2021E WACC

Unlevered Firm

Value

Interest Tax

ShieldsPotential



Value / MSFT Share

Skype Standalone 21 105 245 456 823 1,183 1,669 2,290 2,704 3,309 3,956 4,771 10,212 215 (858) 9,569 142 (760) 8,952 1.06 + Addressable Market Impact 12 37 68 99 153 218 285 356 385 400 422 3,612 (89) (303) 3,220 - - 3,220 0.38 + MSFT Product Stickiness Impact 147 168 171 229 271 273 339 416 607 946 1,342 2,674 - (225) 2,450 - - 2,450 0.29 Skype owned by MSFT 21 265 463 686 1,207 1,717 2,378 3,314 4,062 5,139 6,424 8,024 16.0% 16,499 126 (1,386) 15,239 142 (760) 14,622 1.73

+ Capital Structure Impact 15,136 285 1,331 16,752 - - 16,752 1.99 Source: Ascendere Associates LLC Impact to Microsoft Valuation 11.2% 31,635 411 (55) 31,991 142 (760) 31,373 3.72

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J. Stephen Castellano – founded Ascendere Associates LLC to provide innovative equity research and investment advisory services that blends fundamental and quantitative approaches. In general, our approach is quite simple -- we believe that return on invested capital and long-term earnings growth are key to stock valuation. More specifically, we use powerful and unique financial models that combine publicly available data, consensus estimates and our own inputs to generate consistent and actionable stock recommendations.

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Ascendere Associates, LLC (2009-Present) Boston Private Value Investors , Equity Research, Equity Research Analyst (2005-2009) Pyramid Research, Contract Consultant, Telecom Services (2002-2003) Credit Lyonnais Securities (USA), Equity Research, Telecom Services, Vice President (2000-2001) Warburg Dillon Read, Equity Research, Telecom Services, Research Associate (1999-2000) PaineWebber, Equity Research, Steel and Nonferrous Metals, Research Associate, Editor (1995-1999)

Documents

Detailed Scenario Analysis of Microsoft's Acquisition of Skype