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.

J. Stephen Castellano
steve@ascenderellc.com

Page 1

Ascendere Associates LLC
www.ascenderellc.com

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)

Worst Case
Bad Case
Base Case
Good Case
Best Case
All Scenarios

Scenario
Probability
5%
15%
60%
15%
5%
100%

Skype
Standalone
Value
284
879
2,072 +
4,389
8,952

Benefit of
MSFT
Market
94
288
683 +
1,656
3,220

Benefit of
MSFT
Synergies
(558)
35
1,510 +
1,525
2,450

Source: Ascendere Associates estimates

J. Stephen Castellano
steve@ascenderellc.com

Value of
Net Value
Benefit of
Skype
Skype
of Skype
MSFT
Division
Cash
Realized by
Capital
to MSFT
Cost
MSFT
345
165
(8,500)
(8,335)
1,708
2,910
(8,500)
(5,590)
3,243 =
7,507 +
(8,500) =
(993)
8,615
16,185
(8,500)
7,685
16,752
31,373
(8,500)
22,873
Net Value of Acquisition
445

MSFT shares outstanding

Page 2

Net Value
of Skype
Realized by
MSFT
(0.99)
(0.66)
(0.12)
0.91
2.71
$
0.05

8,432.8

Ascendere Associates LLC
www.ascenderellc.com

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.

J. Stephen Castellano
steve@ascenderellc.com

Page 3

Ascendere Associates LLC
www.ascenderellc.com

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.

J. Stephen Castellano
steve@ascenderellc.com

Page 4

Ascendere Associates LLC
www.ascenderellc.com

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 littleknown 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.

J. Stephen Castellano
steve@ascenderellc.com

Page 5

Ascendere Associates LLC
www.ascenderellc.com

Appendix
Ranking Data as of May 6, 2011
Microsoft Corporation
NasdaqGS:MSFT
Information Technology
Systems Software

Ascendere Ranking

5 = Best
Rank
Relative Value
5
Operating Momentum
1
Analyst Revisions Momentum 1
Fundamental Quality
5

Price 05/10/11
Shares
Market Cap

CY1 Consensus EPS Est.
CY2 Consensus EPS Est.
Latest Annualized Dividend

25.49
8,433
217,818

$
$
$

2.59
2.97
0.64

Cash
Debt
Other
Enterprise Value
CY1 PE
CY2 PE
Div Yield

(48,717)
13,165
182,266
9.8
8.6
2.5%

EV/LTM EBITDA
Price/Book

Total Capital
Debt/Capital
Debt/Enterprise Value

6.1
4.1

$ 66,617
-53%
7%

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

J. Stephen Castellano
steve@ascenderellc.com

Page 6

Ascendere Associates LLC
www.ascenderellc.com

05/10/11

Microsoft Corporation
Information Technology
Systems Software

NasdaqGS:MSFT

$25.49 $0.64 / 2.5%

Stock price

$

Shares outstanding
Market value
EPS
CY +1 estimate
CY +2 estimate

EPS

$
$

2.59
2.98

PE

9.8
8.6

BPVM Adjusted = (31.8+17.4)/(3.6+2.0)

0.8
0.7
8.7
12.0%

Next 5yr EPS growth estimate

EBIT/ Cap

EBITDA/
Cap

Next year estimate

37.3%

Next quarter estimate

44.1%

Latest
Year ago

8,433
217,818

Cash & equivalents
Total debt
Preferred equity
Minority interest
Other

PEG

25.49

Enterprise Value

48,717
13,165
1,524

Debt / Capital
Debt / Op Capital
Debt / EV
EV / Op Capital

183,790

LTM
Trend

Qtr
Trend*

(5)

1

1

(1)

(2)

1

1

(4)

2

EBITDA margin

(2)

(2)

(2)

EBIT margin (or EBT)

(3)

(2)

(2)

5

(2)

(2)

(2)

(2)

(2)

(2)

1

4

LTM EBITDA/Capital

(5)

(2)

ROIC

(2)

(2)

8.7

Total

(15)

(15)

(2)

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

Percent of total possible

-27%

-10%

-3%

NasdaqGS:MSFT

9 qtr avg

ROIC

NasdaqGS:MSFT

Next 5 Qtrs
LTM

41.0%

31.3%

Revenue growth

48.7%

30.0%

Gross margin

47.7%

52.2%

30.7%

SG&A margin

47.9%
52.2%

53.0%
56.6%

24.6%
27.4%

22.0%
17.3%
8.0%
216.2%

Recurring Earnings
Growth

NOPLAT

Next yr, y/y estimate

-15.5%

-15.7%

4.5%

Next Q, y/y estimate

-11.8%

-11.7%

2.6%

EP

-0.5%

-1.5%

24.8%

Free Cash Flow

-21.2%

-21.0%

-8.9%

-8.6%

-7.7%

12.0%

Latest Q, y/y
Last yr, y/y
Lastest Q vs 9Q avg
BPVM Ratio

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%

-12%

-3%

23%

19%

5%

24,967

23,806

22,504

18,220

15,788

Sequential growth

2%

2%

2%

-2%

-2%

# EBIT Forecasts

22

23

23

23

24

EBIAT Trailing 12 months
Depreciation
Capital Spending, recurring
Adjstd Working Capital Investment
Free cash flow to the entity

27,089

26,275

24,818

25,122

25,637

2,919

2,887

2,874

2,793

2,780

2,629

2,603

2,555

2,507

2,365

(2,741)

(2,826)

(2,723)

(2,533)

(2,511)

(2,471)

(2,221)

(2,106)

(1,977)

(2,086)

(1,036)

(1,283)
23,842

(1,132)
23,056

(1,338)
21,615

(572)
18,178

231
16,298

(606)
26,662

(611)
25,725

(730)
24,238

(738)
24,644

24,869

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

J. Stephen Castellano
steve@ascenderellc.com

Page 7

Ascendere Associates LLC
www.ascenderellc.com

Microsoft Corporation

Price
25.56
NTM EPS $ 2.66
NTM PE
9.6
R/R
4.7 to 1

MSFT
Information Technology
Systems Software

Price / Earnings (NTM) vs. Stock Price
45.0

$40

40.0

$35

35.0

$30
30.0
$25

P
/
E

25.0
$20
20.0
$15

15.0

P
r
i
c
e

$10
10.0

$5

5.0

P/E

Max up to ten years
04/30/01
Max PE
Average PE
Min PE

to
38.7
19.5
8.5

Three years
05/02/11
06/11/01
03/09/09

05/05/08
Max PE
Average PE
Min PE

-1 St. Dev.

05/02/11
06/11/01
03/09/09

05/03/10
Max PE
Average PE
Min PE

J-11

A-11

J-10

O-10

J-10

A-10

J-09

O-09

J-09

A-09

J-08

Stock Price

One year
to
38.7
19.5
8.5

O-08

J-08

A-08

J-07

O-07

J-07

+1 St. Dev.

A-07

J-06

O-06

J-06

A-06

J-05

Average

O-05

J-05

A-05

J-04

O-04

J-04

A-04

J-03

O-03

J-03

A-03

J-02

O-02

J-02

A-02

J-01

O-01

$-

A-01

0.0

One year historically implied target range
to
14.1
10.8
9.6

05/02/11
05/03/10
04/18/11

NTM
EPS
Max EPS $ 2.90
Average EPS $ 2.66
Min EPS $ 2.33

Target
$
$
41
$
29
$
22

25.56
59%
13%
-13%

Source: Capital IQ data and estimates.

J. Stephen Castellano
steve@ascenderellc.com

Page 8

Ascendere Associates LLC
www.ascenderellc.com

Ticker:
Company:

MSFT
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
High
Low
Close

4.8x
5.5x
3.8x
5.1x

4.7x
5.4x
4.2x
5.2x

3.5x
5.2x
2.1x
2.4x

3.0x
4.0x
1.9x
3.9x

3.1x
4.0x
2.5x
3.0x

2.7x
3.1x
2.5x
2.5x

3.5x
5.5x
1.9x
2.5x

TEV / NTM EBITDA

Average
High
Low
Close

11.1x
12.7x
9.0x
12.5x

11.2x
13.2x
9.5x
12.4x

8.0x
12.4x
5.1x
5.7x

7.6x
10.0x
4.8x
9.7x

7.6x
10.1x
5.9x
7.0x

6.4x
7.3x
5.9x
5.9x

8.4x
13.2x
4.8x
5.9x

TEV / NTM EBIT

Average
High
Low
Close

12.2x
13.7x
10.1x
13.6x

12.0x
14.2x
10.5x
13.2x

8.8x
13.2x
5.6x
6.4x

8.7x
11.4x
5.5x
11.1x

8.3x
11.3x
6.5x
7.6x

7.0x
7.9x
6.4x
6.4x

9.3x
14.2x
5.5x
6.4x

Price / NTM EPS

Average
High
Low
Close

18.4x
20.4x
16.1x
20.2x

18.0x
21.1x
16.0x
19.4x

13.1x
19.4x
8.5x
9.6x

12.9x
16.2x
8.5x
15.7x

12.3x
16.0x
10.0x
11.3x

10.3x
11.6x
9.5x
9.7x

13.8x
21.1x
8.5x
9.7x

Source: Capital IQ

J. Stephen Castellano
steve@ascenderellc.com

Page 9

Ascendere Associates LLC
www.ascenderellc.com

Skype-reported Adjustments to EBITDA
Net (loss)/income
Income tax (benefit)/ expense
Interest expense
Interest (income) and other expense, net
Depreciation and amortization
Stock-based compensation
Realized loss on credit agreement
Management Services Agreements with shareholders
Acquisition transaction fees
Skype Acquisition transaction bonuses
Transition Services Agreement
Excluded bonus and severance
Joltid litigation settlement
Other litigation settlements
Separation costs
Foreign exchange gains and losses
Dispute with payment service provider
Non-capitalizable expenses attributable to security offering
Skype-reported Adjusted EBITDA
As a percentage of revenue

Ascendere Assumptions for Recurring EBIT
Net (loss)/income
Income tax (benefit)/ expense
Interest expense
Interest (income) and other expense, net
Depreciation and amortization
Stock-based compensation
Realized loss on credit agreement
Management Services Agreements with shareholders
Acquisition transaction fees
Skype Acquisition transaction bonuses
Transition Services Agreement
Excluded bonus and severance
Joltid litigation settlement
Other litigation settlements
Separation costs
Foreign exchange gains and losses
Dispute with payment service provider
Non-capitalizable expenses attributable to security offering
Ascendere-estimated Recurring EBIT
As a percentage of revenue

2008
41,606

2009
(417,547)

2010
(6,905)

(8,447)
(10,297)
75,534
12,826
(410)
(334)
110,478

(21,398)
89,644
(2,943)
156,543
14,746
14,177
1,118
1,755
343,826
2,928
2,054
(8)
184,895

(49,787)
68,645
(4,817)
161,297
15,950
13,513
14,835
1,229
2,463
15,315
(784)
11,312
12,165
9,247
669
264,347

20.0%

25.7%

30.7%

2008
41,606

2009
(417,547)

2010
(6,905)

(8,447)
(10,297)

(21,398)
89,644
(2,943)

(49,787)
68,645
(4,817)

14,177
1,118
1,755
343,826
2,928

14,835
1,229
2,463
15,315
(784)

11,560

669
40,863

(410)

22,452
4.1%

1.6%

4.8%

Source: SEC filings and Ascendere Associates assumptions

J. Stephen Castellano
steve@ascenderellc.com

Page 10

Ascendere Associates LLC
www.ascenderellc.com

Skype S.à r.l.
NasdaqGS:MSFT
Adjusted Present Value Model

Skype as a Division of Microsoft
Base Case
Unlevered Cost of Equity
Pretax Cost of Debt
Terminal growth rate
Current WACC

12.0%
3.7%
2.5% Tax Rate
11.2%
Debt to Capital

22%
8.9%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period
Adjusted Present Value

2005

2006

2007

2008

2009

2010

0.75
2011E

1.75
2012E

2.75
2013E

3.75
2014E

4.75
2015E

5.75
2016E

6.75
2017E

7.75
2018E

8.75
2019E

9.75
2020E

10.75
2021E

6,454
-

6,528
1.14%

6,602
1.14%

6,677
1.14%

6,753
1.14%

6,830
1.14%

6,918
1.28%

6,987
1.00%

7,056
1.00%

7,126
1.00%

7,197
1.00%

7,265
0.94%

7,332
0.94%

7,401
0.94%

7,470
0.94%

7,540
0.94%

7,611
0.94%

159
283
442
6.8%

307
351
658
10.0%

458
413
871
13.0%

703
471
1,174
17.4%

940
555
1,495
21.9%

1,100
649
1,749
25.3%

1,260
744
2,004
28.7%

1,424
841
2,264
32.1%

1,572
928
2,500
35.1%

1,674
988
2,662
37.0%

1,735
1,024
2,760
38.0%

1,797
1,061
2,859
39.0%

1,861
1,099
2,960
40.0%

1,925
1,137
3,062
41.0%

1,991
1,175
3,166
42.0%

2,057
1,215
3,272
43.0%

Registered Skype users (millions)
Registered Skype Users, Annual Growth
Skype % penetration of global population
Skype % penetration of BB subscriptions

217
0.0
3.3%
33.0%

325
49.8%
4.9%
37.3%

474
45.8%
7.0%
40.4%

663
39.9%
9.7%
44.3%

862
30.0%
12.5%
49.3%

1,120
30.0%
16.0%
55.9%

1,457
30.0%
20.6%
64.3%

1,704
17.0%
23.9%
68.2%

1,909
12.0%
26.5%
71.7%

2,081
9.0%
28.6%
75.4%

2,247
8.0%
30.6%
78.6%

2,404
7.0%
32.5%
81.2%

2,549
6.0%
34.1%
83.2%

2,676
5.0%
35.5%
84.5%

2,796
4.5%
36.7%
85.5%

Average monthly Skype connected users (millions)
% of Skype registered users

52
24.0%

75
23.1%

105
22.2%

145
21.9%

186
21.6%

258
23.0%

335
23.0%

392
23.0%

439
23.0%

479
23.0%

517
23.0%

553
23.0%

586
23.0%

615
23.0%

643
23.0%

Average monthly Skype paying users (millions)
% of Skype connected users

4.6
8.8%

5.8
7.7%

7.3
7.0%

8.8
6.1%

11.2
6.0%

15.7
6.1%

21.4
6.4%

27.8
7.1%

33.4
7.6%

38.8
8.1%

44.4
8.6%

50.3
9.1%

55.7
9.5%

60.9
9.9%

66.2
10.3%

Annual revenue per paying user
Monthly revenue per paying user (ARPU)
Annual growth

81
6.75

102
8.50
25.9%

98
8.17
-3.9%

97
8.08
-1.0%

97
8.09
0.1%

93
7.72
-4.6%

88
7.32
-5.1%

83
6.94
-5.1%

79
6.59
-5.1%

75
6.26
-4.9%

71
5.96
-4.9%

68
5.66
-4.9%

65
5.39
-4.9%

61
5.12
-4.9%

58
4.87
-4.9%

Billing minutes (billions)
Annual billing minutes per paying user
Monthly billing minutes per paying user
Annual billing minute growth per user

4.1
891
74

6.9
1,190
99
33.5%

10.7
1,466
122
23.2%

12.8
1,455
121
-0.8%

16.1
1,445
120
-0.7%

23.1
1,467
122
1.5%

32.1
1,496
125
2.0%

42.5
1,526
127
2.0%

51.9
1,556
130
2.0%

61.7
1,591
133
2.3%

72.3
1,627
136
2.3%

83.7
1,664
139
2.3%

94.7
1,701
142
2.3%

106.0
1,740
145
2.3%

117.8
1,779
148
2.3%

0.093

0.080
-14.1%

0.067
-15.9%

0.067
0.0%

0.067
0.0%

0.063
-6.0%

0.059
-7.0%

0.055
-7.0%

0.051
-7.0%

0.047
-7.0%

0.044
-7.0%

0.041
-7.0%

0.038
-7.0%

0.035
-7.0%

0.033
-7.0%

Global population
Annual growth

United Nations

Mobile broadband subscribers
Fixed broadband subscribers
Global broadband subcribers
Historical data: ITU
BB subscriptions / global population

73
216
289
4.5%

Revenue per minute
Revenue per minute annual growth
Source: Company reports, United Nations, ITU, Ascendere Associates estimates.

Skype as a Division of Microsoft -- Base Case
Skype Revenue
Sales Growth

2005
72
-

2006
194
169%

2007
382
97%

2008
551
45%

2009
719
30%

2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E
860
1,084
1,456
1,884
2,319
2,638
2,914
3,177
3,421
3,599
3,745
3,872
20%
26%
34%
29%
23%
14%
10%
9%
8%
5%
4%
3%

Gross Profit
Gross Margin

20
28%

54
28%

152
40%

258
47%

375
52%

444
52%

574
53%

786
54%

1,036
55%

1,299
56%

1,503
57%

1,690
58%

1,874
59%

2,052
60%

2,160
60%

2,247
60%

2,323
60%

Sales & Marketing
Product Development
General & Administrative
Amortization of Intangible Assets
Operating Expenses

27
12
17
14
70

60
39
38
60
197

64
23
42
66
195

83
34
49
70
235

119
45
73
114
351

132
72
95
114
414

163
87
119
114
483

218
116
146
114
595

283
151
170
114
717

325
162
186
114
787

343
171
185
114
813

364
182
204
66
816

397
200
222
820

410
222
257
889

450
243
270
963

487
281
281
1,049

513
300
290
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

38.0%
16.1%
24.2%
19.0%
-69.0%

30.9%
20.1%
19.5%
31.1%
-73.9%

16.9%
6.0%
11.1%
17.2%
-11.3%

15.0%
8.0%
10.0%
7.9%
13.1%

15.0%
8.0%
9.0%
6.1%
16.9%

14.0%
7.0%
8.0%
4.9%
22.1%

13.0%
6.5%
7.0%
4.3%
26.2%

12.5%
6.3%
7.0%
2.3%
30.0%

12.5%
6.3%
7.0%
0.0%
33.2%

12.0%
6.5%
7.5%
0.0%
34.0%

12.5%
6.8%
7.5%
0.0%
33.3%

13.0%
7.5%
7.5%
0.0%
32.0%

13.3%
7.8%
7.5%
0.0%
31.5%

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
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%

Sales & Marketing
Product Development
General & Administrative
Amortization of Intangible Assets
Operating Margin
MSFT Base Revenue
MSFT Base Sales Growth
% MSFT Base Sales "saved" by Skype
Skype-MSFT Synergies

plus
less
less
less

15.1%
6.1%
8.8%
12.7%
4.1%

16.6%
6.3%
10.1%
15.9%
3.3%

15.3%
8.4%
11.1%
13.3%
2.4%

15.0%
8.0%
11.0%
10.5%
8.5%

0.0%
-

0.0%
-

0.0%
-

0.0%
-

0.0%
-

0.0%
-

0.0%
9

0.0%
18

0.1% 0.100%
33
73

0.1%
97

0.2%
110

Adjusted Operating Profit

(50)

(143)

(43)

23

24

21

100

210

352

585

788

983

Cash tax rate
Cash income taxes
Earnings Before Interest After Taxes

nmf
(50)

nmf
(143)

nmf
(43)

nmf
23

nmf
24

nmf
21

22%
22
87

22%
46
164

22%
77
275

22%
129
456

22%
173
614

22%
216
767

(50)

44
(99)

76
26
59

79
(5)
(116)
(19)

157
(12)
200
368

161
(35)
11
157

174
(44)
(50)
166

194
(59)
(134)
164

217
(77)
(174)
241

241
(94)
(49)
553

258
(107)
(56)
709

Depreciation & Amortization
Capital Spending, recurring
Adj Working Capital Investment
Free cash flow to the entity
Residual value of free cash flows
Free cash flow plus residual value
Present value of future cash flows
Value of unlevered firm

7,740

Memo:
Adjusted working capital
% cash estimated used in WC

100%

Gross intangible assets
Net intangible assets
Source: Company reports, United Nations, ITU, Ascendere Associates estimates.

0.2%
151
1,205

0.2%
201

0.3%
227

0.4%
312

0.5%
417

1,364

1,423

1,510

1,637

22%
265
940

22%
300
1,064

22%
313
1,110

22%
332
1,178

22%
360
1,277

225
(119)
(56)
818

174
(129)
(56)
928

187
(139)
(56)
1,056

197
(147)
(56)
1,104

205
(153)
(56)
1,174

212
(158)
(56)
1,274
13,750
15,025

-

-

-

-

-

-

166

164

241

553

709

818

928

1,056

1,104

1,174

-

-

-

-

-

-

114

134

177

362

414

426

432

439

410

389

4,443

55

10

(16)

100

(100)

(110)

(60)

74

248

297

353

409

465

521

577

633

689

263

236

188

341
113

806
788

806
638

806
523

806
409

806
295

806
180

806
66

806
-

806
-

806
-

806
-

806
-

806
-

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

Skype as a Division of Microsoft -- Base Case
2005

2006

2007

2008

2009

2010

0.75
2011E

1.75
2012E

2.75
2013E

3.75
2014E

4.75
2015E

5.75
2016E

6.75
2017E

7.75
2018E

8.75
2019E

9.75
2020E

10.75
2021E

Total Debt
Cash interest expense as % of Debt
Cash interest expense
Interest tax shield
Residual value of interest tax shields
Interest tax shields plus residual value

-

-

-

-

-

-

-

-

777 $ 686 $ 760 $ 760 $ 760 $ 760 $ 760 $ 760 $ 760 $ 760 $ 760 $ 760 $ 760
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
27
27
28
28
28
28
28
28
28
28
28
28
6
6
6
6
6
6
6
6
6
6
6
528
6
6
6
6
6
6
6
6
6
6
535

Cost of debt
Present value of future cash flows

-

-

-

-

-

Value of interest tax shields

411

Cost of Potential Bankruptcy
Probability of bankruptcy
Negative impact to PV
Unlevered firm value
Expected bankruptcy costs

1.0%
35.0%
7,740
(27)

Valuation
Value of unlelvered firm
Value of interest tax shields
Expected bankruptcy costs
Enterprise value

7,740
411
(27)
8,125

Cash
Other non-operating assets
Debt
Preferred
Minority Interest
Other non operating liabilities
Value of equity

142
(760)
7,507

Shares outstanding
Value per share

Source: Ascendere Associates LLC

8,432.8
0.89

-

3.7%
4

3.7%
6

3.7%
6

3.7%
5

3.7%
5

3.7%
5

Current Value
Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Current ValueSkype
11.5%
$as0.92
a Division
$ 0.96
of Microsoft0.115
$ 1.05
3.5%
Current ValueSkype
12.0%
$as0.85
a Division
$ 0.89
of Microsoft0.12
$ 0.95
3.7%
Current ValueSkype
12.5%
$as0.79
a Division
$ 0.83
of Microsoft0.125
$ 0.87
3.9%

Value 12+ months
Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Value 12+
11.5%
monthsSkype
$ 0.99
as a$Division
1.04 of
$ Microsoft0.115
1.13
3.5%
Value 12+
12.0%
monthsSkype
$ 0.92
as a$Division
0.96 of
$ Microsoft0.12
1.03
3.7%
Value 12+
12.5%
monthsSkype
$ 0.86
as a$Division
0.90 of
$ Microsoft0.125
0.95
3.9%

3.7%
5

3.7%
5

3.7%
5

3.7%
4

3.7%
362

Skype S.à r.l.
NasdaqGS:MSFT
Adjusted Present Value Model

Skype Stand-Alone
Base Case
Unlevered Cost of Equity
Pretax Cost of Debt
Terminal growth rate
Current WACC

17.0%
7.0%
2.5%
16.0%

Tax Rate
Debt to Capital

22%
8.9%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period
Adjusted Present Value Model

2010

Skype Revenue
Sales Growth

72

2006

2007

2008

2009

2010

0.75
2011E

1.75
2012E

2.75
2013E

3.75
2014E

4.75
2015E

5.75
2016E

6.75
2017E

7.75
2018E

8.75
2019E

9.75
2020E

10.75
2021E

194
169%

382
97%

551
45%

719
30%

860
20%

1,023
19%

1,223
20%

1,459
19%

1,757
20%

1,944
11%

2,107
8%

2,252
7%

2,374
5%

2,443
3%

2,496
2%

2,533
1%

(50)
-69.0%

(143)
-73.9%

(43)
-11.3%

23
4.1%

24
3.3%

21
2.4%

80
7.8%

155
12.7%

251
17.2%

413
23.5%

537
27.6%

655
31.1%

770
34.2%

807
34.0%

812
33.3%

799
32.0%

798
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
Cash income taxes (benefit)
Earnings Before Interest After Taxes

nmf
(50)

nmf
(143)

nmf
(43)

nmf
23

nmf
24

nmf
21

22%
18
62

22%
34
121

22%
55
195

22%
91
322

22%
118
419

22%
144
511

22%
169
601

22%
178
630

22%
179
634

22%
176
623

22%
176
622

76

79
(5)
(116)
(19)

157
(12)
200
368

161
(35)
11
157

170
(42)
(50)
141

181
(50)
(120)
132

194
(59)
(143)
187

210
(72)
(48)
413

221
(79)
(53)
507

181
(86)
(53)
553

123
(92)
(53)
579

130
(97)
(53)
609

134
(100)
(53)
614

136
(102)
54
712

141

132

187

413

507

553

579

609

614

712

138
(103)
55
713
5,040
5,752

94

101

122

229

240

224

201

180

156

154

1,064

Skype Reported Operating Profit
Operating Margin

plus
less
less
less

2005

Depreciation & Amortization
Capital Spending, recurring
Adj Working Capital Investment
Free cash flow to the entity
Residual value of free cash flows
Free cash flow plus residual value

(50)

Present value of future cash flows

Valuation
Value of unlelvered firm
Value of interest tax shields
Expected bankruptcy costs
Enterprise value

2,765
215
(290)
2,689

Cash
Other non-operating assets
Debt
Preferred
Minority Interest
Other non operating liabilities
Value of equity

142
(760)
2,072

Shares outstanding
Value per share

Source: Ascendere Associates LLC

8,432.8
0.25

44
(99)

26
59

Current Value
Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Current ValueSkype
16.5%
$ Stand-Alone0.165
0.25 $ 0.26 $ 0.27
6.8%
Current ValueSkype
17.0%
$ Stand-Alone0.17
0.24 $ 0.25 $ 0.25
7.0%
Current ValueSkype
17.5%
$ Stand-Alone0.175
0.23 $ 0.23 $ 0.24
7.2%

8432.8

Value 12+ months
Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Value 12+
16.5%
monthsSkype
$ 0.27
Stand-Alone0.165
$ 0.28 $ 0.29
6.8%
Value 12+
17.0%
monthsSkype
$ 0.26
Stand-Alone0.17
$ 0.26 $ 0.27
7.0%
Value 12+
17.5%
monthsSkype
$ 0.24
Stand-Alone0.175
$ 0.25 $ 0.26
7.2%

Skype S.à r.l.
NasdaqGS:MSFT
Adjusted Present Value Model

Skype owned by MSFT
Worst Case
Unlevered Cost of Equity
Pretax Cost of Debt
Terminal growth rate
Current WACC

12.0%
3.7%
2.5%
11.2%

Tax Rate 22.0%
Debt to Capital
8.9%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period
Adjusted Present Value

2010

Skype Revenue
Sales Growth

72

2006

2007

2008

2009

2010

0.75
2011E

1.75
2012E

2.75
2013E

3.75
2014E

4.75
2015E

5.75
2016E

6.75
2017E

7.75
2018E

8.75
2019E

9.75
2020E

10.75
2021E

194
169%

382
97%

551
45%

719
30%

860
20%

1,062
23%

1,291
22%

1,377
7%

1,604
17%

1,602
0%

1,452
-9%

1,280
-12%

1,110
-13%

933
-16%

776
-17%

642
-17%

(50)
-69.0%

(143)
-73.9%

(43)
-11.3%

23
4.1%

24
3.3%

21
2.4%

66
6.2%

105
8.1%

120
8.7%

190
11.9%

238
14.9%

271
18.7%

297
23.2%

278
25.0%

208
22.3%

147
19.0%

106
16.5%

Skype-MSFT Synergies
Adjusted Operating Profit

(50)

(143)

(43)

23

24

21

(128)
(62)

(127)
(22)

(96)
23

(69)
121

(55)
184

(28)
243

(3)
294

(61)
147

(151)
(3)

(234)
(128)

Cash tax rate
Cash income taxes (benefit)
Earnings Before Interest After Taxes

nmf
(50)

nmf
(143)

nmf
(43)

nmf
23

nmf
24

nmf
21

22.0%
(14)
(177)

22.0%
(5)
(17)

22.0%
5
18

22.0%
27
94

22.0%
40
143

22.0%
54
190

22.0%
65
229

22.0%
68
241

22.0%
32
115

22.0%
(1)
(3)

22.0%
(28)
(100)

76

79
(5)
(116)
(19)

157
(12)
200
368

161
(35)
11
157

172
(43)
(50)
(98)

185
(53)
(122)
(6)

190
(56)
(130)
22

202
(65)
(47)
185

202
(65)
(47)
233

146
(59)
(47)
230

70
(52)
(47)
200

61
(45)
40
297

51
(38)
34
162

42
(32)
28
36

Skype Reported Operating Profit
Operating Margin

plus
less
less
less

2005

Depreciation & Amortization
Capital Spending, recurring
Adj Working Capital Investment
Free cash flow to the entity
Residual value of free cash flows
Free cash flow plus residual value

(50)

Present value of future cash flows

Valuation
Value of unlelvered firm
Value of interest tax shields
Expected bankruptcy costs
Enterprise value
Cash
Other non-operating assets
Debt
Preferred
Minority Interest
Other non operating liabilities
Value of equity

Shares outstanding
Value per share

Source: Ascendere Associates LLC

373
411
(2)
782

-

-

-

-

-

-

-

(98)

(6)

22

185

233

230

200

297

162

36

-

-

-

-

-

-

(67)

(5)

16

121

136

120

93

124

60

12

(236)

44
(99)

26
59

Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Current ValueSkype
11.5%
$owned
0.01 by$ MSFT0.115
0.03 $ 0.08
3.5%
Current ValueSkype
12.0%
$owned
0.01 by$ MSFT0.12
0.02 $ 0.05
3.7%
Current ValueSkype
12.5%
$owned
0.00 by$ MSFT0.125
0.01 $ 0.03
3.9%

Value 12+ months

8432.8

32
310

35
(26)
23
(68)
(731)
(799)

-

Current Value

142
(760)
165

8,432.8
0.02

-

-

Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Value 12+
11.5%
monthsSkype
$ 0.01
owned
$ 0.03
by MSFT0.115
$ 0.08
3.5%
Value 12+
12.0%
monthsSkype
$ 0.01
owned
$ 0.02
by MSFT0.12
$ 0.05
3.7%
Value 12+
12.5%
monthsSkype
$ 0.00
owned
$ 0.01
by MSFT0.125
$ 0.03
3.9%

Skype S.à r.l.
NasdaqGS:MSFT
Adjusted Present Value Model

Skype owned by MSFT
Bad Case
Unlevered Cost of Equity
Pretax Cost of Debt
Terminal growth rate
Current WACC

12.0%
3.7%
2.5%
11.2%

Tax Rate 22.0%
Debt to Capital
8.9%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period
Adjusted Present Value

2010

Skype Revenue
Sales Growth

72

2006

2007

2008

2009

2010

0.75
2011E

1.75
2012E

2.75
2013E

3.75
2014E

4.75
2015E

5.75
2016E

6.75
2017E

7.75
2018E

8.75
2019E

9.75
2020E

10.75
2021E

194
169%

382
97%

551
45%

719
30%

860
20%

1,073
25%

1,371
28%

1,549
13%

1,907
23%

2,035
7%

2,043
0%

2,013
-1%

1,956
-3%

1,853
-5%

1,737
-6%

1,620
-7%

(50)
-69.0%

(143)
-73.9%

(43)
-11.3%

23
4.1%

24
3.3%

21
2.4%

79
7.3%

146
10.7%

195
12.6%

324
17.0%

420
20.6%

501
24.5%

568
28.2%

577
29.5%

514
27.8%

443
25.5%

389
24.0%

Skype-MSFT Synergies
Adjusted Operating Profit

(50)

(143)

(43)

23

24

21

(60)
19

(55)
92

(33)
163

324

19
439

38
539

70
637

112
689

72
587

61
504

61
450

Cash tax rate
Cash income taxes (benefit)
Earnings Before Interest After Taxes

nmf
(50)

nmf
(143)

nmf
(43)

nmf
23

nmf
24

nmf
21

22.0%
4
(45)

22.0%
20
71

22.0%
36
127

22.0%
71
253

22.0%
97
342

22.0%
118
420

22.0%
140
497

22.0%
152
537

22.0%
129
458

22.0%
111
393

22.0%
99
351

76

79
(5)
(116)
(19)

157
(12)
200
368

161
(35)
11
157

173
(44)
(50)
34

189
(56)
(128)
77

199
(63)
(144)
119

219
(78)
(49)
345

226
(83)
(53)
432

178
(83)
(53)
462

110
(82)
(53)
473

107
(80)
(53)
512

101
(75)
50
533

95
(71)
47
464

Skype Reported Operating Profit
Operating Margin

plus
less
less
less

2005

Depreciation & Amortization
Capital Spending, recurring
Adj Working Capital Investment
Free cash flow to the entity
Residual value of free cash flows
Free cash flow plus residual value

(50)

Present value of future cash flows

Valuation
Value of unlelvered firm
Value of interest tax shields
Expected bankruptcy costs
Enterprise value

3,130
411
(14)
3,528

Cash
Other non-operating assets
Debt
Preferred
Minority Interest
Other non operating liabilities
Value of equity

142
(760)
2,910

Shares outstanding
Value per share

Source: Ascendere Associates LLC

8,432.8
0.35

-

-

-

-

-

-

-

-

-

34

77

119

345

432

462

473

512

533

464

89
(66)
44
417
4,500
4,917

-

-

-

-

-

-

23

63

87

225

252

241

220

213

198

154

1,454

-

44
(99)

26
59

Current Value
Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Current ValueSkype
11.5%
$owned
0.35 by$ MSFT0.115
0.38 $ 0.44
3.5%
Current ValueSkype
12.0%
$owned
0.32 by$ MSFT0.12
0.35 $ 0.39
3.7%
Current ValueSkype
12.5%
$owned
0.30 by$ MSFT0.125
0.32 $ 0.35
3.9%

Value 12+ months

8432.8

Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Value 12+
11.5%
monthsSkype
$ 0.37
owned
$ 0.40
by MSFT0.115
$ 0.47
3.5%
Value 12+
12.0%
monthsSkype
$ 0.35
owned
$ 0.37
by MSFT0.12
$ 0.41
3.7%
Value 12+
12.5%
monthsSkype
$ 0.32
owned
$ 0.34
by MSFT0.125
$ 0.37
3.9%

Skype S.à r.l.
NasdaqGS:MSFT
Adjusted Present Value Model

Skype as a Division of Microsoft
Base Case
Unlevered Cost of Equity
Pretax Cost of Debt
Terminal growth rate
Current WACC

12.0%
3.7%
2.5%
11.2%

Tax Rate
Debt to Capital

22%
8.9%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period
Adjusted Present Value

2010

Skype Revenue
Sales Growth

72
-

2006

2007

2008

2009

2010

0.75
2011E

1.75
2012E

2.75
2013E

3.75
2014E

4.75
2015E

5.75
2016E

6.75
2017E

7.75
2018E

8.75
2019E

9.75
2020E

10.75
2021E

194
169%

382
97%

551
45%

719
30%

860
20%

1,084
26%

1,456
34%

1,884
29%

2,319
23%

2,638
14%

2,914
10%

3,177
9%

3,421
8%

3,599
5%

3,745
4%

3,872
3%

(50)
-69.0%

(143)
-73.9%

(43)
-11.3%

23
4.1%

24
3.3%

21
2.4%

92
8.5%

191
13.1%

319
16.9%

512
22.1%

690
26.2%

873
30.0%

1,055
33.2%

1,163
34.0%

1,197
33.3%

1,198
32.0%

1,220
31.5%

Skype-MSFT Synergies
Adjusted Operating Profit

(50)

(143)

(43)

23

24

21

9
100

18
210

33
352

73
585

97
788

110
983

151
1,205

201
1,364

227
1,423

312
1,510

417
1,637

Cash tax rate
Cash income taxes
Earnings Before Interest After Taxes

nmf
(50)

nmf
(143)

nmf
(43)

nmf
23

nmf
24

nmf
21

22%
22
87

22%
46
164

22%
77
275

22%
129
456

22%
173
614

22%
216
767

22%
265
940

22%
300
1,064

22%
313
1,110

22%
332
1,178

22%
360
1,277

76

79
(5)
(116)
(19)

157
(12)
200
368

161
(35)
11
157

174
(44)
(50)
166

194
(59)
(134)
164

217
(77)
(174)
241

241
(94)
(49)
553

258
(107)
(56)
709

225
(119)
(56)
818

174
(129)
(56)
928

187
(139)
(56)
1,056

197
(147)
(56)
1,104

205
(153)
(56)
1,174

212
(158)
(56)
1,274
13,750
15,025

Skype Reported Operating Profit
Operating Margin

plus
less
less
less

2005

Depreciation & Amortization
Capital Spending, recurring
Adj Working Capital Investment
Free cash flow to the entity
Residual value of free cash flows
Free cash flow plus residual value

(50)

Present value of future cash flows

Valuation
Value of unlelvered firm
Value of interest tax shields
Expected bankruptcy costs
Enterprise value

7,740
411
(27)
8,125

Cash
Other non-operating assets
Debt
Preferred
Minority Interest
Other non operating liabilities
Value of equity

142
(760)
7,507

Shares outstanding
Value per share

Source: Ascendere Associates LLC

8,432.8
0.89

-

-

44
(99)

26
59

-

-

-

-

-

-

-

-

166

164

241

553

709

818

928

1,056

1,104

1,174

-

-

-

-

-

-

114

134

177

362

414

426

432

439

410

389

Current Value
Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Current ValueSkype
11.5%
$as0.92
a Division
$ 0.96
of Microsoft0.115
$ 1.05
3.5%
Current ValueSkype
12.0%
$as0.85
a Division
$ 0.89
of Microsoft0.12
$ 0.95
3.7%
Current ValueSkype
12.5%
$as0.79
a Division
$ 0.83
of Microsoft0.125
$ 0.87
3.9%

Value 12+ months

8432.8

Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Value 12+
11.5%
monthsSkype
$ 0.99
as a$Division
1.04 of
$ Microsoft0.115
1.13
3.5%
Value 12+
12.0%
monthsSkype
$ 0.92
as a$Division
0.96 of
$ Microsoft0.12
1.03
3.7%
Value 12+
12.5%
monthsSkype
$ 0.86
as a$Division
0.90 of
$ Microsoft0.125
0.95
3.9%

4,443

Skype S.à r.l.
NasdaqGS:MSFT
Adjusted Present Value Model

Skype owned by MSFT
Good Case
Unlevered Cost of Equity
Pretax Cost of Debt
Terminal growth rate
Current WACC

12.0%
3.7%
2.5%
11.2%

Tax Rate 22.0%
Debt to Capital
8.9%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period
Adjusted Present Value

2010

Skype Revenue
Sales Growth

72

2006

2007

2008

2009

2010

0.75
2011E

1.75
2012E

2.75
2013E

3.75
2014E

4.75
2015E

5.75
2016E

6.75
2017E

7.75
2018E

8.75
2019E

9.75
2020E

10.75
2021E

194
169%

382
97%

551
45%

719
30%

860
20%

1,095
27%

1,544
41%

1,945
26%

2,659
37%

3,214
21%

3,884
21%

4,653
20%

5,504
18%

6,375
16%

7,289
14%

8,268
13%

(50)
-69.0%

(143)
-73.9%

(43)
-11.3%

23
4.1%

24
3.3%

21
2.4%

105
9.6%

241
15.6%

391
20.1%

710
26.7%

1,003
31.2%

1,361
35.0%

1,777
38.2%

2,119
38.5%

2,470
38.8%

2,733
37.5%

3,059
37.0%

Skype-MSFT Synergies
Adjusted Operating Profit

(50)

(143)

(43)

23

24

21

77
182

93
333

101
492

149
859

181
1,184

188
1,549

240
2,018

302
2,421

404
2,874

605
3,338

841
3,900

Cash tax rate
Cash income taxes (benefit)
Earnings Before Interest After Taxes

nmf
(50)

nmf
(143)

nmf
(43)

nmf
23

nmf
24

nmf
21

22.0%
40
220

22.0%
73
260

22.0%
108
384

22.0%
189
670

22.0%
260
923

22.0%
341
1,208

22.0%
444
1,574

22.0%
533
1,889

22.0%
632
2,242

22.0%
734
2,604

22.0%
858
3,042

76

79
(5)
(116)
(19)

157
(12)
200
368

161
(35)
11
157

174
(45)
(50)
299

199
(63)
(141)
255

221
(79)
(178)
348

260
(108)
(55)
767

290
(131)
(66)
1,016

278
(158)
(66)
1,262

254
(190)
(66)
1,573

301
(224)
(66)
1,899

348
(260)
(66)
2,265

398
(297)
(66)
2,639

452
(337)
(66)
3,091
33,350
36,441

Skype Reported Operating Profit
Operating Margin

plus
less
less
less

2005

Depreciation & Amortization
Capital Spending, recurring
Adj Working Capital Investment
Free cash flow to the entity
Residual value of free cash flows
Free cash flow plus residual value

(50)

Present value of future cash flows

Valuation
Value of unlelvered firm
Value of interest tax shields
Expected bankruptcy costs
Enterprise value

16,434
411
(43)
16,802

Cash
Other non-operating assets
Debt
Preferred
Minority Interest
Other non operating liabilities
Value of equity

142
(760)
16,185

Shares outstanding
Value per share

8,432.8
1.92

Source: Ascendere Associates LLC

-

-

44
(99)

26
59

-

-

-

-

-

-

-

-

299

255

348

767

1,016

1,262

1,573

1,899

2,265

2,639

-

-

-

-

-

-

206

209

255

501

593

658

732

789

840

874

Current Value
Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Current ValueSkype
11.5%
$owned
1.99 by$ MSFT0.115
2.08 $ 2.21
3.5%
Current ValueSkype
12.0%
$owned
1.84 by$ MSFT0.12
1.92 $ 2.02
3.7%
Current ValueSkype
12.5%
$owned
1.71 by$ MSFT0.125
1.78 $ 1.86
3.9%

Value 12+ months

8432.8

Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Value 12+
11.5%
monthsSkype
$ 2.17
owned
$ 2.27
by MSFT0.115
$ 2.42
3.5%
Value 12+
12.0%
monthsSkype
$ 2.02
owned
$ 2.10
by MSFT0.12
$ 2.21
3.7%
Value 12+
12.5%
monthsSkype
$ 1.88
owned
$ 1.95
by MSFT0.125
$ 2.04
3.9%

10,777

Skype S.à r.l.
NasdaqGS:MSFT
Adjusted Present Value Model

Skype owned by MSFT
Best Case
Unlevered Cost of Equity
Pretax Cost of Debt
Terminal growth rate
Current WACC

12.0%
3.7%
2.5%
11.2%

Tax Rate 22.0%
Debt to Capital
8.9%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period
Adjusted Present Value

2010

Skype Revenue
Sales Growth

72

2006

2007

2008

2009

2010

0.75
2011E

1.75
2012E

2.75
2013E

3.75
2014E

4.75
2015E

5.75
2016E

6.75
2017E

7.75
2018E

8.75
2019E

9.75
2020E

10.75
2021E
17,357
24%

194
169%

382
97%

551
45%

719
30%

860
20%

1,106
29%

1,637
48%

2,172
33%

3,121
44%

4,002
28%

5,262
32%

6,887
31%

8,893 11,259 14,045
29%
27%
25%

(50)
-69.0%

(143)
-73.9%

(43)
-11.3%

23
4.1%

24
3.3%

21
2.4%

118
10.7%

295
18.0%

516
23.7%

978
31.3%

1,446
36.1%

2,105
40.0%

2,975
43.2%

3,646
41.0%

4,532
40.3%

5,478
39.0%

6,682
38.5%

Skype-MSFT Synergies
Adjusted Operating Profit

(50)

(143)

(43)

23

24

21

147
265

168
463

171
686

229
1,207

271
1,717

273
2,378

339
3,314

416
4,062

607
5,139

946
6,424

1,342
8,024

Cash tax rate
Cash income taxes (benefit)
Earnings Before Interest After Taxes

nmf
(50)

nmf
(143)

nmf
(43)

nmf
23

nmf
24

nmf
21

22.0%
58
353

22.0%
102
361

22.0%
151
535

22.0%
266
942

22.0%
378
1,339

22.0%
523
1,855

22.0%
729
2,585

22.0%
894
3,168

22.0%
1,130
4,008

22.0%
1,413
5,011

22.0%
1,765
6,259

76

79
(5)
(116)
(19)

157
(12)
200
368

161
(35)
11
157

175
(45)
(50)
433

204
(67)
(148)
350

233
(88)
(196)
483

285
(127)
(57)
1,042

333
(163)
(74)
1,436

354
(214)
(74)
1,920

376
(281)
(74)
2,607

486
(362)
(74)
3,218

615
(459)
(74)
4,091

768
(572)
(74)
5,133

Skype Reported Operating Profit
Operating Margin

plus
less
less
less

2005

Depreciation & Amortization
Capital Spending, recurring
Adj Working Capital Investment
Free cash flow to the entity
Residual value of free cash flows
Free cash flow plus residual value

(50)

Present value of future cash flows

Valuation
Value of unlelvered firm
Value of interest tax shields
Expected bankruptcy costs
Enterprise value

31,635
411
(55)
31,991

Cash
Other non-operating assets
Debt
Preferred
Minority Interest
Other non operating liabilities
Value of equity

142
(760)
31,373

Shares outstanding
Value per share

8,432.8
3.72

Source: Ascendere Associates LLC

-

-

-

-

-

-

-

-

-

433

350

483

1,042

1,436

1,920

2,607

3,218

4,091

5,133

949
(707)
(74)
6,427
69,341
75,768

-

-

-

-

-

-

298

287

354

681

838

1,001

1,213

1,337

1,518

1,700

22,407

-

44
(99)

26
59

Current Value
Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Current ValueSkype
11.5%
$owned
3.86 by$ MSFT0.115
4.04 $ 4.26
3.5%
Current ValueSkype
12.0%
$owned
3.58 by$ MSFT0.12
3.72 $ 3.90
3.7%
Current ValueSkype
12.5%
$owned
3.32 by$ MSFT0.125
3.44 $ 3.59
3.9%

Value 12+ months

8432.8

Terminal Growth
Equity
2.0%
2.5%
3.0% Tax shield
Value 12+
11.5%
monthsSkype
$ 4.25
owned
$ 4.44
by MSFT0.115
$ 4.68
3.5%
Value 12+
12.0%
monthsSkype
$ 3.94
owned
$ 4.10
by MSFT0.12
$ 4.30
3.7%
Value 12+
12.5%
monthsSkype
$ 3.67
owned
$ 3.81
by MSFT0.125
$ 3.97
3.9%

Skype S.à r.l.
Base Case Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Unlevered Cost of Equity
Skype Standalone
Skype owned by MSFT

17.0%
12.0%

Skype Standalone
Skype owned by MSFT

7.0%
3.7%

Pretax Cost of Debt

Weighted Average Cost of Capital
Skype Standalone
Skype owned by MSFT

16.0%
11.2%

Skype Standalone
Skype owned by MSFT

2.5%
2.5%

Terminal Growth Rate

Probability of Bankruptcy
Skype Standalone
Skype owned by MSFT

30.0%
1.0%

Skype S.à r.l.
Base Case Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Global Population Growth
Skype Standalone
Skype owned by MSFT

2010
1.14%
1.14%

2011E
1.28%
1.28%

2012E
1.00%
1.00%

2013E
1.00%
1.00%

2014E
1.00%
1.00%

2015E
1.00%
1.00%

2016E
0.94%
0.94%

2017E
0.94%
0.94%

2018E
0.94%
0.94%

2019E
0.94%
0.94%

2020E
0.94%
0.94%

2021E
0.94%
0.94%

Skype Standalone
Skype owned by MSFT

2010
6,830
6,830

2011E
6,918
6,918

2012E
6,987
6,987

2013E
7,056
7,056

2014E
7,126
7,126

2015E
7,197
7,197

2016E
7,265
7,265

2017E
7,332
7,332

2018E
7,401
7,401

2019E
7,470
7,470

2020E
7,540
7,540

2021E
7,611
7,611

2010
22%
22%

2011E
25%
25%

2012E
29%
29%

2013E
32%
32%

2014E
35%
35%

2015E
37%
37%

2016E
38%
38%

2017E
39%
39%

2018E
40%
40%

2019E
41%
41%

2020E
42%
42%

2021E
43%
43%

2010
1,495
1,495

2011E
1,749
1,749

2012E
2,004
2,004

2013E
2,264
2,264

2014E
2,500
2,500

2015E
2,662
2,662

2016E
2,760
2,760

2017E
2,859
2,859

2018E
2,960
2,960

2019E
3,062
3,062

2020E
3,166
3,166

2021E
3,272
3,272

Global Population

BB subscriptions % of global population
Skype Standalone
Skype owned by MSFT

Global Broadband Subscriptions
Skype Standalone
Skype owned by MSFT

Skype S.à r.l.
Base Case Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Registered Skype Users, Annual Growth
Skype Standalone
Skype owned by MSFT

2010
39.9%
39.9%

2011E
33.9%
30.0%

2012E
27.0%
30.0%

2013E
21.0%
30.0%

2014E
16.0%
17.0%

2015E
11.0%
12.0%

2016E
8.0%
9.0%

2017E
7.0%
8.0%

2018E
6.0%
7.0%

2019E
5.0%
6.0%

2020E
4.5%
5.0%

2021E
4.0%
4.5%

Skype Standalone
Skype owned by MSFT

2010
663
663

2011E
888
862

2012E
1,127
1,120

2013E
1,364
1,457

2014E
1,582
1,704

2015E
1,756
1,909

2016E
1,897
2,081

2017E
2,029
2,247

2018E
2,151
2,404

2019E
2,259
2,549

2020E
2,360
2,676

2021E
2,455
2,796

2010
21.9%
21.9%

2011E
21.6%
21.6%

2012E
21.3%
23.0%

2013E
21.0%
23.0%

2014E
20.5%
23.0%

2015E
20.0%
23.0%

2016E
19.7%
23.0%

2017E
19.4%
23.0%

2018E
19.1%
23.0%

2019E
18.8%
23.0%

2020E
18.5%
23.0%

2021E
18.2%
23.0%

2010
145
145

2011E
192
186

2012E
240
258

2013E
286
335

2014E
324
392

2015E
351
439

2016E
374
479

2017E
394
517

2018E
411
553

2019E
425
586

2020E
437
615

2021E
447
643

2010
6.1%
6.1%

2011E
5.5%
6.0%

2012E
5.5%
6.1%

2013E
5.8%
6.4%

2014E
6.5%
7.1%

2015E
7.0%
7.6%

2016E
7.5%
8.1%

2017E
8.0%
8.6%

2018E
8.5%
9.1%

2019E
8.9%
9.5%

2020E
9.3%
9.9%

2021E
9.7%
10.3%

2010
8.8
8.8

2011E
10.5
11.2

2012E
13.2
15.7

2013E
16.6
21.4

2014E
21.1
27.8

2015E
24.6
33.4

2016E
28.0
38.8

2017E
31.5
44.4

2018E
34.9
50.3

2019E
37.8
55.7

2020E
40.6
60.9

2021E
43.3
66.2

Registered Skype Users

Connected Skype Users, Avg per Month, % of Registered Users
Skype Standalone
Skype owned by MSFT

Connected Skype Users, Avg per Month
Skype Standalone
Skype owned by MSFT

Avg Monthly Skype-Paying Users as % of Registered Users
Skype Standalone
Skype owned by MSFT

Paying Skype Users, Avg per Month
Skype Standalone
Skype owned by MSFT

Skype S.à r.l.
Base Case Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Billing Minutes, Annual Growth per User
Skype Standalone
Skype owned by MSFT

Billing Minutes per User per Year
Skype Standalone
Skype owned by MSFT

Revenue per billing minute annual growth
Base Case
Base Case

Skype Standalone
Skype owned by MSFT

Revenue per Billing Minute
Base Case
Base Case

Skype Standalone
Skype owned by MSFT

2010
-0.8%
-0.8%

2011E
-0.7%
-0.7%

2012E
1.5%
1.5%

2013E
2.0%
2.0%

2014E
2.0%
2.0%

2015E
2.0%
2.0%

2016E
2.3%
2.3%

2017E
2.3%
2.3%

2018E
2.3%
2.3%

2019E
2.3%
2.3%

2020E
2.3%
2.3%

2021E
2.3%
2.3%

2010
1,455
1,455

2011E
1,445
1,445

2012E
1,467
1,467

2013E
1,496
1,496

2014E
1,526
1,526

2015E
1,556
1,556

2016E
1,591
1,591

2017E
1,627
1,627

2018E
1,664
1,664

2019E
1,701
1,701

2020E
1,740
1,740

2021E
1,779
1,779

2010
0.0%
0.0%

2011E
0.0%
0.0%

2012E
-6.0%
-6.0%

2013E
-7.0%
-7.0%

2014E
-7.0%
-7.0%

2015E
-7.0%
-7.0%

2016E
-7.0%
-7.0%

2017E
-7.0%
-7.0%

2018E
-7.0%
-7.0%

2019E
-7.0%
-7.0%

2020E
-7.0%
-7.0%

2021E
-7.0%
-7.0%

2010
0.067
0.067

2011E
0.067
0.067

2012E
0.063
0.063

2013E
0.059
0.059

2014E
0.055
0.055

2015E
0.051
0.051

2016E
0.047
0.047

2017E
0.044
0.044

2018E
0.041
0.041

2019E
0.038
0.038

2020E
0.035
0.035

2021E
0.033
0.033

Skype S.à r.l.
Base Case Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Gross Margin
Base Case
Base Case

Skype Standalone
Skype owned by MSFT

2010
51.7%
51.7%

2011E
53.0%
53.0%

2012E
55.0%
54.0%

2013E
57.0%
55.0%

2014E
59.0%
56.0%

2015E
60.0%
57.0%

2016E
60.0%
58.0%

2017E
60.0%
59.0%

2018E
60.0%
60.0%

2019E
60.0%
60.0%

2020E
60.0%
60.0%

2021E
60.0%
60.0%

Skype Standalone
Skype owned by MSFT

2010
15.3%
15.3%

2011E
15.0%
15.0%

2012E
15.0%
15.0%

2013E
15.0%
15.0%

2014E
14.0%
14.0%

2015E
13.0%
13.0%

2016E
12.5%
12.5%

2017E
12.5%
12.5%

2018E
12.0%
12.0%

2019E
12.5%
12.5%

2020E
13.0%
13.0%

2021E
13.3%
13.3%

Skype Standalone
Skype owned by MSFT

2010
8.4%
8.4%

2011E
8.0%
8.0%

2012E
8.0%
8.0%

2013E
8.0%
8.0%

2014E
7.0%
7.0%

2015E
6.5%
6.5%

2016E
6.3%
6.3%

2017E
6.3%
6.3%

2018E
6.5%
6.5%

2019E
6.8%
6.8%

2020E
7.5%
7.5%

2021E
7.8%
7.8%

2010
11.1%
11.1%

2011E
11.0%
11.0%

2012E
10.0%
10.0%

2013E
9.0%
9.0%

2014E
8.0%
8.0%

2015E
7.0%
7.0%

2016E
7.0%
7.0%

2017E
7.0%
7.0%

2018E
7.5%
7.5%

2019E
7.5%
7.5%

2020E
7.5%
7.5%

2021E
7.5%
7.5%

2010
114
114

2011E
114
114

2012E
114
114

2013E
114
114

2014E
114
114

2015E
114
114

2016E
66
66

2017E
-

2018E
-

2019E
-

2020E
-

2021E
-

Sales & Marketing
Base Case
Base Case

Product Development
Base Case
Base Case

General & Administrative
Base Case
Base Case

Skype Standalone
Skype owned by MSFT

Amortization of Intangible Assets
Base Case
Base Case

Skype Standalone
Skype owned by MSFT

Skype S.à r.l.
Base Case Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

MSFT Base Sales Growth
Base Case
Base Case

2010
0.0%
6.9%

2011E
0.0%
10.0%

2012E
0.0%
7.0%

2013E
0.0%
-10.0%

2014E
0.0%
10.0%

2015E
0.0%
7.0%

2016E
0.0%
-10.0%

2017E
0.0%
10.0%

2018E
0.0%
7.0%

2019E
0.0%
-10.0%

2020E
0.0%
10.0%

2021E
0.0%
7.0%

Skype Standalone
Skype owned by MSFT

2010
0.0%
0.0%

2011E
0.0%
0.0%

2012E
0.0%
0.0%

2013E
0.0%
0.1%

2014E
0.0%
0.1%

2015E
0.0%
0.1%

2016E
0.0%
0.2%

2017E
0.0%
0.2%

2018E
0.0%
0.2%

2019E
0.0%
0.3%

2020E
0.0%
0.4%

2021E
0.0%
0.5%

Skype Standalone
Skype owned by MSFT

2010
-

2011E
9

2012E
18

2013E
33

2014E
73

2015E
97

2016E
110

2017E
151

2018E
201

2019E
227

2020E
312

2021E
417

Skype Standalone
Skype owned by MSFT

% MSFT Base Sales "saved" by Skype
Base Case
Base Case

Skype-MSFT Synergies
Base Case
Base Case

Skype S.à r.l.
Base Case Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Cash tax rate
Base Case
Base Case

Skype Standalone
Skype owned by MSFT

2010
0.0%
0.0%

2011E
22.0%
22.0%

2012E
22.0%
22.0%

2013E
22.0%
22.0%

2014E
22.0%
22.0%

2015E
22.0%
22.0%

2016E
22.0%
22.0%

2017E
22.0%
22.0%

2018E
22.0%
22.0%

2019E
22.0%
22.0%

2020E
22.0%
22.0%

2021E
22.0%
22.0%

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Unlevered Cost of Equity

Terminal growth rate

Skype Standalone
Skype Standalone
Unlevered CostBest
of Equity
Case
Skype Standalone
Unlevered CostGood
of Equity
Case
Skype Standalone
Unlevered Cost
Base
of Equity
Case
Skype Standalone
Unlevered CostBad
of Equity
Case
Skype Standalone
Unlevered CostWorst
of Equity
Case
Increments

17.0%
17.0%
17.0%
17.0%
17.0%
0.0%

Skype Standalone
Skype Standalone
Terminal growth
Best rate
Case
Skype Standalone
Terminal growth
Goodrate
Case
Skype Standalone
Terminal growth
Base Case
rate
Skype Standalone
Terminal growth
Bad Case
rate
Skype Standalone
Terminal growth
Worst
rate
Case
Increments

2.5%
2.5%
2.5%
2.5%
2.5%
0.00%

Skype Standalone
Skype Standalone
Probability ofBest
Bankruptcy
Case
24.0%
Skype Standalone
Probability ofGood
Bankruptcy
Case
27.0%
Skype Standalone
ProbabilityBase
of Bankruptcy
Case
30.0%
Skype Standalone
Probability ofBad
Bankruptcy
Case
33.0%
Skype Standalone
Probability ofWorst
Bankruptcy
Case
36.0%
Increments -3.00%

Skype owned by MSFT
Skype ownedUnlevered
by MSFTCostBest
of Equity
Case
Skype ownedUnlevered
by MSFTCostGood
of Equity
Case
Skype owned
Unlevered
by MSFTCost
Base
of Equity
Case
Skype ownedUnlevered
by MSFTCostBad
of Equity
Case
Skype ownedUnlevered
by MSFTCostWorst
of Equity
Case
Increments

12.0%
12.0%
12.0%
12.0%
12.0%
0.0%

Skype owned by MSFT
Skype owned
Terminal
by MSFT
growth
Best rate
Case
Skype owned
Terminal
by MSFT
growth
Goodrate
Case
Skype owned
Terminal
by MSFT
growth
Base Case
rate
Skype owned
Terminal
by MSFT
growth
Bad Case
rate
Skype owned
Terminal
by MSFT
growth
Worst
rate
Case
Increments

2.5%
2.5%
2.5%
2.5%
2.5%
0.00%

Skype owned by MSFT
Skype owned
Probability
by MSFTofBest
Bankruptcy
Case
0.5%
Skype owned
Probability
by MSFTofGood
Bankruptcy
Case
0.8%
Skype owned
Probability
by MSFT
Base
of Bankruptcy
Case
1.0%
Skype owned
Probability
by MSFTofBad
Bankruptcy
Case
1.3%
Skype owned
Probability
by MSFTofWorst
Bankruptcy
Case
1.5%
Increments
-0.25%

Pretax Cost of Debt

Probability of Bankruptcy

Weighted Average Cost of Capital

Skype Standalone
Skype Standalone
Pretax Cost of Best
Debt Case
Skype Standalone
Pretax Cost of Good
Debt Case
Skype Standalone
Pretax Cost ofBase
DebtCase
Skype Standalone
Pretax Cost of Bad
DebtCase
Skype Standalone
Pretax Cost of Worst
Debt Case
Increments

7.0%
7.0%
7.0%
7.0%
7.0%
0.0%

Skype Standalone
Skype Standalone
Pretax Cost Best
of Debt
Case
Skype Standalone
Pretax Cost Good
of Debt
Case
Skype Standalone
Pretax CostBase
of Debt
Case
Skype Standalone
Pretax Cost Bad
of Debt
Case
Skype Standalone
Pretax Cost Worst
of DebtCase
Increments

16.0%
16.0%
16.0%
16.0%
16.0%
0.0%

Skype owned by MSFT
Skype ownedPretax
by MSFT
Cost of Best
Debt Case
Skype ownedPretax
by MSFT
Cost of Good
Debt Case
Skype owned
Pretax
by MSFT
Cost ofBase
DebtCase
Skype ownedPretax
by MSFT
Cost of Bad
DebtCase
Skype ownedPretax
by MSFT
Cost of Worst
Debt Case
Increments

3.7%
3.7%
3.7%
3.7%
3.7%
0.0%

Skype owned by MSFT
Skype owned
Pretax
by MSFT
Cost Best
of Debt
Case
Skype owned
Pretax
by MSFT
Cost Good
of Debt
Case
Skype owned
Pretax
by MSFT
CostBase
of Debt
Case
Skype owned
Pretax
by MSFT
Cost Bad
of Debt
Case
Skype owned
Pretax
by MSFT
Cost Worst
of DebtCase
Increments

11.2%
11.2%
11.2%
11.2%
11.2%
0.0%

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Skype Standalone
Global

pop annual growth

Global pop annual growth
Skype Standalone
Skype Standalone
Global pop annual
Bestgrowth
Case
Skype Standalone
Global pop annual
Good
growth
Case
Skype Standalone
Global pop annual
Base growth
Case
Skype Standalone
Global pop annual
Bad growth
Case
Skype Standalone
Global pop annual
Worst
growth
Case
Increments
Skype owned by MSFT
Skype ownedGlobal
by MSFT
pop annual
Bestgrowth
Case
Skype ownedGlobal
by MSFT
pop annual
Good
growth
Case
Skype owned
Global
by MSFT
pop annual
Base growth
Case
Skype ownedGlobal
by MSFT
pop annual
Bad growth
Case
Skype ownedGlobal
by MSFT
pop annual
Worst
growth
Case
Increments

2010

1.14%

2010

1.14%

2011E
1.78%
1.53%
1.28%
1.03%
0.78%
0.25%

2012E
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%

2013E
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%

2014E
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%

2015E
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%

2016E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2017E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2018E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2019E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2020E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2021E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2011E
1.78%
1.53%
1.28%
1.03%
0.78%
0.25%

2012E
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%

2013E
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%

2014E
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%

2015E
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%

2016E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2017E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2018E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2019E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2020E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2021E
1.44%
1.19%
0.94%
0.69%
0.44%
0.25%

2011E
6,952
6,935
6,918
6,901
6,884

2012E
7,056
7,021
6,987
6,952
6,918

2013E
7,161
7,109
7,056
7,004
6,952

2014E
7,268
7,197
7,126
7,056
6,986

2015E
7,377
7,287
7,197
7,109
7,021

2016E
7,483
7,373
7,265
7,157
7,052

2017E
7,590
7,460
7,332
7,206
7,082

2018E
7,699
7,549
7,401
7,256
7,113

2019E
7,810
7,638
7,470
7,305
7,144

2020E
7,922
7,729
7,540
7,356
7,175

2021E
8,036
7,820
7,611
7,406
7,206

2011E
6,952
6,935
6,918
6,901
6,884

2012E
7,056
7,021
6,987
6,952
6,918

2013E
7,161
7,109
7,056
7,004
6,952

2014E
7,268
7,197
7,126
7,056
6,986

2015E
7,377
7,287
7,197
7,109
7,021

2016E
7,483
7,373
7,265
7,157
7,052

2017E
7,590
7,460
7,332
7,206
7,082

2018E
7,699
7,549
7,401
7,256
7,113

2019E
7,810
7,638
7,470
7,305
7,144

2020E
7,922
7,729
7,540
7,356
7,175

2021E
8,036
7,820
7,611
7,406
7,206

Global Population
Skype Standalone
Skype Standalone
Global Population
Best Case
Skype Standalone
Global Population
Good Case
Skype Standalone
Global Population
Base Case
Skype Standalone
Global Population
Bad Case
Skype Standalone
Global Population
Worst Case

Skype owned by MSFT
Skype ownedGlobal
by MSFT
Population
Best Case
Skype ownedGlobal
by MSFT
Population
Good Case
Skype owned
Global
by MSFT
Population
Base Case
Skype ownedGlobal
by MSFT
Population
Bad Case
Skype ownedGlobal
by MSFT
Population
Worst Case

2010

6,830

2010

6,830

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

BB subscriptions % of global population
Skype Standalone
2010
Skype Standalone
BB subscriptions
Best
%Case
of global population
Skype Standalone
BB subscriptions
Good
% of
Case
global population
Skype Standalone
BB subscriptions
Base
% of
Case
global population 21.9%
Skype Standalone
BB subscriptions
Bad%Case
of global population
Skype Standalone
BB subscriptions
Worst
% ofCase
global population
Increments

2011E
25.49%
25.39%
25.3%
25.19%
25.09%
0.10%

2012E
28.89%
28.79%
28.7%
28.59%
28.49%
0.10%

2013E
32.29%
32.19%
32.1%
31.99%
31.89%
0.10%

2014E
35.29%
35.19%
35.1%
34.99%
34.89%
0.10%

2015E
37.19%
37.09%
37.0%
36.89%
36.79%
0.10%

2016E
38.19%
38.09%
38.0%
37.89%
37.79%
0.10%

2017E
39.19%
39.09%
39.0%
38.89%
38.79%
0.10%

2018E
40.19%
40.09%
40.0%
39.89%
39.79%
0.10%

2019E
41.19%
41.09%
41.0%
40.89%
40.79%
0.10%

2020E
42.19%
42.09%
42.0%
41.89%
41.79%
0.10%

2021E
43.19%
43.09%
43.0%
42.89%
42.79%
0.10%

Skype owned by MSFT
2010
Skype ownedBB
bysubscriptions
MSFT
Best
%Case
of global population
Skype ownedBB
bysubscriptions
MSFT
Good
% of
Case
global population
Skype owned
BBby
subscriptions
MSFT Base
% of
Case
global population 21.9%
Skype ownedBB
bysubscriptions
MSFT
Bad%Case
of global population
Skype ownedBB
bysubscriptions
MSFT
Worst
% ofCase
global population
Increments

2011E
25.49%
25.39%
25.3%
25.19%
25.09%
0.10%

2012E
28.89%
28.79%
28.7%
28.59%
28.49%
0.10%

2013E
32.29%
32.19%
32.1%
31.99%
31.89%
0.10%

2014E
35.29%
35.19%
35.1%
34.99%
34.89%
0.10%

2015E
37.19%
37.09%
37.0%
36.89%
36.79%
0.10%

2016E
38.19%
38.09%
38.0%
37.89%
37.79%
0.10%

2017E
39.19%
39.09%
39.0%
38.89%
38.79%
0.10%

2018E
40.19%
40.09%
40.0%
39.89%
39.79%
0.10%

2019E
41.19%
41.09%
41.0%
40.89%
40.79%
0.10%

2020E
42.19%
42.09%
42.0%
41.89%
41.79%
0.10%

2021E
43.19%
43.09%
43.0%
42.89%
42.79%
0.10%

2011E
1,772
1,761
1,749
1,738
1,727

2012E
2,038
2,021
2,004
1,987
1,971

2013E
2,312
2,288
2,264
2,240
2,217

2014E
2,565
2,533
2,500
2,469
2,437

2015E
2,743
2,702
2,662
2,622
2,583

2016E
2,858
2,808
2,760
2,712
2,665

2017E
2,974
2,916
2,859
2,802
2,747

2018E
3,094
3,026
2,960
2,894
2,830

2019E
3,217
3,138
3,062
2,987
2,914

2020E
3,342
3,253
3,166
3,081
2,998

2021E
3,470
3,370
3,272
3,176
3,083

2011E
1,772
1,761
1,749
1,738
1,727

2012E
2,038
2,021
2,004
1,987
1,971

2013E
2,312
2,288
2,264
2,240
2,217

2014E
2,565
2,533
2,500
2,469
2,437

2015E
2,743
2,702
2,662
2,622
2,583

2016E
2,858
2,808
2,760
2,712
2,665

2017E
2,974
2,916
2,859
2,802
2,747

2018E
3,094
3,026
2,960
2,894
2,830

2019E
3,217
3,138
3,062
2,987
2,914

2020E
3,342
3,253
3,166
3,081
2,998

2021E
3,470
3,370
3,272
3,176
3,083

Global Broadband Subscriptions
Skype Standalone
Skype Standalone
Global Broadband
BestSubscriptions
Case
Skype Standalone
Global Broadband
Good
Subscriptions
Case
Skype Standalone
Global Broadband
Base Subscriptions
Case
Skype Standalone
Global Broadband
BadSubscriptions
Case
Skype Standalone
Global Broadband
Worst
Subscriptions
Case

Skype owned by MSFT
Skype ownedGlobal
by MSFT
Broadband
BestSubscriptions
Case
Skype ownedGlobal
by MSFT
Broadband
Good
Subscriptions
Case
Skype owned
Global
by MSFT
Broadband
Base Subscriptions
Case
Skype ownedGlobal
by MSFT
Broadband
BadSubscriptions
Case
Skype ownedGlobal
by MSFT
Broadband
Worst
Subscriptions
Case

2010

1,495

2010

1,495

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Registered Skype Users, Annual Growth
Skype Standalone
2010
Skype Standalone
Registered Skype
BestUsers,
Case Annual Growth
Skype Standalone
Registered Skype
Good
Users,
CaseAnnual Growth
Skype Standalone
Registered Skype
Base
Users,
CaseAnnual Growth39.9%
Skype Standalone
Registered Skype
BadUsers,
Case Annual Growth
Skype Standalone
Registered Skype
Worst
Users,
CaseAnnual Growth
Increments

2011E
35.9%
34.9%
33.9%
32.9%
31.9%
1.00%

2012E
31.0%
29.0%
27.0%
25.0%
23.0%
2.00%

2013E
25.0%
23.0%
21.0%
19.0%
17.0%
2.00%

2014E
20.0%
18.0%
16.0%
14.0%
12.0%
2.00%

2015E
15.0%
13.0%
11.0%
9.0%
7.0%
2.00%

2016E
12.0%
10.0%
8.0%
6.0%
4.0%
2.00%

2017E
11.0%
9.0%
7.0%
5.0%
3.0%
2.00%

2018E
10.0%
8.0%
6.0%
4.0%
2.0%
2.00%

2019E
9.0%
7.0%
5.0%
3.0%
1.0%
2.00%

2020E
8.5%
6.5%
4.5%
2.5%
0.5%
2.00%

2021E
8.0%
6.0%
4.0%
2.0%
0.0%
2.00%

Skype owned by MSFT
2010
Skype ownedRegistered
by MSFT Skype
BestUsers,
Case Annual Growth
Skype ownedRegistered
by MSFT Skype
Good
Users,
CaseAnnual Growth
Skype owned
Registered
by MSFT
Skype
Base
Users,
CaseAnnual Growth39.9%
Skype ownedRegistered
by MSFT Skype
BadUsers,
Case Annual Growth
Skype ownedRegistered
by MSFT Skype
Worst
Users,
CaseAnnual Growth
Increments

2011E
32.0%
31.0%
30.0%
29.0%
28.0%
1.00%

2012E
34.0%
32.0%
30.0%
28.0%
26.0%
2.00%

2013E
34.0%
32.0%
30.0%
28.0%
26.0%
2.00%

2014E
21.0%
19.0%
17.0%
15.0%
13.0%
2.00%

2015E
16.0%
14.0%
12.0%
10.0%
8.0%
2.00%

2016E
13.0%
11.0%
9.0%
7.0%
5.0%
2.00%

2017E
12.0%
10.0%
8.0%
6.0%
4.0%
2.00%

2018E
2019E
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0% $
0.04
3.0%
2.0%
2.00%
2.00%

2020E
9.0%
7.0%
5.0%
3.0%
1.0%
2.00%

2021E
8.5%
6.5%
4.5%
2.5%
0.5%
2.00%

2011E
901
894
888
881
874

2012E
1,180
1,154
1,127
1,101
1,075

2013E
1,475
1,419
1,364
1,310
1,258

2014E
1,770
1,674
1,582
1,494
1,409

2015E
2,036
1,892
1,756
1,628
1,508

2016E
2,280
2,081
1,897
1,726
1,568

2017E
2,531
2,268
2,029
1,812
1,615

2018E
2,784
2,450
2,151
1,885
1,648

2019E
3,034
2,621
2,259
1,941
1,664

2020E
3,292
2,792
2,360
1,990
1,672

2021E
3,556
2,959
2,455
2,030
1,672

2011E
875
869
862
855
849

2012E
1,173
1,146
1,120
1,095
1,069

2013E
1,571
1,513
1,457
1,401
1,347

2014E
1,901
1,801
1,704
1,611
1,522

2015E
2,206
2,053
1,909
1,773
1,644

2016E
2,492
2,279
2,081
1,897
1,726

2017E
2,791
2,507
2,247
2,010
1,796

2018E
3,099
2,732
2,404
2,111
1,849

2019E
3,408
2,951
2,549
2,195
1,886

2020E
3,715
3,157
2,676
2,261
1,905

2021E
4,031
3,363
2,796
2,318
1,915

Registered Skype Users
Skype Standalone
Skype Standalone
Registered Skype
BestUsers
Case
Skype Standalone
Registered Skype
Good
Users
Case
Skype Standalone
Registered Skype
BaseUsers
Case
Skype Standalone
Registered Skype
BadUsers
Case
Skype Standalone
Registered Skype
Worst
Users
Case

2010

Skype owned by MSFT
Skype ownedRegistered
by MSFT Skype
BestUsers
Case
Skype ownedRegistered
by MSFT Skype
Good
Users
Case
Skype owned
Registered
by MSFTSkype
BaseUsers
Case
Skype ownedRegistered
by MSFT Skype
BadUsers
Case
Skype ownedRegistered
by MSFT Skype
Worst
Users
Case

2010

663

663

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

% of Skype registered users
Skype Standalone
Skype Standalone
% of Skype registered
Best Case
users
Skype Standalone
% of Skype registered
Good Case
users
Skype Standalone
% of Skype registered
Base Case
users
Skype Standalone
% of Skype registered
Bad Case
users
Skype Standalone
% of Skype registered
Worst Case
users
Increments

2011E
21.6%
21.6%
21.6%
21.6%
21.6%
0.00%

2012E
21.6%
21.4%
21.3%
21.2%
21.1%
0.13%

2013E
21.5%
21.3%
21.0%
20.8%
20.5%
0.25%

2014E
21.3%
20.9%
20.5%
20.1%
19.8%
0.38%

2015E
21.0%
20.5%
20.0%
19.5%
19.0%
0.50%

2016E
21.2%
20.5%
19.7%
19.0%
18.2%
0.75%

2017E
21.4%
20.4%
19.4%
18.4%
17.4%
1.00%

2018E
21.6%
20.4%
19.1%
17.9%
16.6%
1.25%

2019E
21.8%
20.3%
18.8%
17.3%
15.8%
1.50%

2020E
22.0%
20.3%
18.5%
16.8%
15.0%
1.75%

2021E
22.2%
20.2%
18.2%
16.2%
14.2%
2.00%

2011E
21.6%
21.6%
21.6%
21.6%
21.6%
0.00%

2012E
23.3%
23.1%
23.0%
22.9%
22.8%
0.13%

2013E
23.5%
23.3%
23.0%
22.8%
22.5%
0.25%

2014E
23.8%
23.4%
23.0%
22.6%
22.3%
0.38%

2015E
24.0%
23.5%
23.0%
22.5%
22.0%
0.50%

2016E
24.5%
23.8%
23.0%
22.3%
21.5%
0.75%

2017E
25.0%
24.0%
23.0%
22.0%
21.0%
1.00%

2018E
25.5%
24.3%
23.0%
21.8%
20.5%
1.25%

2019E
26.0%
24.5%
23.0%
21.5%
20.0%
1.50%

2020E
26.5%
24.8%
23.0%
21.3%
19.5%
1.75%

2021E
27.0%
25.0%
23.0%
21.0%
19.0%
2.00%

Skype Standalone
2010
Skype Standalone
Connected Skype
BestUsers,
Case Avg per Month
Skype Standalone
Connected Skype
Good
Users,
CaseAvg per Month
Skype Standalone
Connected Skype
BaseUsers,
Case Avg per Month
145
Skype Standalone
Connected Skype
BadUsers,
Case Avg per Month
Skype Standalone
Connected Skype
Worst
Users,
Case
Avg per Month

2011E
194
193
192
190
189

2012E
254
247
240
233
226

2013E
317
302
286
272
258

2014E
376
349
324
301
278

2015E
427
388
351
318
286

2016E
483
426
374
327
285

2017E
542
463
394
333
281

2018E
601
499
411
336
273

2019E
661
532
425
336
263

2020E
724
565
437
333
251

2021E
789
598
447
329
237

Skype owned by MSFT
2010
Skype ownedConnected
by MSFT Skype
BestUsers,
Case Avg per Month
Skype ownedConnected
by MSFT Skype
Good
Users,
CaseAvg per Month
Skype owned
Connected
by MSFTSkype
BaseUsers,
Case Avg per Month
145
Skype ownedConnected
by MSFT Skype
BadUsers,
Case Avg per Month
Skype ownedConnected
by MSFT Skype
Worst
Users,
Case
Avg per Month

2011E
189
188
186
185
183

2012E
273
265
258
250
243

2013E
369
352
335
319
303

2014E
452
421
392
365
339

2015E
529
482
439
399
362

2016E
611
541
479
422
371

2017E
698
602
517
442
377

2018E
790
663
553
459
379

2019E
886
723
586
472
377

2020E
985
781
615
481
372

2021E
1,088
841
643
487
364

Skype owned by MSFT
Skype owned%by
of MSFT
Skype registered
Best Case
users
Skype owned%by
of MSFT
Skype registered
Good Case
users
Skype owned
% of
bySkype
MSFTregistered
Base Case
users
Skype owned%by
of MSFT
Skype registered
Bad Case
users
Skype owned%by
of MSFT
Skype registered
Worst Case
users
Increments

2010

21.9%

2010

21.9%

Connected Skype Users, Avg per Month

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

% of Skype connected users
Skype Standalone
Skype Standalone
% of Skype connected
Best Case
users
Skype Standalone
% of Skype connected
Good Case
users
Skype Standalone
% of Skype connected
Base Case
users
Skype Standalone
% of Skype connected
Bad Case
users
Skype Standalone
% of Skype connected
Worst Case
users
Increments

2010

2011E
5.5%
5.5%
5.5%
5.5%
5.5%
0.00%

2012E
5.8%
5.6%
5.5%
5.4%
5.3%
0.13%

2013E
6.3%
6.1%
5.8%
5.6%
5.3%
0.25%

2014E
7.3%
6.9%
6.5%
6.1%
5.8%
0.38%

2015E
8.0%
7.5%
7.0%
6.5%
6.0%
0.50%

2016E
9.0%
8.3%
7.5%
6.8%
6.0%
0.75%

2017E
10.0%
9.0%
8.0%
7.0%
6.0%
1.00%

2018E
11.0%
9.8%
8.5%
7.3%
6.0%
1.25%

2019E
11.9%
10.4%
8.9%
7.4%
5.9%
1.50%

2020E
12.8%
11.1%
9.3%
7.6%
5.8%
1.75%

2021E
13.7%
11.7%
9.7%
7.7%
5.7%
2.00%

Skype owned by MSFT
Skype owned%by
of MSFT
Skype connected
Best Case
users
Skype owned%by
of MSFT
Skype connected
Good Case
users
Skype owned
% of
bySkype
MSFTconnected
Base Case
users
Skype owned%by
of MSFT
Skype connected
Bad Case
users
Skype owned%by
of MSFT
Skype connected
Worst Case
users
Increments

2010

6.1%

2011E
6.0%
6.0%
6.0%
6.0%
6.0%
0.00%

2012E
6.4%
6.2%
6.1%
6.0%
5.9%
0.13%

2013E
6.6%
6.3%
6.4%
5.8%
5.6%
0.25%

2014E
7.9%
7.5%
7.1%
6.7%
6.4%
0.38%

2015E
8.6%
8.1%
7.6%
7.1%
6.6%
0.50%

2016E
9.6%
8.9%
8.1%
7.4%
6.6%
0.75%

2017E
10.6%
9.6%
8.6%
7.6%
6.6%
1.00%

2018E
11.6%
10.4%
9.1%
7.9%
6.6%
1.25%

2019E
12.5%
11.0%
9.5%
8.0%
6.5%
1.50%

2020E
13.4%
11.7%
9.9%
8.2%
6.4%
1.75%

2021E
14.3%
12.3%
10.3%
8.3%
6.3%
2.00%

Skype Standalone
2010
Skype Standalone
Paying Skype Users,
Best Case
Avg per Month
Skype Standalone
Paying Skype Users,
Good Case
Avg per Month
Skype Standalone
Paying SkypeBase
Users,
Case
Avg per Month 8.8
Skype Standalone
Paying Skype Users,
Bad Case
Avg per Month
Skype Standalone
Paying Skype Users,
Worst Case
Avg per Month

2011E
10.7
10.6
10.5
10.5
10.4

2012E
14.6
13.9
13.2
12.5
11.9

2013E
20.0
18.2
16.6
15.1
13.7

2014E
27.3
24.0
21.1
18.4
16.0

2015E
34.2
29.1
24.6
20.6
17.2

2016E
43.5
35.1
28.0
22.1
17.1

2017E
54.2
41.6
31.5
23.3
16.9

2018E
66.1
48.6
34.9
24.4
16.4

2019E
78.7
55.3
37.8
24.9
15.5

2020E
92.7
62.5
40.6
25.2
14.5

2021E
108.1
69.9
43.3
25.3
13.5

Skype owned by MSFT
2010
Skype ownedPaying
by MSFT
Skype Users,
Best Case
Avg per Month
Skype ownedPaying
by MSFT
Skype Users,
Good Case
Avg per Month
Skype owned
Paying
by MSFT
SkypeBase
Users,
Case
Avg per Month 8.8
Skype ownedPaying
by MSFT
Skype Users,
Bad Case
Avg per Month
Skype ownedPaying
by MSFT
Skype Users,
Worst Case
Avg per Month

2011E
11.3
11.3
11.2
11.1
11.0

2012E
17.3
16.5
15.7
15.0
14.2

2013E
24.3
22.2
21.4
18.6
16.9

2014E
35.4
31.5
27.8
24.5
21.5

2015E
45.5
39.1
33.4
28.3
23.9

2016E
58.6
47.9
38.8
31.0
24.5

2017E
74.0
57.8
44.4
33.6
24.9

2018E
91.7
68.6
50.3
36.0
25.0

2019E
110.8
79.5
55.7
37.8
24.5

2020E
131.9
91.0
60.9
39.2
23.8

2021E
155.6
103.4
66.2
40.4
22.9

6.1%

Paying Skype Users, Avg per Month

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Annual billing minute growth per user
Skype Standalone
Skype Standalone
Annual billing Best
minute
Case
growth per user
Skype Standalone
Annual billing Good
minuteCase
growth per user
Skype Standalone
Annual billing Base
minuteCase
growth per user
Skype Standalone
Annual billing Bad
minute
Case
growth per user
Skype Standalone
Annual billing Worst
minuteCase
growth per user
Increments
Skype owned by MSFT
Skype ownedAnnual
by MSFT
billing Best
minute
Case
growth per user
Skype ownedAnnual
by MSFT
billing Good
minuteCase
growth per user
Skype owned
Annual
by MSFT
billing Base
minuteCase
growth per user
Skype ownedAnnual
by MSFT
billing Bad
minute
Case
growth per user
Skype ownedAnnual
by MSFT
billing Worst
minuteCase
growth per user
Increments

2010

-0.8%

2010

-0.8%

2011E
-0.7%
-0.7%
-0.7%
-0.7%
-0.7%
0.00%

2012E
2.0%
1.8%
1.5%
1.3%
1.0%
0.25%

2013E
3.0%
2.5%
2.0%
1.5%
1.0%
0.50%

2014E
3.5%
2.8%
2.0%
1.3%
0.5%
0.75%

2015E
4.0%
3.0%
2.0%
1.0%
0.0%
1.00%

2016E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2017E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2018E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2019E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2020E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2021E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2011E
-0.7%
-0.7%
-0.7%
-0.7%
-0.7%
0.00%

2012E
2.0%
1.8%
1.5%
1.3%
1.0%
0.25%

2013E
0.2%
-0.3%
2.0%
-1.3%
-1.8%
0.50%

2014E
3.5%
2.8%
2.0%
1.3%
0.5%
0.75%

2015E
4.0%
3.0%
2.0%
1.0%
0.0%
1.00%

2016E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2017E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2018E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2019E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2020E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2021E
4.8%
3.5%
2.3%
1.0%
-0.3%
1.25%

2011E
1,445
1,445
1,445
1,445
1,445

2012E
1,474
1,470
1,467
1,463
1,459

2013E
1,518
1,507
1,496
1,485
1,474

2014E
1,571
1,548
1,526
1,504
1,481

2015E
1,634
1,595
1,556
1,519
1,481

2016E
1,712
1,651
1,591
1,534
1,478

2017E
1,793
1,709
1,627
1,549
1,474

2018E
1,878
1,768
1,664
1,565
1,470

2019E
1,967
1,830
1,701
1,580
1,467

2020E
2,061
1,894
1,740
1,596
1,463

2021E
2,159
1,961
1,779
1,612
1,459

2011E
1,445
1,445
1,445
1,445
1,445

2012E
1,474
1,470
1,467
1,463
1,459

2013E
1,477
1,466
1,496
1,445
1,434

2014E
1,529
1,507
1,526
1,463
1,441

2015E
1,590
1,552
1,556
1,477
1,441

2016E
1,666
1,606
1,591
1,492
1,437

2017E
1,745
1,662
1,627
1,507
1,434

2018E
1,828
1,721
1,664
1,522
1,430

2019E
1,915
1,781
1,701
1,537
1,427

2020E
2,006
1,843
1,740
1,553
1,423

2021E
2,101
1,908
1,779
1,568
1,419

Billing Minutes per User per Year
Skype Standalone
Skype Standalone
Billing MinutesBest
per User
Caseper Year
Skype Standalone
Billing MinutesGood
per User
Case
per Year
Skype Standalone
Billing Minutes
Base
per Case
User per Year
Skype Standalone
Billing MinutesBad
per User
Caseper Year
Skype Standalone
Billing MinutesWorst
per User
Case
per Year

Skype owned by MSFT
Skype ownedBilling
by MSFT
MinutesBest
per User
Caseper Year
Skype ownedBilling
by MSFT
MinutesGood
per User
Case
per Year
Skype owned
Billing
by MSFT
Minutes
Base
per Case
User per Year
Skype ownedBilling
by MSFT
MinutesBad
per User
Caseper Year
Skype ownedBilling
by MSFT
MinutesWorst
per User
Case
per Year

2010

1,455

2010

1,455

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Revenue per billing minute annual growth
Skype Standalone
2010
Skype Standalone
Revenue per billing
Best minute
Case annual growth
Skype Standalone
Revenue per billing
Goodminute
Case annual growth
Skype Standalone
Revenue per billing
Baseminute
Case annual growth0.0%
Skype Standalone
Revenue per billing
Bad Case
minute annual growth
Skype Standalone
Revenue per billing
Worstminute
Case annual growth
Increments

2011E
0.5%
0.3%
0.0%
-0.3%
-0.5%
0.25%

2012E
-5.0%
-5.5%
-6.0%
-6.5%
-7.0%
0.50%

2013E
-5.5%
-6.3%
-7.0%
-7.8%
-8.5%
0.75%

2014E
-5.0%
-6.0%
-7.0%
-8.0%
-9.0%
1.00%

2015E
-4.0%
-5.5%
-7.0%
-8.5%
-10.0%
1.50%

2016E
-2.5%
-4.8%
-7.0%
-9.3%
-11.5%
2.25%

2017E
-1.0%
-4.0%
-7.0%
-10.0%
-13.0%
3.00%

2018E
-0.5%
-3.8%
-7.0%
-10.3%
-13.5%
3.25%

2019E
0.0%
-3.5%
-7.0%
-10.5%
-14.0%
3.50%

2020E
0.0%
-3.5%
-7.0%
-10.5%
-14.0%
3.50%

2021E
0.0%
-3.5%
-7.0%
-10.5%
-14.0%
3.50%

Skype owned by MSFT
2010
Skype ownedRevenue
by MSFT
per billing
Best minute
Case annual growth
Skype ownedRevenue
by MSFT
per billing
Goodminute
Case annual growth
Skype owned
Revenue
by MSFT
per billing
Baseminute
Case annual growth0.0%
Skype ownedRevenue
by MSFT
per billing
Bad Case
minute annual growth
Skype ownedRevenue
by MSFT
per billing
Worstminute
Case annual growth
Increments

2011E
0.5%
0.3%
0.0%
-0.3%
-0.5%
0.25%

2012E
-5.0%
-5.5%
-6.0%
-6.5%
-7.0%
0.50%

2013E
-5.5%
-6.3%
-7.0%
-7.8%
-8.5%
0.75%

2014E
-5.0%
-6.0%
-7.0%
-8.0%
-9.0%
1.00%

2015E
-4.0%
-5.5%
-7.0%
-8.5%
-10.0%
1.50%

2016E
-2.5%
-4.8%
-7.0%
-9.3%
-11.5%
2.25%

2017E
-1.0%
-4.0%
-7.0%
-10.0%
-13.0%
3.00%

2018E
-0.5%
-3.8%
-7.0%
-10.3%
-13.5%
3.25%

2019E
0.0%
-3.5%
-7.0%
-10.5%
-14.0%
3.50%

2020E
0.0%
-3.5%
-7.0%
-10.5%
-14.0%
3.50%

2021E
0.0%
-3.5%
-7.0%
-10.5%
-14.0%
3.50%

2011E
0.068
0.067
0.067
0.067
0.067

2012E
0.064
0.064
0.063
0.063
0.062

2013E
0.061
0.060
0.059
0.058
0.057

2014E
0.058
0.056
0.055
0.053
0.052

2015E
0.055
0.053
0.051
0.049
0.047

2016E
0.054
0.050
0.047
0.044
0.041

2017E
0.053
0.048
0.044
0.040
0.036

2018E
0.053
0.047
0.041
0.036
0.031

2019E
0.053
0.045
0.038
0.032
0.027

2020E
0.053
0.043
0.035
0.029
0.023

2021E
0.053
0.042
0.033
0.026
0.020

2011E
0.068
0.067
0.067
0.067
0.067

2012E
0.064
0.064
0.063
0.063
0.062

2013E
0.061
0.060
0.059
0.058
0.057

2014E
0.058
0.056
0.055
0.053
0.052

2015E
0.055
0.053
0.051
0.049
0.047

2016E
0.054
0.050
0.047
0.044
0.041

2017E
0.053
0.048
0.044
0.040
0.036

2018E
0.053
0.047
0.041
0.036
0.031

2019E
0.053
0.045
0.038
0.032
0.027

2020E
0.053
0.043
0.035
0.029
0.023

2021E
0.053
0.042
0.033
0.026
0.020

Revenue per Billing Minute
Skype Standalone
Skype Standalone
Revenue per Billing
Best Case
Minute
Skype Standalone
Revenue per Billing
GoodMinute
Case
Skype Standalone
Revenue per Billing
Base Case
Minute
Skype Standalone
Revenue per Billing
Bad Case
Minute
Skype Standalone
Revenue per Billing
WorstMinute
Case

Skype owned by MSFT
Skype ownedRevenue
by MSFT
per Billing
Best Case
Minute
Skype ownedRevenue
by MSFT
per Billing
GoodMinute
Case
Skype owned
Revenue
by MSFT
per Billing
Base Case
Minute
Skype ownedRevenue
by MSFT
per Billing
Bad Case
Minute
Skype ownedRevenue
by MSFT
per Billing
WorstMinute
Case

2010

0.067

2010

0.067

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Gross Margin
Skype Standalone
Skype Standalone
Gross Margin Best Case
Skype Standalone
Gross Margin Good Case
Skype Standalone
Gross Margin Base Case
Skype Standalone
Gross Margin Bad Case
Skype Standalone
Gross Margin Worst Case
Increments
Skype owned by MSFT
Skype ownedGross
by MSFT
Margin Best Case
Skype ownedGross
by MSFT
Margin Good Case
Skype owned
Gross
by MSFT
Margin Base Case
Skype ownedGross
by MSFT
Margin Bad Case
Skype ownedGross
by MSFT
Margin Worst Case
Increments

2010

51.7%

2010

51.7%

0.64
2011E
53.5%
53.3%
53.0%
52.8%
52.5%
0.25%
0.64
2011E
53.5%
53.3%
53.0%
52.8%
52.5%
0.25%

0.64
2012E
56.0%
55.5%
55.0%
54.5%
54.0%
0.50%
0.64
2012E
55.0%
54.5%
54.0%
53.5%
53.0%
0.50%

0.64
2013E
58.5%
57.8%
57.0%
56.3%
55.5%
0.75%
0.64
2013E
56.5%
55.8%
55.0%
54.3%
53.5%
0.75%

0.64
2014E
61.0%
60.0%
59.0%
58.0%
57.0%
1.00%
0.64
2014E
58.0%
57.0%
56.0%
55.0%
54.0%
1.00%

0.64
2015E
62.5%
61.3%
60.0%
58.8%
57.5%
1.25%
0.64
2015E
59.5%
58.3%
57.0%
55.8%
54.5%
1.25%

0.64
2016E
63.0%
61.5%
60.0%
58.5%
57.0%
1.50%
0.64
2016E
61.0%
59.5%
58.0%
56.5%
55.0%
1.50%

0.64
2017E
64.0%
62.0%
60.0%
58.0%
56.0%
2.00%
0.64
2017E
63.0%
61.0%
59.0%
57.0%
55.0%
2.00%

0.64
2018E
64.0%
63.0%
60.0%
57.0%
54.0%
3.00%
0.64
2018E
64.0%
63.0%
60.0%
57.0%
54.0%
3.00%

0.64
2019E
64.0%
64.0%
60.0%
56.0%
52.0%
4.00%
0.64
2019E
64.0%
64.0%
60.0%
56.0%
52.0%
4.00%

0.64
2020E
64.0%
64.0%
60.0%
55.0%
50.0%
5.00%
0.64
2020E
64.0%
64.0%
60.0%
55.0%
50.0%
5.00%

0.64
2021E
64.0%
64.0%
60.0%
54.0%
48.0%
6.00%
0.64
2021E
64.0%
64.0%
60.0%
54.0%
48.0%
6.00%

2011E
14.5%
14.8%
15.0%
15.3%
15.5%
-0.25%

2012E
14.0%
14.5%
15.0%
15.5%
16.0%
-0.50%

2013E
13.5%
14.3%
15.0%
15.8%
16.5%
-0.75%

2014E
12.0%
13.0%
14.0%
15.0%
16.0%
-1.00%

2015E
11.0%
12.0%
13.0%
14.0%
15.0%
-1.00%

2016E
10.5%
11.5%
12.5%
13.5%
14.5%
-1.00%

2017E
10.5%
11.5%
12.5%
13.5%
14.5%
-1.00%

2018E
11.0%
11.5%
12.0%
12.5%
13.0%
-0.50%

2019E
11.5%
12.0%
12.5%
13.0%
13.5%
-0.50%

2020E
12.0%
12.5%
13.0%
13.5%
14.0%
-0.50%

2021E
12.3%
12.8%
13.3%
13.8%
14.3%
-0.50%

2011E
14.5%
14.8%
15.0%
15.3%
15.5%
-0.25%

2012E
14.0%
14.5%
15.0%
15.5%
16.0%
-0.50%

2013E
13.5%
14.3%
15.0%
15.8%
16.5%
-0.75%

2014E
12.0%
13.0%
14.0%
15.0%
16.0%
-1.00%

2015E
11.0%
12.0%
13.0%
14.0%
15.0%
-1.00%

2016E
10.5%
11.5%
12.5%
13.5%
14.5%
-1.00%

2017E
10.5%
11.5%
12.5%
13.5%
14.5%
-1.00%

2018E
11.0%
11.5%
12.0%
12.5%
13.0%
-0.50%

2019E
11.5%
12.0%
12.5%
13.0%
13.5%
-0.50%

2020E
12.0%
12.5%
13.0%
13.5%
14.0%
-0.50%

2021E
12.3%
12.8%
13.3%
13.8%
14.3%
-0.50%

Sales & Marketing
Skype Standalone
Skype Standalone
Sales & Marketing
Best Case
Skype Standalone
Sales & Marketing
Good Case
Skype Standalone
Sales & Marketing
Base Case
Skype Standalone
Sales & Marketing
Bad Case
Skype Standalone
Sales & Marketing
Worst Case
Increments
Skype owned by MSFT
Skype owned bySales
MSFT
& Marketing
Best Case
Skype owned bySales
MSFT
& Marketing
Good Case
Skype owned by
Sales
MSFT
& Marketing
Base Case
Skype owned bySales
MSFT
& Marketing
Bad Case
Skype owned bySales
MSFT
& Marketing
Worst Case
Increments

2010

15.3%

2010

15.3%

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Product Development
Skype Standalone
Skype Standalone
Product Development
Best Case
Skype Standalone
Product Development
Good Case
Skype Standalone
Product Development
Base Case
Skype Standalone
Product Development
Bad Case
Skype Standalone
Product Development
Worst Case
Increments

2010

Skype owned by MSFT
Skype owned byProduct
MSFT Development
Best Case
Skype owned byProduct
MSFT Development
Good Case
Skype owned by
Product
MSFT
Development
Base Case
Skype owned byProduct
MSFT Development
Bad Case
Skype owned byProduct
MSFT Development
Worst Case
Increments

2010

8.4%

8.4%

2011E
7.5%
7.8%
8.0%
8.3%
8.5%
-0.25%

2012E
7.0%
7.5%
8.0%
8.5%
9.0%
-0.50%

2013E
6.5%
7.3%
8.0%
8.8%
9.5%
-0.75%

2014E
5.0%
6.0%
7.0%
8.0%
9.0%
-1.00%

2015E
4.5%
5.5%
6.5%
7.5%
8.5%
-1.00%

2016E
4.3%
5.3%
6.3%
7.3%
8.3%
-1.00%

2017E
4.3%
5.3%
6.3%
7.3%
8.3%
-1.00%

2018E
5.5%
6.0%
6.5%
7.0%
7.5%
-0.50%

2019E
5.8%
6.3%
6.8%
7.3%
7.8%
-0.50%

2020E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

2021E
6.8%
7.3%
7.8%
8.3%
8.8%
-0.50%

2011E
7.5%
7.8%
8.0%
8.3%
8.5%
-0.25%

2012E
7.0%
7.5%
8.0%
8.5%
9.0%
-0.50%

2013E
6.5%
7.3%
8.0%
8.8%
9.5%
-0.75%

2014E
5.0%
6.0%
7.0%
8.0%
9.0%
-1.00%

2015E
4.5%
5.5%
6.5%
7.5%
8.5%
-1.00%

2016E
4.3%
5.3%
6.3%
7.3%
8.3%
-1.00%

2017E
4.3%
5.3%
6.3%
7.3%
8.3%
-1.00%

2018E
5.5%
6.0%
6.5%
7.0%
7.5%
-0.50%

2019E
5.8%
6.3%
6.8%
7.3%
7.8%
-0.50%

2020E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

2021E
6.8%
7.3%
7.8%
8.3%
8.8%
-0.50%

2011E
10.5%
10.8%
11.0%
11.3%
11.5%
-0.25%

2012E
9.0%
9.5%
10.0%
10.5%
11.0%
-0.50%

2013E
7.5%
8.3%
9.0%
9.8%
10.5%
-0.75%

2014E
6.0%
7.0%
8.0%
9.0%
10.0%
-1.00%

2015E
5.0%
6.0%
7.0%
8.0%
9.0%
-1.00%

2016E
5.0%
6.0%
7.0%
8.0%
9.0%
-1.00%

2017E
5.0%
6.0%
7.0%
8.0%
9.0%
-1.00%

2018E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

2019E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

2020E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

2021E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

2011E
10.5%
10.8%
11.0%
11.3%
11.5%
-0.25%

2012E
9.0%
9.5%
10.0%
10.5%
11.0%
-0.50%

2013E
7.5%
8.3%
9.0%
9.8%
10.5%
-0.75%

2014E
6.0%
7.0%
8.0%
9.0%
10.0%
-1.00%

2015E
5.0%
6.0%
7.0%
8.0%
9.0%
-1.00%

2016E
5.0%
6.0%
7.0%
8.0%
9.0%
-1.00%

2017E
5.0%
6.0%
7.0%
8.0%
9.0%
-1.00%

2018E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

2019E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

2020E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

2021E
6.5%
7.0%
7.5%
8.0%
8.5%
-0.50%

General & Administrative
Skype Standalone
Skype Standalone
General & Administrative
Best Case
Skype Standalone
General & Administrative
Good Case
Skype Standalone
General & Administrative
Base Case
Skype Standalone
General & Administrative
Bad Case
Skype Standalone
General & Administrative
Worst Case
Increments
Skype owned by MSFT
Skype owned byGeneral
MSFT & Administrative
Best Case
Skype owned byGeneral
MSFT & Administrative
Good Case
Skype owned by
General
MSFT& Administrative
Base Case
Skype owned byGeneral
MSFT & Administrative
Bad Case
Skype owned byGeneral
MSFT & Administrative
Worst Case
Increments

2010

11.1%

2010

11.1%

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Amortization of Intangible Assets
Skype Standalone
Skype Standalone
AmortizationBest
of Intangible
Case
Assets
Skype Standalone
AmortizationGood
of Intangible
Case Assets
Skype Standalone
AmortizationBase
of Intangible
Case Assets
Skype Standalone
AmortizationBad
of Intangible
Case
Assets
Skype Standalone
AmortizationWorst
of Intangible
Case Assets
Increments

2010

Skype owned by MSFT
Skype owned byAmortization
MSFT
Best
of Intangible
Case
Assets
Skype owned byAmortization
MSFT
Good
of Intangible
Case Assets
Skype owned by
Amortization
MSFT Base
of Intangible
Case Assets
Skype owned byAmortization
MSFT
Bad
of Intangible
Case
Assets
Skype owned byAmortization
MSFT
Worst
of Intangible
Case Assets
Increments

2010

114

114

2011E
114
114
114
114
114
-

2012E
114
114
114
114
114
-

2013E
114
114
114
114
114
-

2014E
114
114
114
114
114
-

2015E
114
114
114
114
114
-

2016E
66
66
66
66
66
-

2017E
-

2018E
-

2019E
-

2020E
-

2021E
-

2011E
114
114
114
114
114
-

2012E
114
114
114
114
114
-

2013E
114
114
114
114
114
-

2014E
114
114
114
114
114
-

2015E
114
114
114
114
114
-

2016E
66
66
66
66
66
-

2017E
-

2018E
-

2019E
-

2020E
-

2021E
-

MSFT Base Sales Growth
Skype Standalone
Skype Standalone MSFT Base
BestSales
Case Growth
Skype Standalone MSFT Base
GoodSales
CaseGrowth
Skype Standalone
MSFT Base
BaseSales
CaseGrowth
Skype Standalone MSFT Base
Bad Sales
Case Growth
Skype Standalone MSFT Base
Worst
Sales
Case
Growth
Increments

2010

2011E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2012E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2013E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2014E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2015E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2016E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2017E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2018E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2019E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2020E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2021E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

Skype owned by MSFT
Skype owned by MSFT
MSFT Base
BestSales
Case Growth
Skype owned by MSFT
MSFT Base
GoodSales
CaseGrowth
Skype owned by MSFT
MSFT Base
BaseSales
CaseGrowth
Skype owned by MSFT
MSFT Base
Bad Sales
Case Growth
Skype owned by MSFT
MSFT Base
Worst
Sales
Case
Growth
Increments

2010

2011E
10.5%
10.3%
10.0%
9.8%
9.5%
0.25%

2012E
8.0%
7.5%
7.0%
6.5%
6.0%
0.50%

2013E
-8.5%
-9.3%
-10.0%
-10.8%
-11.5%
0.75%

2014E
12.0%
11.0%
10.0%
9.0%
8.0%
1.00%

2015E
9.0%
8.0%
7.0%
6.0%
5.0%
1.00%

2016E
-8.0%
-9.0%
-10.0%
-11.0%
-12.0%
1.00%

2017E
12.0%
11.0%
10.0%
9.0%
8.0%
1.00%

2018E
9.0%
8.0%
7.0%
6.0%
5.0%
1.00%

2019E
-8.0%
-9.0%
-10.0%
-11.0%
-12.0%
1.00%

2020E
12.0%
11.0%
10.0%
9.0%
8.0%
1.00%

2021E
9.0%
8.0%
7.0%
6.0%
5.0%
1.00%

6.9%

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

MSFT Base Revenue
Skype Standalone
Skype Standalone MSFT Base
BestRevenue
Case
Skype Standalone MSFT Base
GoodRevenue
Case
Skype Standalone
MSFT Base
BaseRevenue
Case
Skype Standalone MSFT Base
Bad Revenue
Case
Skype Standalone MSFT Base
Worst
Revenue
Case

2010

2011E
-

2012E
-

2013E
-

2014E
-

2015E
-

2016E
-

2017E
-

2018E
-

2019E
-

2020E
-

2021E
-

Skype owned by MSFT
Skype owned by MSFT
MSFT Base
BestRevenue
Case
Skype owned by MSFT
MSFT Base
GoodRevenue
Case
Skype owned by MSFT Base
BaseRevenue
Case
Skype owned by MSFT
MSFT Base
Bad Revenue
Case
Skype owned by MSFT
MSFT Base
Worst
Revenue
Case

2010

2011E
69,045
68,889
68,732
68,576
68,420

2012E
74,568
74,055
73,544
73,034
72,525

2013E
68,230
67,205
66,189
65,183
64,185

2014E
76,418
74,598
72,808
71,049
69,320

2015E
83,295
80,566
77,905
75,312
72,786

2016E
76,632
73,315
70,114
67,028
64,051

2017E
85,827
81,379
77,126
73,060
69,175

2018E
93,552
87,890
82,525
77,444
72,634

2019E
86,068
79,980
74,272
68,925
63,918

2020E
96,396
88,777
81,699
75,128
69,031

2021E
105,072
95,879
87,418
79,636
72,483

Skype Standalone
2010
Skype Standalone
% MSFT BaseBest
SalesCase
"saved" by Skype
Skype Standalone
% MSFT BaseGood
SalesCase
"saved" by Skype
Skype Standalone
% MSFT BaseBase
SalesCase
"saved" by Skype 0.0%
Skype Standalone
% MSFT BaseBad
Sales
Case
"saved" by Skype
Skype Standalone
% MSFT BaseWorst
Sales Case
"saved" by Skype
Increments

2011E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2012E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2013E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2014E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2015E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2016E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2017E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2018E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2019E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2020E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

2021E
0.0%
0.0%
0.0%
0.0%
0.0%
0.00%

Skype owned by MSFT
2010
Skype owned%by
MSFT
MSFT
BaseBest
SalesCase
"saved" by Skype
Skype owned%by
MSFT
MSFT
BaseGood
SalesCase
"saved" by Skype
Skype owned
% MSFT
by MSFT
BaseBase
SalesCase
"saved" by Skype 0.0%
Skype owned%by
MSFT
MSFT
BaseBad
Sales
Case
"saved" by Skype
Skype owned%by
MSFT
MSFT
BaseWorst
Sales Case
"saved" by Skype
Increments

2011E
0.2%
0.1%
0.0%
-0.1%
-0.2%
0.10%

2012E
0.2%
0.1%
0.0%
-0.1%
-0.2%
0.10%

2013E
0.3%
0.2%
0.1%
-0.1%
-0.2%
0.10%

2014E
0.3%
0.2%
0.1%
0.0%
-0.1%
0.10%

2015E
0.3%
0.2%
0.1%
0.0%
-0.1%
0.10%

2016E
0.4%
0.3%
0.2%
0.1%
0.0%
0.10%

2017E
0.4%
0.3%
0.2%
0.1%
0.0%
0.10%

2018E
0.4%
0.3%
0.2%
0.1%
0.0%
0.10%

2019E
0.7%
0.5%
0.3%
0.1%
-0.1%
0.20%

2020E
1.0%
0.7%
0.4%
0.1%
-0.2%
0.30%

2021E
1.3%
0.9%
0.5%
0.1%
-0.3%
0.40%

-

62,484

% MSFT Base Sales "saved" by Skype

Skype S.à r.l.
Key Driver Assumptions
Ascendere Associates LLC
Stephen Castellano
steve@ascenderellc.com

Skype-MSFT Synergies
Skype Standalone
Skype Standalone
Skype-MSFT Synergies
Best Case
Skype Standalone
Skype-MSFT Synergies
Good Case
Skype Standalone
Skype-MSFT Base
Synergies
Case
Skype Standalone
Skype-MSFT Synergies
Bad Case
Skype Standalone
Skype-MSFT Synergies
Worst Case

2010

2011E
-

2012E
-

2013E
-

2014E
-

2015E
-

2016E
-

2017E
-

2018E
-

2019E
-

2020E
-

2021E
-

Skype owned by MSFT
Skype ownedSkype-MSFT
by MSFT Synergies
Best Case
Skype ownedSkype-MSFT
by MSFT Synergies
Good Case
Skype owned
Skype-MSFT
by MSFT Base
Synergies
Case
Skype ownedSkype-MSFT
by MSFT Synergies
Bad Case
Skype ownedSkype-MSFT
by MSFT Synergies
Worst Case

2010

2011E
147
77
9
(60)
(128)

2012E
168
93
18
(55)
(127)

2013E
171
101
33
(33)
(96)

2014E
229
149
73
(69)

2015E
271
181
97
19
(55)

2016E
273
188
110
38
(28)

2017E
339
240
151
70
(3)

2018E
416
302
201
112
32

2019E
607
404
227
72
(61)

2020E
946
605
312
61
(151)

2021E
1,342
841
417
61
(234)

2010

2011E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2012E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2013E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2014E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2015E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2016E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2017E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2018E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2019E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2020E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2021E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2010

2011E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2012E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2013E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2014E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2015E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2016E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2017E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2018E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2019E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2020E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

2021E
22.0%
22.0%
22.0%
22.0%
22.0%
0.00%

-

-

Cash tax rate
Skype Standalone
Skype Standalone
Cash tax rate Best Case
Skype Standalone
Cash tax rate Good Case
Skype Standalone
Cash tax rate Base Case
Skype Standalone
Cash tax rate Bad Case
Skype Standalone
Cash tax rate Worst Case
Increments
Skype owned by MSFT
Skype ownedCash
by MSFT
tax rate Best Case
Skype ownedCash
by MSFT
tax rate Good Case
Skype owned
Cash
by tax
MSFT
rate Base Case
Skype ownedCash
by MSFT
tax rate Bad Case
Skype ownedCash
by MSFT
tax rate Worst Case
Increments

nmf

nmf

Operating Profit
Worst Case
Skype Standalone
+ Addressable Market Impact
+ MSFT Product Stickiness Impact
Skype owned by MSFT

Valuation Impact
2010
21

21

2011E

2012E

2013E

2014E

2015E

56
12
(128)
(62)

80
37
(127)
(22)

103
68
(96)
23

156
99
(69)
121

182
153
(55)
184

2016E 20119E
197
218
(28)
243

216
285
(3)
294

2018E
187
356
32
310

2019E

2020E

2021E

135
385
(61)
147

93
400
(151)
(3)

64
422
(234)
(128)

+ Capital Structure Impact
Impact to Microsoft Valuation

Operating Profit
Bad Case
Skype Standalone
+ Addressable Market Impact
+ MSFT Product Stickiness Impact
Skype owned by MSFT

2010
21

21

2011E

2012E

2013E

2014E

68
12
(60)
19

115
37
(55)
92

171
68
(33)
163

268
99
324

2015E
332
153
19
439

2016E 20119E
379
218
38
539

420
285
70
637

2018E
402
356
112
689

2019E
348
385
72
587

2020E

2021E

293
400
61
504

250
422
61
450

Operating Profit
Base Case

2010
21

21

2011E
80
12
9
100

2012E
155
37
18
210

2013E
251
68
33
352

2014E
413
99
73
585

2015E
537
153
97
788

2016E 20119E
655
218
110
983

770
285
151
1,205

2018E

2019E

2020E

2021E

807
356
201
1,364

812
385
227
1,423

799
400
312
1,510

798
422
417
1,637

Operating Profit
Good Case

2010
21

21

2011E
92
12
77
182

2012E
198
37
93
333

2013E
345
68
101
492

2014E
595
99
149
859

2015E

2016E 20119E

2018E

2019E

2020E

2021E

814
153
181
1,184

1,068
218
188
1,549

1,544
356
302
2,421

1,767
385
404
2,874

1,927
400
605
3,338

2,126
422
841
3,900

1,352
285
240
2,018

Operating Profit
Best Case

Source: Ascendere Associates LLC

Debt

16.0%

215
(89)
126

(99)
(26)
80
(45)

901
94
(558)
437

142
142

(760)
(760)

284
94
(558)
(181)

0.03
0.01
(0.07)
(0.02)

11.2%

17
373

285
411

43
(2)

345
782

142

(760)

345
165

0.04
0.02

Unlevered Interest
Firm
Tax
Potential Enterprise
Value Shields Bankruptcy
value
WACC

Value /
MSFT
Share

Cash

Debt

Equity
Value

16.0%

1,449
427
39
1,915

215
(89)
126

(167)
(49)
(5)
(221)

1,496
288
35
1,820

142
142

(760)
(760)

879
288
35
1,202

0.10
0.03
0.00
0.14

11.2%

1,215
3,130

285
411

207
(14)

1,708
3,528

142

(760)

1,708
2,910

0.20
0.35

Value /
MSFT
Share

Unlevered Interest
Firm
Tax
Potential Enterprise
Value Shields Bankruptcy
value
WACC

Cash

Debt

Equity
Value

16.0%

2,765
862
1,687
5,314

215
(89)
126

(290)
(91)
(177)
(558)

2,689
683
1,510
4,882

142
142

(760)
(760)

2,072
683
1,510
4,264

0.25
0.08
0.18
0.51

11.2%

2,427
7,740

285
411

531
(27)

3,243
8,125

142

(760)

3,243
7,507

0.38
0.89

Value /
MSFT
Share

Valuation Impact

+ Capital Structure Impact
Impact to Microsoft Valuation

Skype Standalone
+ Addressable Market Impact
+ MSFT Product Stickiness Impact
Skype owned by MSFT

Cash

785
209
(639)
356

Valuation Impact

+ Capital Structure Impact
Impact to Microsoft Valuation

Skype Standalone
+ Addressable Market Impact
+ MSFT Product Stickiness Impact
Skype owned by MSFT

Value /
MSFT
Share

Equity
Value

Valuation Impact

+ Capital Structure Impact
Impact to Microsoft Valuation

Skype Standalone
+ Addressable Market Impact
+ MSFT Product Stickiness Impact
Skype owned by MSFT

Unlevered Interest
Firm
Tax
Potential Enterprise
Value Shields Bankruptcy
value
WACC

Unlevered Interest
Firm
Tax
Potential Enterprise
Value Shields Bankruptcy
value
WACC

Cash

Debt

Equity
Value

16.0%

5,291
1,927
1,684
8,902

215
(89)
126

(500)
(182)
(159)
(841)

5,006
1,656
1,525
8,187

142
142

(760)
(760)

4,389
1,656
1,525
7,570

0.52
0.20
0.18
0.90

11.2%

7,532
16,434

285
411

798
(43)

8,615
16,802

142

(760)

8,615
16,185

1.02
1.92

Valuation Impact
2010

2011E

21

105
12
147
265

21

2012E
245
37
168
463

2013E
456
68
171
686

2014E

2015E

2016E 20119E

2018E

2019E

2020E

2021E

823
99
229
1,207

1,183
153
271
1,717

1,669
218
273
2,378

2,704
356
416
4,062

3,309
385
607
5,139

3,956
400
946
6,424

4,771
422
1,342
8,024

2,290
285
339
3,314

+ Capital Structure Impact
Impact to Microsoft Valuation

Unlevered Interest
Firm
Tax
Potential Enterprise
Value Shields Bankruptcy
value
WACC

Equity
Value

Value /
MSFT
Share

Cash

Debt

16.0%

10,212
3,612
2,674
16,499

215
(89)
126

(858)
(303)
(225)
(1,386)

9,569
3,220
2,450
15,239

142
142

(760)
(760)

8,952
3,220
2,450
14,622

1.06
0.38
0.29
1.73

11.2%

15,136
31,635

285
411

1,331
(55)

16,752
31,991

142

(760)

16,752
31,373

1.99
3.72

DISCLOSURES
Ascendere is in the business of providing equity research and related consulting services to investors and their advisors. The equity research it provides includes basic quantitative model portfolios and
more detailed fundamental research with respect to individual stocks. In addition, the firm manages stock portfolios for itself and clients.
Ascendere does not rate stocks on any scale, but does offer individual stock commentary and valuation opinions. With regard to Ascendere's portfolio strategies, "long" or "high-quality" baskets should
generally be considered buys, unless otherwise noted. Stocks in our "short" or "low-quality" baskets should generally be considered sells, unless otherwise noted. While exceptions may occasionally
occur, typically stocks in the high-quality basket are expected to outperform the S&P 500 over a month's time and stocks in the low-quality basket are expected to underperform. A more relevant
benchmark would comprise of all stocks and ADRs that trade on major U.S. stock exchanges with a market cap above $2 billion.
Ascendere adheres to professional standards and abides by codes of ethics that put the interests of clients ahead of its own. The following are specific disclosures made by Ascendere:
1) Ascendere may have a financial interest in the companies referred to in this report ("the Companies"). The research analyst covering the Companies and members of the analyst's immediate family
have a financial interest in one or more of the Companies.
2) Ascendere generates revenue from research subscription revenue and portfolio management fees. At any given time it may be long or short any of the Companies.
3) Ascendere does not make a market in the securities of any of the Companies.
4) Ascendere has not received compensation from the Companies.
5) Ascendere has not managed or co-managed a public offering for any of the Companies.
6) Neither Ascendere nor any of its officers or any family member of the covering analyst serve as an officer, director or advisory board member of any of the Companies.
7) Neither Ascendere nor any of its officers or any family member of the covering analyst beneficially own 1% or more of any class of securities of any of the Companies.

DISCLAIMERS
This report is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy or sell any securities or related financial instruments. The report is not intended to
be in furtherance of the specific investment objectives, financial situation, or particular needs of any individual recipient. Investment decisions should be based on an individual's own goals, time horizon
and tolerance for risk. The information contained herein accurately reflects the opinion of Ascendere at the time the report was released. The opinions of Ascendere are subject to change at any time
without notice and without obligation or notification. The officers, affiliates or family members of Ascendere Associates may hold positions in the securities of the Companies. No warranty is made as to
the accuracy of the information contained herein. The views and opinions expressed in the market commentary reflect the opinions of the author and may be based upon information obtained from
third-party sources believed to be reliable but not guaranteed. These opinions are subject to change at any time based upon market or other conditions. Ascendere disclaims any responsibility to update
such views. This information is intended for the sole use of clients of Ascendere. Any other use, distribution or reproduction is strictly prohibited. Investing in stocks includes a high degree of risk,
including the risk of total loss. This is for informational purposes only and is not intended to constitute a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy
or sell any securities or investment services. All information, opinions and estimates are current as of original distribution by author and are subject to change at any time without notice. Any companies,
securities and/or markets referenced are solely for illustrative purposes. Past performance is not indicative of future performance, and no representation or warranty, express or implied, is made
regarding future performance.
For Investment Professional use only. NOT FOR FURTHER DISTRIBUTION. Any dissemination or copying of this commentary is strictly prohibited.

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.
Among the services that Ascendere provides are: 1) detailed custom equity research analysis; 2) valuation scenario
analysis studies; 3) supply /demand studies; 4) long and short stock idea generation; 5) portfolio feedback; 6) detailed
fundamental financial modeling services; and 7) additional analytical consulting services. Additional information is
available at www.ascenderellc.com.
Mr. Castellano has over 15 years of experience in equity research and related consulting positions. At PaineWebber,
Warburg Dillon Read and Credit Lyonnais Securities he developed fundamental equity valuation models and
conducted in-depth research on the steel and telecom services industries. At Boston Private Value Investors, he
developed quantitative models for stock idea generation and also provided general fundamental equity research
coverage. Steve received a MBA from the F. W. Olin School of Business at Babson College (2005) and a BA from
Oberlin College (1993).
Mr. Castellano's career history is highlighted below:
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)

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