Company Description:
Microsoft Corporation, incorporated in 1981, develops, manufactures, licenses and supports a range of software products for computing devices. The Company's software products include operating systems for servers, personal computers (PCs) and intelligent devices, server applications for distributed computing environments, information worker productivity applications, business solution applications, high-performance computing applications and software development tools. It provides consulting and product support services, and trains and certifies computer system integrators and developers. Microsoft Corporation sells the Xbox 360 video game console and games, the Zune digital music and entertainment device, PC games, and peripherals. Online offerings and information are delivered through its Windows Live, Office Live, and MSN portals and channels. The Company enables the delivery of online advertising through its adCenter platform. The Company has five segments: Client, Server and Tools, the Online Services Business, the Microsoft Business Division, and the Entertainment and Devices Division.
Click here for a full description of the company’s operations (provided by Reuters).
Annual Report Highlights (latest report is for the period ending
Table of Contents:
- General
- Operations
- Product Development
- Distribution, Sales, and Marketing
- Customers
- Employees
- Risk Factors
- Properties
- Stock Repurchase Program
- Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Outlook for Fiscal Year 2008
- Operating Expenses
- Summary of the Types of Products and Services Provided By Each Segment
General
We research and develop advanced technologies for future software products. We believe that delivering breakthrough innovation and high-value solutions through our integrated software platform is the key to meeting our customers’ needs and to our future growth. We believe that we continue to lay the foundation for long-term growth by delivering new products, creating opportunities for partners, improving customer satisfaction, and improving our internal processes. Our focus is to build on this foundation through ongoing innovation in our integrated software platforms; by delivering compelling value propositions to customers; by responding effectively to customer and partner needs; and by continuing to emphasize the importance of product excellence, business efficacy, and accountability.
Operations
To serve the needs of customers around the world and to improve the quality and usability of products in international markets, we “localize” many of our products to reflect local languages and conventions. Localizing a product may require modifying the user interface, altering dialog boxes, and translating text.
We contract most of our manufacturing activities to third parties who produce the Xbox 360, Zune, various retail software packaged products, and Microsoft hardware. We generally have multiple sources for raw materials, supplies, and components, and are often able to acquire component parts and materials on a volume discount basis.
Product Development
During fiscal years 2007, 2006, and 2005, research and development expense was $7.12 billion, $6.58 billion, and $6.10 billion, respectively. These amounts represented 14%, 15%, and 15%, respectively, of revenue in each of those years. We plan to continue to make significant investments in a broad range of research and product development efforts.
While most of our software products are developed internally, we also purchase technology, license intellectual property rights, and oversee third-party development and localization of certain products.
Business and Product Development Strategy
Innovation is a key factor affecting Microsoft’s growth. Our model for growth is based on broad adoption of innovation, willingness to enter new markets, and embracing and acting on disruptive trends.
Increasingly, we are taking a global approach to innovation. While our main research and development facilities are located in
Based on our broad focus on innovation and long-term approach to new markets, we see the following key opportunities for growth:
· Consumer technology – To build on our strength in the consumer marketplace with Windows Vista, the 2007 Microsoft Office System, Xbox 360, Microsoft Windows Live, Windows Mobile, and Zune, we are focused on delivering products that we believe are compelling and cutting edge in terms of design as well as features and functionality. Today, the innovation in consumer electronics devices lies in the software that powers them. This is creating new opportunities for us to deliver end-to-end experiences.
· Software plus services – Underlying our opportunities in consumer technologies, and in all of our businesses, is a company-wide commitment to fully embrace software plus services. The ability to combine the power of desktop and server software with the reach of the Internet represents an opportunity across every one of our businesses.
· Expanding our presence on the desktop and server – While we enjoyed success in fiscal year 2007 with the launches of Windows Vista and the 2007 Microsoft Office System, we see potential for growth by delivering more value per customer. With the planned releases in fiscal year 2008 of Windows Server 2008, SQL Server 2008, and Visual Studio 2008, and the possibility to provide additional value in security, messaging, systems management, and collaboration, we believe we are well-positioned to build on our strength with businesses of all sizes. We will continue to pursue new opportunities in high performance computing, unified communications, healthcare, and business intelligence. Emerging markets are also an important opportunity for us.
Distribution, Sales, and Marketing
We distribute our products primarily through the following channels: OEM; distributors and resellers; and online.
· OEM – Our operating systems are licensed primarily to OEMs under agreements that grant the OEMs the right to build computing devices based on our operating systems, principally PCs. Under similar arrangements, we also market and license certain server operating systems, desktop applications, hardware devices, and consumer software products to OEMs.
· Distributors and Resellers – We license software to organizations under arrangements that allow the end-user customer to acquire multiple licenses of products. We distribute our finished goods products primarily through independent non-exclusive distributors, authorized replicators, resellers, and retail outlets. Individual consumers obtain our products primarily through retail outlets, including Best Buy, Target, and Wal-Mart.
· Online – We distribute online content and services through MSN and other online channels.
o OSB delivers Internet access, online e-mail and messaging communication services and information services such as online search, advertising, and premium content.
o EDD operates the Xbox Live service which allows customers to participate in the gaming experience with other subscribers online.
o Microsoft Small Business Center portal provides tools and expertise for small-business owners to build, market, and manage their businesses online
Customers
Our customers include individual consumers, small and medium-sized organizations, enterprises, governmental institutions, educational institutions, Internet Service Providers, application developers, and OEMs. Consumers and small- and medium-sized organizations obtain our products primarily through resellers and OEMs. No sales to an individual customer accounted for more than 10% of fiscal year 2007 revenue. Sales to Dell and its subsidiaries accounted for approximately 11% and 10% of fiscal year 2006 and 2005 revenue, respectively. Our practice is to ship our products promptly upon receipt of purchase orders from customers; consequently, backlog is not significant.
Employees
As of
Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, cash flows, and trading price of our common stock.
· Challenges to our business model may reduce our revenues and operating margins.
· We face intense competition.
· We may not be able to adequately protect our intellectual property rights.
· Third parties may claim we infringe their intellectual property rights.
· We may not be able to protect our source code from copying if there is an unauthorized disclosure of source code.
· Security vulnerabilities in our products could lead to reduced revenues or to liability claims.
· We are subject to government litigation and regulatory activity that affects how we design and market our products.
· Our business depends largely on our ability to attract and retain talented employees
· Delays in product development schedules may adversely affect our revenues.
· We make significant investments in new products and services that may not be profitable
· Adverse economic conditions may harm our business.
· We have claims and lawsuits against us that may result in adverse outcomes.
· We may have additional tax liabilities
· Our consumer hardware products may experience quality or supply problems
· If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.
· We operate a global business that exposes us to additional risks.
· Catastrophic events or geo-political conditions may disrupt our business.
· Acquisitions and joint ventures may have an adverse effect on our business.
· Improper disclosure of personal data could result in liability and harm our reputation.
Properties
Microsoft’s corporate offices consist of approximately 11 million square feet of office space located in
The Company occupies many sites internationally, totaling approximately 8 million square feet that is leased and approximately 1 million square feet that is owned.
The Company’s facilities are fully used for current operations of all segments, and suitable additional space is available to accommodate expansion needs.
Stock Repurchase Program
On
Management’s Discussion and Analysis of Financial Condition and Results of Operations For Fiscal Years 2007, 2006, and 2005
Key market opportunities include:
· Consumer technology – We are focused on delivering consumer software products that we believe are compelling in terms of design and features. We are also working to define the next era of consumer electronics through innovating software that powers today’s consumer devices.
· Software plus services – The ability to combine the power of desktop and server software with the reach of the Internet represents an opportunity across every one of our businesses. We believe our software plus services approach will enable us to deliver new experiences to end users and new value to businesses.
· Expanding our presence on the desktop and server – Through our ability to deliver additional value in security, messaging, systems management, and collaboration, and new technology for high performance computing, unified communications, healthcare, and business intelligence, we believe we are well-positioned to build on our strength with businesses of all sizes.
| (In millions, except percentages) |
| 2007 |
| 2006 |
| 2005 |
| Percent versus 2006 |
| Percent versus 2005 | |||
|
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|
|
|
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| Revenue |
| $ | 51,122 |
| $ | 44,282 |
| $ | 39,788 |
| 15% |
| 11% |
| Operating income |
| $ | 18,524 |
| $ | 16,472 |
| $ | 14,561 |
| 12% |
| 13% |
Fiscal year 2007 compared to fiscal year 2006
Revenue growth was driven primarily by licensing of the 2007 Microsoft Office system and Windows Vista, increased revenue associated with SQL Server, Windows Server, and Visual Studio, and increased Xbox 360 console sales.
Operating income growth was driven primarily by the increased revenue and decreased costs for legal settlements and legal contingencies, partially offset by increased cost of revenue associated with Xbox 360 and Windows Vista, increased OSB data centers costs, and increased sales and marketing expenses.
· In July 2007, we expanded our global Xbox 360 warranty coverage to three years from the date of purchase for a general hardware failure indicated by three flashing red lights. As a result, we recorded a $1.06 billion charge for anticipated costs under the warranty policy, inventory write-downs, and product returns.
· The increase in sales and marketing expenses was primarily driven by increased headcount-related costs and marketing costs related to recent product launches.
Fiscal year 2006 compared to fiscal year 2005
Revenue growth was driven primarily by growth in SQL Server following the launch of SQL Server 2005 in the second quarter of fiscal year 2006, Windows Server and other server applications, increased Xbox revenue resulting from the Xbox 360 launch in November 2005, growth in licensing of Windows PC operating systems through OEMs, and increased licensing of Office and other MBD software
Operating income increased primarily reflecting the revenue increase and a decrease in costs for legal settlements and legal contingencies. These changes were partially offset by an increase in cost of revenue primarily related to Xbox 360 and an increase in sales and marketing expenses primarily as a result of increased investments in partner marketing and product launch-related spending. Headcount-related costs increased 7%, driven by an increase in salaries and benefits for existing headcount and a 16% growth in headcount.
Outlook for Fiscal Year 2008
· Client – We expect revenue to grow reflecting improvement in the commercial and retail portion of the business due to increased acceptance of Windows Vista. We expect PC shipments to grow 9% to 11% for fiscal year 2008. We believe that PC unit growth rates will be higher in the consumer segment than in the business segment and higher in emerging markets than in mature markets.
· Server and Tools – We expect continued momentum from recent product launches and to benefit from the upcoming launches of the new versions of SQL Server, Windows Server, and Visual Studio in the second half of fiscal year 2008.
· Online Services Business – We expect increased growth in online advertising revenue as the portals, channels, and communications services continue to expand globally and the overall Internet advertising industry continues to expand. In May 2007, we agreed to acquire aQuantive, Inc., a digital marketing company, for approximately $6 billion in cash. We expect to complete this transaction in August 2007. This acquisition will enable us to strengthen relationships with advertisers, agencies and publishers by enhancing our advertising platforms and services. The acquisition also provides us with increased depth in building and supporting next generation advertising solutions and environments such as cross media planning and video-on-demand.
· Microsoft Business Division – We expect revenue to continue to increase in fiscal year 2008 due to increased customer acceptance of the 2007 Microsoft Office system. We continue to develop plans to grow revenue in new areas such as unified communications, enterprise content management, collaboration tools, business intelligence, and through our existing portfolio of Microsoft Dynamics products.
· Entertainment and Devices Division – We expect revenue to increase due to the increased installed base of the Xbox 360 console and from the release of Halo 3, a new Xbox 360 game. Revenue from existing mobility and embedded devices is expected to increase due to unit volume increases of Windows Mobile software driven by increased market demand for phone-enabled devices and Windows Embedded operating systems.
Operating Expenses
Cost of Revenue
| (In millions, except percentages) |
| 2007 |
| 2006 |
| 2005 |
| Percent versus 2006 |
| Percent versus 2005 | |||
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| Cost of revenue |
| $ | 10,693 |
| $ | 7,650 |
| $ | 6,031 |
| 40% |
| 27% |
| As a percent of revenue | | | 21% |
|
| 17% |
|
| 15% |
| 4ppt |
| 2ppt |
Research and Development
| (In millions, except percentages) |
| 2007 |
| 2006 |
| 2005 |
| Percent versus 2006 |
| Percent versus 2005 | |||
|
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|
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| Research and development |
| $ | 7,121 |
| $ | 6,584 |
| $ | 6,097 |
| 8% |
| 8% |
| As a percent of revenue | | | 14% |
|
| 15% |
|
| 15% |
| (1)ppt |
| – |
Sales and Marketing
| (In millions, except percentages) |
| 2007 |
| 2006 |
| 2005 |
| Percent versus 2006 |
| Percent versus 2005 | |||
|
|
|
|
|
|
| ||||||||
| Sales and marketing |
| $ | 11,455 |
| $ | 9,818 |
| $ | 8,563 |
| 17% |
| 15% |
| As a percent of revenue | | | 22% |
|
| 22% |
|
| 22% |
| – |
| – |
General and Administrative
| (In millions, except percentages) |
| 2007 |
| 2006 |
| 2005 |
| Percent versus 2006 |
| Percent versus 2005 | |||
|
|
|
|
|
|
| ||||||||
| General and administrative |
| $ | 3,329 |
| $ | 3,758 |
| $ | 4,536 |
| (11)% |
| (17)% |
| As a percent of revenue | | | 7% |
|
| 8% |
|
| 11% |
| (1)ppt |
| (3)ppt |
Investment Income and Other
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| (In millions) |
| 2007 |
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| 2006 |
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| 2005 |
| |||
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| Dividends and interest |
| $ | 1,319 |
|
| $ | 1,510 |
|
| $ | 1,460 |
|
| Net gains on investments |
|
| 650 |
|
|
| 161 |
|
|
| 856 |
|
| Net losses on derivatives |
|
| (358 | ) |
|
| (99 | ) |
|
| (262 | ) |
| Other, net |
|
| (34 | ) |
|
| 218 |
|
|
| 13 |
|
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| Investment income and other |
| $ | 1,577 |
|
| $ | 1,790 |
|
| $ | 2,067 |
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Summary of the Types of Products and Services Provided By Each Segment:
· Client – Windows Vista, including Home, Home Premium, Ultimate, Business, and Enterprise Starter Edition; Windows XP Professional and Home; Media Center Edition; Tablet PC Edition; and other standard Windows operating systems.
· Server and Tools – Windows Server operating system; Microsoft SQL Server; Microsoft Enterprise Services; product support services; Visual Studio; System Center products; Forefront Security products; Biz Talk Server; MSDN; and TechNet, among others.
· Online Services Business – MSN Search; MapPoint; MSN Internet Access; MSN Premium Web Services (consisting of MSN Internet Software Subscription, MSN Hotmail Plus, MSN Bill Pay, and MSN Radio Plus); Windows Live; and MSN Mobile Serv