Microsoft 2004 Annual Report Download - page 19

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PAGE 19
Client operating income was flat for fiscal 2004 compared to fiscal 2003 due to increased operating expenses primarily
related to the charge for the Sun Microsystems settlement of $700 million in the third quarter of fiscal 2004 and $307
million of stock-based compensation expense from the employee stock option transfer program in the second quarter of
fiscal 2004, offset by growth in revenue. Operating income for fiscal 2003 increased primarily as a result of the 11%
growth in revenue, partially offset by an increase in operating expenses, largely attributed to headcount additions and
related costs.
We estimate that PC market growth will be from 7% to 9% in fiscal 2005. We expect emerging markets to continue to
outpace mature market growth rates and we expect to hold our share in these respective markets. The differential market
growth rate is expected to result in lower unit license growth in the OEM business and lower revenue growth, as piracy
continues to be problematic in emerging markets, and significant price changes are not anticipated. We plan to continue
our efforts to increase premium product mix but expect to see only modest improvements in fiscal 2005. The Client
commercial and retail licensing revenues are expected to continue to lag behind overall Client revenue growth. We expect
operating profits as a percentage of Client revenue to improve in fiscal 2005, due to the legal settlements expenses and
stock-based compensation expense from the employee stock option transfer program in fiscal 2004. Major investments in
fiscal 2005 include development of the Windows Client next generation operating system (Longhorn), security programs,
and marketing initiatives, including those related to Windows XP Service Pack 2 and other new products.
Server and Tools
(In millions, except percentages) 2002 2003
Percentage
inc./ (dec.) 2004
Percentage
inc./ (dec.)
Revenue $6,157 $7,140 16% $8,483 19%
Operating income $ 747 $1,121 50% $ 96 (91)%
Server and Tools consists of server software licenses and client access licenses (CALs) for Windows Server, SQL Server,
Exchange Server, and other servers. It also includes developer tools, training, certification, Microsoft Press, Premier
product support services, and Microsoft consulting services. Growth in the overall market for information technology, both
hardware and software, is the principal driver for Server and Tools revenue growth. The segment concentrates on
licensing products, applications, tools, content, and services that make information technology professionals and
developers more productive and efficient. Products are sold through OEMs, distributors, direct to customers, and through
one-time licenses or multi-year volume license agreements.
We estimate that overall server hardware shipments grew 16% in fiscal 2004 compared to the prior year. Server and
Server applications revenue, including CAL revenue, grew $1.28 billion or 25% driven primarily by an estimated 18%
increase in Windows-based server shipments resulting in 15% growth in new Windows Server licenses, and by favorable
conversion of revenue billed in foreign currencies to U.S. dollars. Consulting and Premier product support services
revenue increased $189 million or 19% compared to fiscal 2003 due to increased customer penetration from new product
offerings. Revenue from developer tools, training, certification, and Microsoft Press and other services declined $128
million or 14% compared to fiscal 2003 due to recognition of revenue deferred in prior years. Foreign exchange rates
contributed approximately $350 million or 5% of Server and Tools revenue growth.
Total Server and Tools revenue grew $983 million or 16% in fiscal 2003, driven by an increase in Windows-based
server shipments and growth in SQL Server and Exchange revenue. Windows Server and CALs revenue grew $787
million or 18% from fiscal 2002 as a result of increased new and anniversary multi-year licensing agreements. Consulting
and Premier product support services increased $91 million or 10% compared to fiscal 2002. Revenue from developer
tools, training, certification, Microsoft Press, and other services increased $105 million or 13% from fiscal 2002.
Server and Tools operating income for fiscal 2004 declined primarily due to the charge for the Sun Microsystems
settlement of $1.22 billion in the third quarter of fiscal 2004 and $651 million of stock-based compensation costs from the
employee stock option transfer program in the second quarter of fiscal 2004. Server and Tools operating income for fiscal
2003 grew 50%, primarily as a result of the 16% increase in revenue.
We anticipate that overall server hardware shipments will grow from 13% to 15% in fiscal 2005 and new licenses of
Windows Server operating system will grow slightly faster than the overall market. We believe that Windows Server 2003
shipments will create opportunities for sales of Windows Server System products. However, we face strong competition
from the Linux-based, Unix, and other server operating systems. In addition, Server and Tools net revenue for fiscal 2005
will be unfavorably affected by the absence of revenue earned from our Upgrade Advantage program and no anticipated
foreign exchange benefit.