Microsoft 2004 Annual Report Download - page 21

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PAGE 21
We announced in the fourth quarter of fiscal 2004 a plan to align and include the Small and Mid-Market Solutions &
Partners (SMS&P) organization in the Microsoft Business Solutions segment. This change is designed to optimize our
focus on delivering business applications to small and mid-market segment businesses. The SMS&P organization is
currently part of the Information Worker segment. This reorganization will result in a corresponding change to the
Microsoft Business Solutions and Information Worker reported results, primarily from the reorganization of approximately
$100 million in revenue and costs associated with our Partner program offerings, which will move from Information Worker
segment to Microsoft Business Solutions. In fiscal 2005, we expect continued growth for Microsoft Business Solutions
through CRM, Axapta, Navision, and Great Plains product lines with increased sales and marketing focus from the
SMS&P organization, and new product launches for Great Plains and Navision.
MSN
(In millions, except percentages) 2002 2003
Percentage
inc./ (dec.) 2004
Percentage
inc./ (dec.)
Revenue $1,571 $1,953 24% $2,216 13%
Operating income/(loss) $ (909) $ (567) (38)% $ 121 nm
The MSN segment includes personal communications services, such as e-mail and instant messaging, and information
services, such as MSN Search and the MSN portals and channels around the World. MSN also provides a variety of paid
services resulting in revenue for the segment including MSN Internet Access, and MSN Premium Web Services. Revenue
is principally generated from advertisers on MSN, from consumers through subscriptions and transactions generated from
MSN Premium Web Services and from subscribers to MSN Narrowband Internet Access.
In fiscal 2004, MSN advertising revenue increased $360 million or 43% as a result of growth in paid search and growth
in the overall Internet advertising market. This increase was partially offset by a decline of $168 million or 15% in Internet
access revenue, primarily from the migration of internet access subscribers to broadband or other competitively priced
Internet service providers. Revenue from subscription and transaction services other than Internet access increased $71
million in fiscal 2004 to $95 million. At the end of the current fiscal year, MSN had 4.3 million internet access subscribers
compared to 6.5 million at the end of the prior fiscal year and 8.8 million total subscribers compared to 8.6 million at the
end of the prior year. In addition, MSN has over 350 million unique users monthly, 187 million active Hotmail accounts,
and 135 million active Messenger accounts. Compared to fiscal 2002, MSN advertising revenue grew $270 million or 48%
in fiscal 2003 as a result of growth in paid search and strong online advertising sales across all geographic regions. MSN
subscription revenue grew $112 million or 11% in fiscal 2003 reflecting an increase in the number of paying non-
promotion subscribers.
MSN reached segment profitability in the first quarter of fiscal 2004 and was profitable for the full fiscal year. The
improvement in profitability was primarily driven by an increase in revenue from advertising in both display and paid
search, a decline in customer acquisition costs and other expenses related to the Internet access business, efficiency
gains in the operations of the advertising and subscription businesses, and a $48 million refund of prior year taxes,
partially offset by $144 million of stock-based compensation expense related to the employee stock option transfer
program in the second quarter of fiscal 2004. MSN operating loss for fiscal 2003 decreased from fiscal 2002, primarily as
a result of the growth in revenue and lower relative subscription acquisition and support costs.
MSN expects advertising revenue and revenue from subscriptions and transactions for premium Web services to
increase in fiscal 2005. Advertising revenue should benefit from expected increases in Internet spending and additions to
the advertising platform including music download service, communication innovations, and an improved search engine.
We expect revenue from narrowband Internet access to decline in fiscal 2005 as narrowband subscribers continue to
migrate to broadband Internet access. We announced in the fourth quarter of fiscal 2004 an increase to the amount of
storage we will provide for select MSN and Hotmail email accounts which will increase operating costs and may impact
the revenues from our extra storage customers. However, we expect the segment to increase its profitability in fiscal
2005, led by continued operational efficiencies and lower unit margin costs in both the subscriber and advertising
businesses.
Mobile and Embedded Devices
(In millions, except percentages) 2002 2003
Percentage
inc./ (dec.) 2004
Percentage
inc./ (dec.)
Revenue $ 112 $ 156 39% $ 247 58%
Operating loss $(275) $(277) 1% $(224) (19)%