Microsoft 2005 Annual Report Download

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Table of contents

  • Page 1

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  • Page 3
    ...history. Many other important products were launched by our Client, Information Worker, and Microsoft Business Solutions businesses: 64-bit editions of Windows XP Professional and Windows Server 2003; new versions of Windows XP for Media Centers and Tablet PCs; Office Live Communications Server 2005...

  • Page 4
    ...supported by advertising or subscriptions. Such services include Hotmail, the world's largest free email service with over 205 million active accounts, MSN.com, one of the world's most popular online portals, MSN Messenger, MSN Search, and Xbox Live, the world's largest unified online console gaming...

  • Page 5
    ...partnering to help extend the benefits of technology to more people and communities. Last year alone, Microsoft provided more than $334 million in cash and software to more than 9,000 nonprofit organizations. Through our Partners in Learning program, we have helped bring technology access and skills...

  • Page 6
    ... dividends approved by our Board of Directors in fiscal year 2005. On July 20, 2004, our Board of Directors approved a plan to buy back up to $30 billion in Microsoft common stock over four years. The specific timing and amount of repurchases will vary based on market conditions, securities law...

  • Page 7
    ... QUARTERLY STOCK PRICE INFORMATION, AND ISSUER PURCHASES OF EQUITY SECURITIES (CONTINUED) Total number of shares purchased Average price paid per share Period July 1, 2004 - September 30, 2004 October 1, 2004 - December 31, 2004 January 1, 2005 - March 31, 2005 April 1, 2005 - June 30, 2005 Common...

  • Page 8
    ... and Tools; Information Worker; Microsoft Business Solutions; MSN; Mobile and Embedded Devices; and Home and Entertainment. See Note 18 - Segment Information of the Notes to Financial Statements for financial information regarding segment reporting. Client. The Microsoft Windows operating system...

  • Page 9
    ... product support services to corporations and other large customers. The Server and Tools segment also includes: developer tools, training, and certification; Microsoft Press; the Enterprise and Partner Group, which is responsible for sales, partner management and partner programs for the enterprise...

  • Page 10
    ...of Sale and Microsoft Retail Management System); and other business applications and services including the Microsoft Partner Program. The Business Solutions R&D team also develops Office Small Business Accounting and Business Contact Manager for Outlook, which are marketed by Information Worker. In...

  • Page 11
    ...of learning products and services, application software for Macintosh computers, the Works productivity suite, and Microsoft PC hardware products such as mice, keyboards, and game controllers. The MSTV group develops the MSTV Foundation Edition and Internet Protocol TV (IPTV) products. OPERATIONS To...

  • Page 12
    ..., we are working to develop new technologies that offer greater value in meeting many targeted customer needs: workflow management, real-time communications, document management, collaboration, terminal services, search and portals, unified messaging, media technologies management, PAGE 11

  • Page 13
    ...'s largest email service, one of the world's most popular online portals, MSN Search for the Web and the PC desktop, and Xbox Live, the world's largest online gaming service. We also have begun to develop services for business, such as Outlook Live and Office Live Meeting, which enable workers to...

  • Page 14
    ...in the gaming experience with other subscribers online. Microsoft Business Solutions operates the Microsoft Small Business Center portal, which is delivered online. This portal provides tools and expertise for small-business owners to build, market, and manage their businesses online. Other services...

  • Page 15
    ...additional functionality and products, including new server and service offerings, additional vendors are competing in the Information Worker segment, most notably in document management, collaboration tools, real time messaging and business intelligence. As just one example, Microsoft competes with...

  • Page 16
    ... for mobile or embedded devices; providing a flexible platform that allows customers and partners to build differentiated and profitable business models; and providing end users significant benefits such as ease of use, personal productivity, and better information management and control. Home and...

  • Page 17
    ... services. Our competitors range in size from Fortune 100 companies to small, single-product businesses that are highly specialized and open source community-based projects. While we believe the breadth of our businesses and product portfolio offers benefits to our customers that are a competitive...

  • Page 18
    ...to seek to return products, to reduce or delay future purchases, or to use competitive products. Customers may also increase their expenditures on protecting their existing computer systems from attack, which could delay adoption of new technologies. Any of these actions by customers could adversely...

  • Page 19
    ... investments in research, development, and marketing for new products, services, and technologies, including Windows Vista, Office 12, MSN Search, SQL Server, Windows Server and Xbox 360. Investments in new technology are inherently speculative. Commercial success depends on many factors including...

  • Page 20
    ...us to record charges to cost of revenue for the excess inventory. Xbox 360 consoles will be assembled in Asia; disruptions in the supply chain may result in console shortages that would affect our revenues and operating margins. If our goodwill or amortizable intangible assets become impaired we may...

  • Page 21
    ... reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. Our SEC reports can be accessed through the investor relations section of our Web site. The information...

  • Page 22
    ... business solutions applications; and software development tools. We provide consulting and product support services, and we train and certify system integrators and developers. We sell the Xbox video game console and games, PC games, and PC peripherals. Online communication and information services...

  • Page 23
    ... corporate IT spend budgets and short-term purchase intent. As open source software development and distribution evolves, we continue to seek to differentiate our products from competitive products based on open source software. We believe that Microsoft's share of server unit operating systems...

  • Page 24
    ... of and investments in Xbox 360. SEGMENT PRODUCT REVENUE/OPERATING INCOME (LOSS) Our seven segments are Client; Server and Tools; Information Worker; Microsoft Business Solutions; MSN; Mobile and Embedded Devices; and Home and Entertainment. The revenue and operating income/(loss) amounts in this...

  • Page 25
    ... revenue from Windows XP Professional and Home, Media Center Edition, Tablet PC Edition, and other standard Windows operating systems. Client revenue growth is correlated with the growth of corporate and consumer purchases of PCs from OEMs that pre-install versions of Windows operating systems...

  • Page 26
    ... and Tools consists of server software licenses and client access licenses (CALs) for Windows Server, Microsoft SQL Server®, Exchange Server, and other server products. It also includes developer tools, training, certification, Microsoft Press, Premier and Professional product support services, and...

  • Page 27
    ... of the plan. Our solutions are delivered through a worldwide network of channel partners that provide specialized services and local support tailored to customer needs. The market for Microsoft Business Solutions is highly competitive, with a few strong players in the enterprise segment while the...

  • Page 28
    ... year 2005, MSN operating income increased mainly due to a decrease in stock-based compensation expense, reduced online operations and bandwidth costs associated with the Internet Access business as the number of subscribers declines, and increased advertising and subscription revenue. The operating...

  • Page 29
    ... to the Windows Mobile 5.0 platform through the Windows Mobile 5.0 Messaging and Security Feature Pack and the Exchange Server 2003 Service Pack 2. This solution enables business users to easily stay connected to their Microsoft Office Outlook Mobile information and helps businesses to better...

  • Page 30
    ... and MSN reported results. Home and Entertainment (In millions, except percentages) 2003 2004 Percent Change 2005 Percent Change Revenue Operating loss $ 2,748 $(1,191) $ 2,876 $(1,220) 5% (2)% $3,242 $ (391) 13% 68% Home and Entertainment includes the Microsoft Xbox video game console system...

  • Page 31
    ... offset by an increase in headcount-related costs associated with incremental hiring and product development costs associated with upcoming products, primarily the Xbox 360 console and related games, SQL Server 2005, Windows Vista, and product development in Mobile and Embedded devices. The increase...

  • Page 32
    ... a decline in equity prices were $202 million and losses related to interest rate derivatives were $53 million. These losses were offset by the combination of realized gains on sales of securities and unrealized gains related to increases in the market value of the underlying assets included as...

  • Page 33
    ...over the related product's life cycle. Other unearned revenue includes Services, TV Platform, Microsoft Business Solutions, and advertising and subscription services where we have been paid upfront and earn the revenue when we provide the service or software or otherwise meet the revenue recognition...

  • Page 34
    ..., sales and marketing, support, and administrative staff. Commitments for constructing new buildings were $152 million on June 30, 2005. We have operating leases for most U.S. and international sales and support offices and certain equipment under which we incurred rental expense totaling, $290...

  • Page 35
    ... to shareholders of record as of August 17, 2005 on September 8, 2005. On July 20, 2004, our Board of Directors approved a plan to buy back up to $30 billion in Microsoft common stock over four years. The specific timing and amount of repurchases will vary based on market conditions, securities law...

  • Page 36
    ... services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under Accounting Principles Board (APB) Opinion No. 25. In March 2005, the SEC...

  • Page 37
    ... and a new cost basis in the investment is established. If market, industry and/or investee conditions deteriorate, we may incur future impairments. SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level (operating segment or...

  • Page 38
    ... value over time. VAR is calculated by, first, simulating 10,000 market price paths over a specified period of time for equities, interest rates and foreign exchange rates, taking into account historical correlations among the different rates and prices. Each resulting unique set of equities prices...

  • Page 39
    ...June 30 2003 2004 2005 Revenue Operating expenses: Cost of revenue Research and development Sales and marketing General and administrative Total operating expenses Operating income Investment income and other Income before income taxes Provision for income taxes Net income Earnings per share: Basic...

  • Page 40
    ... 2004 2005 Assets Current assets: Cash and equivalents Short-term investments Total cash and short-term investments Accounts receivable, net Inventories Deferred income taxes Other Total current assets Property and equipment, net Equity and other investments Goodwill Intangible assets, net Deferred...

  • Page 41
    ...cash dividends Other Net cash used for financing Investing Additions to property and equipment Acquisition of companies, net of cash acquired Purchases of investments Maturities of investments Sales of investments Net cash from investing Net change in cash and equivalents Effect of exchange rates on...

  • Page 42
    STOCKHOLDERS' EQUITY STATEMENTS (In millions) Year Ended June 30 2003 2004 2005 Common stock and paid-in capital Balance, beginning of period Common stock issued Common stock repurchased Stock-based compensation expense Stock option income tax benefits/(deficiencies) Other, net Balance, end of ...

  • Page 43
    ... basis under Open, Select, and Enterprise Agreement volume licensing programs. Premier support services agreements, MSN Internet Access subscriptions, Xbox Live, and Microsoft Developer Network subscriptions are also accounted for as subscriptions. Revenue related to our Xbox game console is...

  • Page 44
    ... support for developer tools software, PC games, computer hardware, and Xbox, are accrued when the related revenue is recognized. Provisions are recorded for estimated returns, concessions, and bad debts. RESEARCH AND DEVELOPMENT Research and development expenses include payroll, employee benefits...

  • Page 45
    ...carrying value, we reduce our inventory to a new cost basis. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated life of the asset or the lease term, ranging from one to 15 years. Computer software developed...

  • Page 46
    ...XP Home, approximately 5% to 15% of the sales price for Windows XP Professional, and approximately 1% to 15% of the sales price for desktop applications, depending on the terms and conditions of the license and prices of the elements. Product life cycles are currently estimated at three and one-half...

  • Page 47
    ... related to international equity securities. Unrealized losses from fixed income securities are primarily attributable to changes in interest rates. Unrealized losses from domestic and international equities are due to market price movements. Of the unrealized losses of $258 million at June 30, 2005...

  • Page 48
    ... was $1.27 billion. The estimate of fair value is based on publicly available market information or other estimates determined by management. The maturities of debt securities at June 30, 2005 were as follows: (In millions) Cost basis Estimated fair value Due in one year or less Due after one year...

  • Page 49
    ... Balance as of June 30, 2004 Acquisitions / purchase accounting adjustments Balance as of June 30, 2005 Divestitures Divestitures Client Server and Tools Information Worker Microsoft Business Solutions MSN Mobile and Embedded Devices Home and Entertainment Total $ 37 106 180 2,219 154 28 404...

  • Page 50
    ... was related to a comprehensive intellectual property license that we received in conjunction with the settlement of InterTrust v. Microsoft. During fiscal year 2005, we recorded additions to finite-lived intangible assets of approximately $90 million. No other material intangibles were acquired in...

  • Page 51
    ... revenue items Other expense items Other Deferred income tax assets Deferred income tax liabilities: Unrealized gain on investments International earnings Other Deferred income tax liabilities Net deferred income tax assets Reported as: Current deferred tax assets Long-term deferred tax assets Net...

  • Page 52
    ... LIABILITIES (In millions) June 30 2004 2005 Tax contingencies Legal contingencies Employee stock option transfer program Other Other long-term liabilities NOTE 12 STOCKHOLDERS' EQUITY Shares of common stock outstanding are as follows: (In millions) Year Ended June 30 2003 $1,979 699 146 87 $2,911...

  • Page 53
    ..., our Board of Directors approved a plan to buy back up to $30 billion of Microsoft common stock over the succeeding four years. The specific timing and amount of repurchases will vary based on market conditions, securities law limitations, and other factors. The repurchases will be made using our...

  • Page 54
    ... the elimination of the related look back period and a change to quarterly purchase periods that became effective July 1, 2005. As a result, beginning in fiscal year 2005, shares of our common stock may presently be purchased by employees at three months intervals at 90% of the fair market value on...

  • Page 55
    ... to the stock plans that allowed our Board of Directors to adjust eligible options, unvested stock awards, and shared performance stock awards to maintain their pre-dividend value after the $3.00 special dividend. Additional awards were granted for options, stock awards, and shared performance stock...

  • Page 56
    ...our existing plans: (share amounts in millions) Year Ended June 30 2004 2005 Stock awards Beginning balance Granted Special dividend adjustment Vested Cancelled Ending balance Weighted-average fair value per share for shares granted during the year* Shared performance stock awards Beginning balance...

  • Page 57
    ... earnings per share) Year Ended June 30 2003 2004 2005 Net income available for common shareholders (A) Weighted average outstanding shares of common stock (B) Dilutive effect of employee stock options and awards Common stock and common stock equivalents (C) Earnings per share: Basic (A/B) Diluted...

  • Page 58
    ... size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products. In addition, we also provide indemnification against credit risk in several geographical locations to our volume license resellers in case the resellers fail to...

  • Page 59
    ... action lawsuits. A large number of antitrust and unfair competition class action lawsuits have been filed against us in various state and federal courts on behalf of variously defined classes of direct and indirect purchasers of our PC operating system and certain software applications products...

  • Page 60
    ... the form of "reasonable royalties" on Microsoft's Windows products. Microsoft's defense based on the plaintiff's inequitable conduct was tried on August 11 and 12, 2005. The remaining issues in the case may be scheduled for trial in the second half of calendar year 2005. In TVI v. Microsoft, filed...

  • Page 61
    ... matters. NOTE 18 SEGMENT INFORMATION Segment revenue and operating income/(loss) is as follows: (In millions) Year Ended June 30 2003 2004 2005 Revenue Client Server and Tools Information Worker Microsoft Business Solutions MSN Mobile and Embedded Devices Home and Entertainment Reconciling amounts...

  • Page 62
    ... services provided by each segment are summarized below: Client - Windows XP Professional and Home, Media Center Edition, Tablet PC Edition, and other standard Windows operating systems. Server and Tools - Server software licenses and client access licenses (CALs) for Windows Server, Microsoft SQL...

  • Page 63
    ... for approximately 10% of total fiscal year 2004 and 2005 revenue. These sales were made primarily through our OEM and volume licensing channels and were included in all operating segments. No single customer accounted for more than 10% of revenue in 2003. Revenue, classified by the major geographic...

  • Page 64
    ...Dec. 31 Mar. 31 June 30 Total Fiscal year 2003 Revenue Gross profit Net income Basic earnings per share Diluted earnings per share Fiscal year 2004 Revenue Gross profit Net income Basic earnings per share Diluted earnings per share Fiscal year 2005 Revenue Gross profit Net income Basic earnings per...

  • Page 65
    ... REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Microsoft Corporation: We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2005 and 2004, and the related consolidated statements of...

  • Page 66
    ... PROCEDURES (CONTINUED) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Microsoft Corporation: We have audited management's assessment, included in the accompanying Report of Management on Internal Control over Financial Reporting, that Microsoft...

  • Page 67
    ...Microsoft Business Solutions David W. Cole Senior Vice President, MSN and Personal Services Group Jean-Philippe Courtois Senior Vice President; President, Microsoft International J. Scott Di Valerio Corporate Vice President, Finance and Administration; Chief Accounting Officer Kevin R. Johnson Group...

  • Page 68
    .../investor/openenroll.mspx © 2005 Microsoft Corporation. All rights reserved. Microsoft, BizTalk, Halo, MSN, Navision, Outlook, Visual Studio, Windows, Windows Media, Windows Mobile, Windows Server, Windows Server System, Xbox, Xbox Live and Xbox 360 are either registered trademarks or trademarks...

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