Microsoft 2005 Annual Report Download - page 22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 21
RESULTS OF OPERATIONS FOR FISCAL YEARS 2003, 2004, AND 2005
OVERVIEW
The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand the results of
operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in
conjunction with our financial statements and the accompanying notes to the financial statements (Notes).
We develop, manufacture, license, and support a wide range of software products for many computing devices. Our software
products include operating systems for servers, PCs, and intelligent devices; server applications for distributed computing
environments; information worker productivity applications; 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 are
delivered through our MSN portals and channels around the world.
Our revenue historically has fluctuated quarterly and has generally been the highest in the second quarter of our fiscal year
due to corporate calendar year-end spending trends in our major markets and holiday season spending by consumers. Our
Home and Entertainment segment is particularly subject to seasonality as its products are aimed at the consumer market and
are in highest demand during the holiday shopping season. Historically, approximately 40% to 50% of Home and Entertainment
revenue has been generated in the second fiscal quarter. We believe the seasonality of revenue is likely to continue in the
future.
We intend to sustain the long-term growth of our businesses through technological innovation, engineering excellence, and a
commitment to delivering high-quality products and services to customers and partners. Recognizing that one of our primary
challenges is to help accelerate worldwide PC adoption and software upgrades, we continue to advance the functionality,
security, and value of Windows operating systems, including versions for new devices such as Tablet PCs, Media Center PCs,
Portable Media Centers, and mobile devices such as Smartphones. We are also increasing our focus on emerging markets and
reducing the amount of unlicensed software in those markets. In addition, we develop innovative software applications and
solutions to enhance the productivity of information workers, improve communication and collaboration in work groups, aid
business intelligence, and streamline processes for small and mid-sized businesses. To sustain the growth of our Server and
Tools business amid competition from other vendors of both proprietary and open source software, our goal is to deliver
products that provide the best platform for network computing – the most advanced, easiest to deploy and manage and most
secure – with the lowest total cost of ownership.
To take advantage of new market opportunities, we continue to invest in research and development of existing and new lines
of business, such as services for consumers, businesses and large enterprises that we believe can contribute significantly to our
long-term growth. We also research and develop advanced technologies for future software products. Delivering breakthrough
innovation and high-value solutions through our integrated platform is the key to meeting customer needs and to our future
growth.
We believe that over the last few years we have laid a foundation for long-term growth by delivering innovative new products,
creating opportunity for partners, improving customer satisfaction with key audiences, putting some of our most significant legal
cases behind us, and improving our internal business processes. Our focus in fiscal year 2006 is building on this foundation
and executing well in key areas, including continuing to innovate on our integrated software platform, delivering compelling
value propositions to customers, responding effectively to customer and partner needs, and continuing to focus internally on
product excellence, business efficacy, and accountability across the company.
Key market opportunities include:
• Growth in our anchor businesses through forthcoming innovations and new product launches and making inroads
against software piracy.
• Expanding our innovation portfolio by offering extensions of our technologies targeted towards specific customer needs
– either as new products or as higher-value versions of existing products.
• Delivering software services through online consumer services and services for businesses that enable workers to
collaborate interactively.
Worldwide macroeconomic factors have a strong correlation to business and consumer demand for our software, services,
games and Internet service offerings. We expect that general macroeconomic trends will remain stable or experience slight
improvement in fiscal year 2006 as compared to fiscal year 2005. Our optimism is balanced by recent data which revealed
slight downward revisions when compared to previous forecasts for Gross Domestic Product growth in the U.S., United Kingdom,
France, Germany, Japan and Latin America. The leading indicators were also revised slightly lower for the major markets.