Microsoft 2005 Annual Report Download - page 27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PAGE 26
Beginning in fiscal year 2005, the Small and Mid-Market Solutions & Partners (SMS&P) organization, which was historically part
of Information Worker, was re-aligned in Microsoft Business Solutions. As a result of this change, Information Worker results
have been restated to reflect the reclassification of the SMS&P organization to Microsoft Business Solutions. The results for
previous periods have also been restated due to the reclassification of Professional product support services from Information
Worker into Server and Tools.
Information Worker revenue increased in fiscal year 2005 primarily due to a 3% or $269 million increase in volume licensing,
retail packaged product, and pre-installed versions of Office in Japan, a 6% or $91 million increase in OEM revenue, and the
impact of foreign currency exchange rates, partially offset by reduced Upgrade Advantage earned revenue. Changes in foreign
currency exchange rates accounted for approximately $367 million or three percentage points of the revenue growth for fiscal
year 2005 as compared to the previous fiscal year, offset by a $663 million decline in Upgrade Advantage earned revenue.
Revenue growth for fiscal year 2004 from volume licensing, retail packaged product and pre-installed versions of Office in Japan
was 15% in aggregate. This increase was driven by recognition of unearned revenue primarily from a large increase in multi-year
licenses signed previous to the transition to our Licensing 6.0 programs and approximately $110 million related to the launch of
Office 2003. OEM licensing revenue grew 29% or $325 million. Foreign currency exchange rates provided approximately $485
million or 5% of total Information Worker revenue growth.
Information Worker operating income growth for fiscal year 2005 was primarily due to the revenue growth and a decrease in
stock-based compensation expense. Operating expenses were also impacted by a reduction in marketing campaign costs from
the previous period associated with the launch of Office 2003. This decline was offset by an increase in headcount-related costs
from increased hiring and increases in salary and benefits. Information Worker operating income in fiscal year 2004 increased
from the previous year primarily due to growth in revenue, partially offset by an increase in operating expenses, primarily related
to $351 million of stock-based compensation expense from the employee stock option transfer program in the second quarter
of fiscal year 2004 and higher sales and marketing expenses.
The revenue growth rate for Information Worker is expected to be higher in fiscal year 2006 than fiscal year 2005. We expect
sustained momentum in our OEM and multi-year licensing offerings and increased purchasing of Office System 2003 as
enterprises complete their product evaluations. We expect to see slowing revenue from packaged product late in the year as we
approach the next version launch. We anticipate little or no year-over-year foreign currency exchange rate benefit in fiscal year
2006.
Microsoft Business Solutions
(In millions, except percentages) 2003 2004
Percent
Change 2005
Percent
Change
Revenue $ 631 $ 759 20% $ 803 6%
Operating loss $ (148) $ (315) (113)% $ (201) 36%
Microsoft Business Solutions provides integrated and adaptable business management software solutions optimized for small
and mid-sized businesses, large organizations and divisions of global enterprises. Microsoft Business Solutions products are
developed to deliver affordable and rich functionality through an adaptable software platform that works like and with other
Microsoft technologies. The main products consist of a line of business solutions, customer relationship management software,
retail solutions, and related services. Revenue is derived from software and services sales, with software sales representing a
significant amount of total revenue. Software revenues include both new software licenses and enhancement plans, which
provide customers with future software upgrades over the period 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 mid-market
segment is more fragmented. Microsoft Business Solutions now includes the SMS&P organization, which previously had been
included in Information Worker. SMS&P supports small and mid-market customers for Microsoft including Microsoft Business
Solutions. Results have been restated to reflect the reclassification of SMS&P for all periods presented. Also as a result of the
reorganization, the Microsoft Partner Program became a component of Microsoft Business Solutions.
The increase in Microsoft Business Solutions revenue in fiscal year 2005 was mainly due to a 10% revenue growth in
software partially offset by a 25% decline in services revenue, which resulted from encouraging our partners to provide more of
these types of services. The software revenue increase was driven by a 9% growth in license revenue and 16% growth in
enhancement revenue as compared to the previous year, and is attributed to growth in our line of business solutions and
customer relationship management solutions, and increased Microsoft Partner Program subscriptions. The revenue increase in
fiscal year 2004 was primarily attributable to continued growth in licensing of Navision and Axapta line of business solutions,
new sales of Microsoft CRM, and Microsoft Partner Program subscriptions.