Microsoft 2006 Annual Report Download

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Table of contents

  • Page 1

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  • Page 3
    ...a provider of security-enhanced managed messaging services; Teleo, which develops voice over Internet protocol (VoIP) software; mobile search technology provider MotionBridge; and Massive, a pioneer in delivering advertising within video games. Through our commitment to research and development, and...

  • Page 4
    ... of Windows. Our Windows Genuine Advantage program and agreements with PC manufacturers in China are just two examples of our commitment to ensuring that we realize the full value of our intellectual property. Meanwhile, innovative payment options like FlexGo, which enables people to finance their...

  • Page 5
    ... expand access to technology, provide training that can give people the skills they need to thrive in today's economy, and nurture local software economies that open the door to new opportunities and greater prosperity. In 2006, community learning centers supported by our Unlimited Potential program...

  • Page 6
    ... DATA, STOCK PRICE INFORMATION, AND ISSUER PURCHASES OF EQUITY SECURITIES FINANCIAL HIGHLIGHTS (In millions, except per share data) Fiscal Year Ended June 30 2006 2005 2004 2003 2002 Revenue Operating income Net income Diluted earnings per share Cash dividends declared per share Cash and short-term...

  • Page 7
    ... PRICE INFORMATION, AND ISSUER PURCHASES OF EQUITY SECURITIES (CONTINUED) Common stock repurchases in the fourth quarter of fiscal year 2006 were as follows: (c) Total number of shares purchased as part of publicly announced plans or programs (d) Maximum number of shares (or approximate dollar value...

  • Page 8
    ...; information worker productivity applications; business solution applications; high-performance computing applications, and software development tools. We provide consulting and product support services, and we train and certify computer system integrators and developers. We sell the Xbox 360 video...

  • Page 9
    ... purchased through fully packaged product and transactional volume licensing programs, and approximately 10% comes from licenses sold to OEMs. Approximately 15% of revenue comes from consulting and product support services. Products and Services. Windows Server operating system; Microsoft SQL Server...

  • Page 10
    ... tools and development environment, compatibility with a broad base of hardware and software applications, security, and manageability. Information Worker. Information Worker consists of the Microsoft Office system of programs, services, and software solutions designed to increase personal...

  • Page 11
    ... released Windows Live Messenger to consumers in 58 countries. Products. MSN Search; MapPoint; MSN Internet Access; MSN Premium Web Services (consisting of MSN Internet Software Subscription, MSN Hotmail Plus, MSN Bill Pay, and MSN Radio Plus); Windows Live; and MSN Mobile Services. Competition. MSN...

  • Page 12
    ... services, application software for Macintosh computers, and Microsoft PC hardware products such as mice and keyboards. In addition, the segment carries out all retail sales and marketing for Microsoft Office and the Windows operating systems (for which it receives an inter-segment commission), Xbox...

  • Page 13
    ...way workers communicate. We believe new enterprise information management tools will help knowledge workers create, find, use, and share business information more quickly and more effectively. In addition, we'll offer new security capabilities, improved management products, and new development tools...

  • Page 14
    ... maintenance (Windows Live SafetyCenter and Windows Live OneCare), communications (Windows Live Mail and Windows Live Messenger), and entertainment (Xbox Live). We also created Live Labs, an applied research program that targets Internet products and services. Because software services offer strong...

  • Page 15
    ... Internet access and various premium services and tools to consumers. MSN also delivers online e-mail and messaging communication services and information services such as online search, advertising, and premium content. Home and Entertainment operates the Xbox Live service which allows customers...

  • Page 16
    .... These competitive pressures may result in decreased sales volumes, price reductions, and/or increased operating costs, such as for marketing and sales incentives, resulting in lower revenue, gross margins and operating income. We may not be able to protect our intellectual property rights against...

  • Page 17
    ... development costs. The Commission ruling obligates Microsoft to make available specifications for certain Windows communications protocol technologies on licensing terms that are closely regulated by the Commission. The availability of these licenses may enable competitors to develop software...

  • Page 18
    ... system, Xbox 360, MSN Search, Windows Server and Windows Live. Investments in new technology are inherently speculative. Commercial success depends on many factors including innovativeness, developer support, and effective distribution and marketing. Significant revenue from new product and service...

  • Page 19
    ... significant investments in Windows Vista and the 2007 Microsoft Office system. If these products are not perceived as offering significant new functionality or value to prospective purchasers, our revenue and operating margins could be adversely affected. We have claims and lawsuits against us that...

  • Page 20
    ...laws that protect personal data, resulting in increased costs or loss of revenue. Our software products also enable our customers to store and process personal data. Perceptions that our products do not adequately protect the privacy of personal information could inhibit sales of our products. Other...

  • Page 21
    ... 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...

  • Page 22
    ... SQL Server 2005 in the second quarter, Windows Server and other server applications, increased Xbox revenue resulting from the Xbox 360 launch in the second quarter, growth in licensing of Windows client operating systems through OEMs, and increased licensing of Office and other Information Worker...

  • Page 23
    ... to reverse in the second half of the fiscal year when we expect operating income to grow faster than revenue. SEGMENT PRODUCT REVENUE/OPERATING INCOME (LOSS) Our seven segments were Client; Server and Tools; Information Worker; Microsoft Business Solutions; MSN; Mobile and Embedded Devices; and...

  • Page 24
    ...Server and Tools consists of server software licenses and client access licenses ("CAL") 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...

  • Page 25
    ... Change 2006 versus 2005 Percent Change 2005 versus 2004 Revenue Operating income $11,756 $ 8,285 $11,169 $ 8,025 $10,748 $ 7,458 5% 3% 4% 8% Information Worker primarily consists of the Microsoft Office system of programs, servers, solutions, and services designed to increase personal, team...

  • Page 26
    ... 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 services and local support. Microsoft Business Solutions revenue increased in...

  • Page 27
    ...2005, MSN operating income increased mainly due to a $241 million decrease in stock-based compensation expense, reduced costs associated with the Internet Access business, and increased advertising and subscription revenue. Partially offsetting the decreased expenses were increased headcount-related...

  • Page 28
    ... include corporate operations related to broad-based sales and marketing, product support services, human resources, legal, finance, information technology, corporate development and procurement activities, research and development and other costs, and legal settlements and contingencies. Corporate...

  • Page 29
    ...Exchange Server business and certain client access licenses related to products residing in the Microsoft Business Division. Products will include the Windows Server operating system, Microsoft SQL Server, Microsoft Consulting Services, product support services, Visual Studio, System Center products...

  • Page 30
    ... systems as well as competition in server applications. Online Services Business We expect increased growth in display advertising revenue as the portals, channels, and communications services continue to expand globally and the overall Internet advertising industry continues to expand. Our search...

  • Page 31
    ... offset by increased headcount and product development costs associated with the Xbox 360 console and related games, SQL Server 2005, Windows Vista, and product development in Mobile and Embedded Devices. Sales and Marketing Percent Change 2006 versus 2005 Percent Change 2005 versus 2004 (In...

  • Page 32
    ...-related costs from increased headcount and general salary increases; higher sales and marketing costs driven by product planning, reseller marketing, and advertising campaign costs mainly related to launch of the "Start Something" campaign; launch of "Halo 2"; and launch arrangements for Xbox 360...

  • Page 33
    ... 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 34
    ..., is based on the sales price of those elements when sold separately and is recognized ratably on a straight-line basis over the life cycle of the related product. Other unearned revenue includes services, TV Platform, Microsoft Business Solutions, advertising, and subscriptions for which we have...

  • Page 35
    ... in sales, marketing, product support infrastructure, and existing and advanced areas of technology. Additions to property and equipment will continue, including new facilities and computer systems for research and development, sales and marketing, support, and administrative staff. Commitments...

  • Page 36
    ...quarterly dividends and planned share repurchases. Our philosophy regarding the maintenance of a balance sheet with a large component of cash and short-term investments, and equity and other investments, reflects our views on potential future capital requirements relating to research and development...

  • Page 37
    ... goodwill, accounting for research and development costs, accounting for legal contingencies, accounting for income taxes, and accounting for stockbased compensation. We account for the licensing of software in accordance with American Institute of Certified Public Accountants Statement of Position...

  • Page 38
    ... of SFAS No. 5. We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense...

  • Page 39
    ...on the consolidated financial statements and management's report on its assessment and the effectiveness of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Board of Directors, through its Audit Committee...

  • Page 40
    ...1,000 equity, fixed-income, foreign exchange, and commodity risk factors. The exposures are then used to compute the parameters of a distribution of potential changes in the total market value of all holdings, taking into account the weighted historical volatilities of the different rates and prices...

  • Page 41
    ...for substantially all of our positions as of June 30, 2006 and 2005, and for the fiscal year ended June 30, 2006: (In millions) Year ended June 30, 2006 Risk Categories 2006 2005 Average High Low Interest rates Currency rates Equity prices Commodity prices $66 91 88 12 $ 88 52 164 14 $ 82 33 116...

  • Page 42
    INCOME STATEMENTS (In millions, except per share amounts) Year Ended June 30 2006 2005 2004 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 ...

  • Page 43
    ... equipment, net Equity and other investments Goodwill Intangible assets, net Deferred income taxes Other long-term assets Total assets Liabilities and stockholders' equity Current liabilities: Accounts payable Accrued compensation Income taxes Short-term unearned revenue Securities lending payable...

  • Page 44
    ... Common stock repurchased Common stock cash dividends Excess tax benefits from stock-based payment arrangements Other Net cash used in financing Investing Additions to property and equipment Acquisition of companies, net of cash acquired Purchases of investments Maturities of investments Sales of...

  • Page 45
    STOCKHOLDERS' EQUITY STATEMENTS (In millions) Year Ended June 30 2006 2005 2004 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 46
    ... future versions of software products on a when-and-if-available 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...

  • Page 47
    ... and the number of hours worked during the period. Revenue for fixed price services arrangements is recognized based on percentage of completion. Costs related to insignificant obligations, which include telephone support for developer tools software, PC games, computer hardware, and Xbox, are...

  • Page 48
    .... Equities Price Risk. Equity investments are subject to market price risk. From time to time, we use and designate options to hedge fair values and cash flows on certain equity securities. We determine the security, or forecasted sale thereof, selected for hedging by evaluating market conditions...

  • Page 49
    ...billings that are accounted for as subscriptions, and other agreements where Microsoft is committed to the delivery of future enhancements, products, or services, including the TV platform. The components of unearned revenue were as follows: (In millions) June 30 2006 2005 Volume licensing programs...

  • Page 50
    ...: (In millions) June 30 2006 2005 Client Server and Tools Information Worker Other segments Unearned revenue NOTE 3 INVESTMENTS The components of investments were as follows: (In millions) June 30, 2006 Cost basis Unrealized gains Unrealized losses Recorded basis Cash and equivalents $ 2,850...

  • Page 51
    ...domestic equity securities and $43 million 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. Management does...

  • Page 52
    ... 2005 2004 Dividends and interest Net gains on investments Net losses on derivatives Income/(losses) from equity ...2005, and $82 million in fiscal year 2004. The increase in other-than-temporary impairments in fiscal year 2006 was driven by planned sales of certain investments in an unrealized loss...

  • Page 53
    ...compliance, security, and availability requirements; • Teleo, Inc., a California-based voice over Internet protocol software and services provider; • MediaStreams.com AG, a Zurich, Switzerland-based developer of PC-based voice over Internet protocol communication systems and peripheral equipment...

  • Page 54
    ... a New York-based developer of video game advertising; • ProClarity Corporation, an Idaho-based developer of advanced analysis and visualization technologies for business platforms; and • 14 various other entities specializing in areas such as application security, digital access management, and...

  • Page 55
    NOTES TO FINANCIAL STATEMENTS (CONTINUED) Acquired intangibles are generally amortized on a straight-line basis over weighted average periods. Intangible assets amortization expense was $127 million for fiscal year 2006, $161 million for fiscal year 2005, and $170 million for fiscal year 2004. The ...

  • Page 56
    ... transfer pricing, restructuring of foreign operations, tax benefits from the Foreign Sales Corporation and Extra Territorial Income tax rules, the amount of research and experimentation tax credits claimed, state income taxes, and certain other matters. Although we believe our recorded assets...

  • Page 57
    ... Legal contingencies Employee stock option transfer program Other Other long-term liabilities NOTE 12 STOCKHOLDERS' EQUITY Shares of common stock outstanding were as follows: (In millions) Year Ended June 30 2006 $4,194 1,022 - 71 $5,287 $3,066 961 48 83 $4,158 2005 2004 Balance, beginning of...

  • Page 58
    ... 973 61 1,119 $ NOTE 14 EMPLOYEE STOCK AND SAVINGS PLANS Effective July 1, 2005, we adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective application transition method. Because the fair value recognition provisions of SFAS No. 123, Stock-Based Compensation, and SFAS No. 123...

  • Page 59
    ... ex-dividend date. Strike prices for options were decreased by the same ratio. Stock-based compensation was not affected by this adjustment. As a result of this approval and payment of the $3.00 special dividend on December 2, 2004, an adjustment to the prices and number of shares of existing awards...

  • Page 60
    ... was the total dividend per share for fiscal year 2004. During fiscal year 2006, the following activity occurred under our existing plans: Weighted Average Grant-Date Fair Value Shares (in millions) Stock awards: Nonvested balance at July 1, 2005 Granted Vested Forfeited Nonvested balance at June...

  • Page 61
    ... per share and have expiration dates extending through December 2006. Employee stock options outstanding were as follows: Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in millions) Shares (in millions) Weighted Average Exercise Price Balance, July 1, 2005 Granted...

  • Page 62
    ... estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such indemnifications in our financial statements. Our product warranty accrual reflects management's best estimate of our probable...

  • Page 63
    ... the form of vouchers that also may be redeemed for cash against purchases of a wide variety of platform-neutral computer hardware, software, and related services. We also have reached similar agreements to settle all claims in a number of other states. The settlements in these states are structured...

  • Page 64
    ..., claiming that Xbox 360 violates one of the patents that earlier had been dismissed from the older lawsuit. In response to Lucent's new complaint, we asserted patent infringement counterclaims accusing Lucent of infringing ten Microsoft patents by its sales of various products. No trial date has...

  • Page 65
    ...) was as follows: (In millions) Year Ended June 30 2006 2005 2004 Revenue Client Server and Tools Information Worker Microsoft Business Solutions MSN Mobile and Embedded Devices Home and Entertainment Reconciling amounts Consolidated Year Ended June 30 $13,001 10,542 12,380 906 2,488 365 4,292 308...

  • Page 66
    ... Client - Windows XP Professional and Home; Media Center Edition; Tablet PC Edition; and other standard Windows operating systems. Server and Tools - Windows Server operating system; Microsoft SQL Server; Exchange Server; Microsoft Consulting Services; product support services; Visual Studio; System...

  • Page 67
    ...) on Microsoft related to the Commission's March 2004 decision in its competition law investigation. As of June 30, 2006, the total amount of the fine was included in other current liabilities. On July 20, 2006, we announced that our Board of Directors authorized two new share repurchase programs...

  • Page 68
    ...) related to IBM and other matters. Includes stock-based compensation charges totaling $2.2 billion for the employee stock option transfer program. Includes charges totaling $2.53 billion (pre-tax) related to the Sun Microsystems Inc. settlement and a fine imposed by the European Commission. PAGE...

  • Page 69
    REPORT OF INDEPENDENT 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, 2006 and 2005, and the related ...

  • Page 70
    ... Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2006 of the Company and our report...

  • Page 71
    ... Compliance Committee EXECUTIVE OFFICERS William H. Gates III Chairman of the Board Steven A. Ballmer Chief Executive Officer Lisa E. Brummel Senior Vice President, Human Resources Kevin R. Johnson Co-President, Platforms & Services Division Christopher P. Liddell Senior Vice President, Finance...

  • Page 72
    ...Services, our transfer agent, can help you with a variety of shareholder related services including: • Change of address • Lost stock certificates • Transfer of stock to another person • Additional administrative services Mellon Investor Services also administers a direct stock purchase plan...

  • Page 73
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