Microsoft 2007 Annual Report Download

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Table of contents

  • Page 1

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  • Page 3
    ... digital and music entertainment device; released Microsoft Windows Mobile® 6; and introduced Microsoft Silverlight, which enables developers to create rich, interactive media experiences and applications for the Web. During 2007, we acquired the global digital marketing company aQuantive. Valued...

  • Page 4
    ... Windows Vista and the 2007 Microsoft Office system, we see strong opportunities for growth by delivering more value per customer. With the planned releases in fiscal 2008 of Windows Server® 2008, SQL Server 2008, and Visual Studio® 2008, and the opportunity to provide additional value in security...

  • Page 5
    During fiscal 2007, community technology skills centers supported by Unlimited Potential reached more than 46 million people. Through our Partners in Learning program, we have helped provide information and communications technology curriculum and skills training to more than 71 million primary and ...

  • Page 6
    ... transactions occurred in open market purchases and pursuant to a trading plan under Rule 10b5-1. We repurchased common stock in each quarter of fiscal year 2007 using available cash resources as follows: Period Total number of shares purchased Average price paid per share July 1, 2006 - September...

  • Page 7
    ... STOCK PRICE INFORMATION, ISSUER PURCHASES OF EQUITY SECURITIES, AND STOCK PERFORMANCE (CONTINUED) Common stock repurchases in the fourth quarter of fiscal year 2007 were as follows: (c) Total number of shares purchased as part of publicly announced plans or programs (d) Approximate dollar value...

  • Page 8
    ...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 game console and games, the Zune digital music and entertainment device, PC games, and peripherals. Online...

  • Page 9
    ... licenses sold to OEMs. The remainder of our revenue comes from consulting and product support services. Products and Services. Windows Server operating system; Microsoft SQL Server; Microsoft Enterprise Services; product support services; Visual Studio; System Center products; Forefront Security...

  • Page 10
    ... servers. System Center competes with BMC, Computer Associates, and IBM in the management of information technology ("IT") infrastructures, while Forefront Security competes with McAfee, Symantec, and Trend Micro in protecting both client and server applications. Non-commercial software products...

  • Page 11
    ... games, games published under the Microsoft brand, and Xbox Live operations, as well as research, sales, and support of those products. In addition to Xbox, we offer the Zune digital music and entertainment device; PC software games; online games; Mediaroom, our Internet protocol television...

  • Page 12
    ...-wide sales and customer relations with device manufacturers and other communication-sector customers including network service providers and media and entertainment companies. Products. Xbox 360 console and games; Xbox Live; Zune; Mediaroom; numerous consumer software and hardware products (such...

  • Page 13
    ... 2007 Microsoft Office System, we see potential for growth by delivering more value per customer. With the planned releases in fiscal year 2008 of Windows Server 2008, SQL Server 2008, and Visual Studio 2008, and the possibility to provide additional value in security, messaging, systems management...

  • Page 14
    ...large account resellers ("LARs"), direct market resellers, and value-added resellers ("VARs"). Many organizations that license products through enterprise agreements ("EAs") transact directly with us, with sales support from our Enterprise Software Advisor channel partners. These Enterprise Software...

  • Page 15
    ... institutions, Internet Service Providers, application developers, and OEMs. Consumers and small- and medium-sized organizations obtain our products primarily through resellers and OEMs. No sales to an individual customer accounted for more than 10% of fiscal year 2007 revenue. Sales to Dell and its...

  • Page 16
    ...; 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, the Zune digital music...

  • Page 17
    ... primarily by licensing of the 2007 Microsoft Office system and Windows Vista, increased revenue associated with SQL Server, Windows Server, and Visual Studio, and increased Xbox 360 console sales. Foreign currency exchange rates did not have a significant impact on consolidated revenue during the...

  • Page 18
    ... Windows Vista software development costs and completion of product development on Windows Vista. Headcount-related costs decreased 3%, driven by a 1% decrease in headcount and a decrease in stock-based compensation expense. Fiscal year 2006 compared to fiscal year 2005 Client revenue increased...

  • Page 19
    ...of server software licenses and client access licenses ("CAL") for Windows Server, Microsoft SQL Server, and other server products. It also includes developer tools, training, certification, Microsoft Press, Premier and Professional product support services, and Microsoft Consulting Services. Server...

  • Page 20
    ... in adCenter, Windows Live, and other new platforms. Headcount-related costs increased 25%, reflecting a 44% increase in headcount and increased salaries and benefits for existing employees, partially offset by a decrease in stock-based compensation. Microsoft Business Division Percent Change 2007...

  • Page 21
    ... sales and marketing expenses and cost of revenue primarily associated with the 2007 Microsoft Office system. The increase in sales and marketing expenses reflects increased headcount-related expenses, increased sales support costs from our Enterprise Software Advisor channel partners, and increased...

  • Page 22
    ... volume increases in major product lines, especially Windows Mobile software sales and Windows Embedded operating systems. EDD operating loss increased primarily as a result of a $1.64 billion increase in cost of revenue resulting from the number of Xbox 360 consoles sold and higher Xbox 360 unit...

  • Page 23
    ... centers, costs incurred to support and maintain Internet-based products and services, warranty costs, inventory write-downs, and costs associated with the delivery of consulting services. Cost of revenue increased in fiscal year 2007 primarily driven by the Xbox 360 charge, increased Windows Vista...

  • Page 24
    ... include payroll, employee benefits, stock-based compensation expense, and other headcount-related costs associated with sales and marketing personnel and advertising, promotions, trade shows, seminars, and other programs. Sales and marketing expenses increased during fiscal year 2007 primarily...

  • Page 25
    ... dividend paid on December 2, 2004, and stock repurchases made throughout fiscal year 2006. For fiscal year 2007, net gains on investments increased primarily due to lower other-than-temporary impairments and gains on sales of fixed-income investments in the current period as compared to losses...

  • Page 26
    ... or pay dividends given our continuing profitability and strong cash and financial position. Unearned Revenue Unearned revenue from volume licensing programs represents customer billings, paid either upfront or annually at the beginning of each billing coverage period, that are accounted for as...

  • Page 27
    ... from our securities lending program. We have no material long-term debt. Stockholders' equity at June 30, 2007, was $31.10 billion. We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology. Additions to property and equipment will...

  • Page 28
    ... dividends, and planned share repurchases. Our philosophy regarding the maintenance of a balance sheet with a large component of cash and short-term investments, as well as equity and other investments, reflects our views on potential future capital requirements relating to research and development...

  • Page 29
    ... non-cash items of $71 million and unearned revenue of $1.87 billion. In May 2007, we entered into an Agreement and Plan of Merger with aQuantive, Inc. to acquire the company for approximately $6 billion in cash. As part of the Agreement and Plan of Merger, we are required to pay $500 million if...

  • Page 30
    ... and development costs, accounting for legal contingencies, accounting for income taxes, and accounting for stock-based compensation. We account for the licensing of software in accordance with American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, Software Revenue...

  • Page 31
    ... with Windows Vista and the 2007 Microsoft Office system during the second quarter of fiscal year 2007 and accordingly, we capitalized approximately $120 million of software development costs. The amortization of these costs will be included in cost of revenue over the estimated life of the products...

  • Page 32
    ... for the estimated costs of hardware and software warranties at the time the related revenue is recognized. For hardware warranty, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any...

  • Page 33
    ... durations are used in calculations that reflect the principle that fixed-income security prices revert to maturity value over time. VaR is calculated by computing the exposures of each holding's market value to a range of over 1,000 equity, fixed-income, foreign exchange, and commodity risk factors...

  • Page 34
    INCOME STATEMENTS (In millions, except per share amounts) Year Ended June 30 2007 2006 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 ...

  • Page 35
    BALANCE SHEETS (In millions) June 30 2007 2006 Assets Current assets: Cash and equivalents Short-term investments (including securities pledged as collateral of $2,356 and $3,065) Total cash and short-term investments Accounts receivable, net of allowance for doubtful accounts of $117 and $142 ...

  • Page 36
    ... 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 investments Securities lending payable...

  • Page 37
    STOCKHOLDERS' EQUITY STATEMENTS (In millions) Year Ended June 30 2007 2006 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 38
    ... license for current products combined with rights to receive 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, PAGE...

  • Page 39
    ...the number of hours worked during the period. Consulting 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 40
    ...excluding those accounted for using the equity method, are recorded at cost. We lend certain fixed-income and equity securities to enhance investment income. The loaned securities continue to be carried as investments on our balance sheet. Collateral and/or security interest is determined based upon...

  • Page 41
    ... for the estimated costs of hardware and software warranties at the time the related revenue is recognized. For hardware warranty, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any...

  • Page 42
    ... financial statements. NOTE 2 UNEARNED REVENUE Unearned revenue is comprised of the following items: Volume licensing programs - Represents customer billings for multi-year licensing arrangements, paid either upfront or annually at the beginning of each billing coverage period, which are accounted...

  • Page 43
    ... billings, Xbox Live and other billings that are accounted for as subscriptions, and other agreements where Microsoft is committed to the delivery of future enhancements, products, or services. The components of unearned revenue were as follows: (In millions) June 30 2007 2006 Volume licensing...

  • Page 44
    ... as follows: Cost basis INVESTMENTS (In millions) Unrealized gains Unrealized losses Recorded Cash and basis equivalents Short-term investments Equity and other investments June 30, 2007 Cash Mutual funds Commercial paper Certificates of deposit U.S. Government and Agency securities Foreign...

  • Page 45
    ... equity securities, and $33 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 46
    ... fiscal year 2006, and were $152 million in fiscal year 2005. The decrease in other-thantemporary impairments in fiscal year 2007 and the increase in fiscal year 2006 were driven by planned sales of certain investments in an unrealized loss position in order to raise funds for the $20 billion tender...

  • Page 47
    ... by segment were as follows: (In millions) Balance as of June 30, 2005 Acquisitions Other Balance as of June 30, 2006 Acquisitions Other Balance as of June 30, 2007 Client Server and Tools Microsoft Business Division Online Services Business Entertainment and Devices Division Total $ 43 241 2,435...

  • Page 48
    .... The components of finite-lived intangible assets acquired during fiscal years 2007 and 2006 were as follows: (In millions) Year Ended June 30 Amount 2007 Weighted average life 2006 Amount Weighted average life Contract-based Technology-based Marketing-related Customer-related Total $ 57 333 14...

  • Page 49
    ...TO FINANCIAL STATEMENTS (CONTINUED) Acquired intangibles are generally amortized on a straight-line basis over weighted average lives. Intangible assets amortization expense was $236 million for fiscal year 2007, $127 million for fiscal year 2006, and $161 million for fiscal year 2005. The estimated...

  • Page 50
    ...European Commission fine. The 2005 other reconciling items include a $179 million repatriation tax benefit under the American Jobs Creation Act of 2004. The components of the deferred tax assets and liabilities were as follows: (In millions) June 30 2007 2006 Deferred income tax assets: Stock-based...

  • Page 51
    ...Tax contingencies Legal contingencies Product warranty Other Other long-term liabilities NOTE 12 STOCKHOLDERS' EQUITY $5,071 778 487 117 $6,453 $4,194 1,022 - 71 $5,287 Shares of common stock outstanding were as follows: (In millions) Year Ended June 30 2007 2006 2005 Balance, beginning of year...

  • Page 52
    ... 2007 will be paid after the filing date of this report on Form 10-K and was included in other current liabilities as of June 30, 2007. In fiscal year 2006, our Board of Directors declared the following dividends: Declaration Date Dividend Per Share Date of Record Total Amount (in millions) Payment...

  • Page 53
    ... $ 27 1,344 55 $1,426 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 54
    ... fair market value on the last day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Employees purchased the following shares: (Shares In millions) 2007 2006 2005 Shares purchased Average price per share...

  • Page 55
    ...2006 2005 Dividend per share (quarterly amounts) Interest rates range $0.08 $0.09 - $0.10 $0.08 - $0.09 4.3% - 5.3% 3.2% - 5.3% 1.3% - 4.3% During fiscal year 2007, the following activity occurred under our existing plans: Weighted Average Grant-Date Fair Value Shares (in millions) Stock awards...

  • Page 56
    ... option transfer program. The other approximately 232 million options expired unexercised. Employee stock options outstanding were as follows: Weighted Aggregate Average Intrinsic Remaining Value Contractual Term (years) (in millions) Shares (in millions) Weighted Average Exercise Price Balance...

  • Page 57
    ... in Note 14 - Employee Stock and Savings Plans. NOTE 16 COMMITMENTS AND GUARANTEES We have committed $821 million for constructing new buildings. We have operating leases for most U.S. and international sales and support offices and certain equipment. Rental expense for operating leases was $326...

  • Page 58
    ... for the estimated costs of hardware and software warranties at the time the related revenue is recognized. For hardware warranty, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any...

  • Page 59
    ... and mix of products for which claims will be made, the number of eligible class members who ultimately use the vouchers, the nature of hardware and software that is acquired using the vouchers, and the cost of administering the claims. At June 30, 2007, we have recorded a liability related to these...

  • Page 60
    ... filed a lawsuit against us in U.S. District Court in California, claiming the Xbox 360 violates one of its patents. In response, we asserted counterclaims that Alcatel-Lucent infringes 10 Microsoft patents by its sales of various products. That case has been set for trial in April 2008. • In...

  • Page 61
    ... requires segmentation based on our internal organization and reporting of revenue and operating income based upon internal accounting methods. Our financial reporting systems present various data for management to operate the business, including internal profit and loss statements prepared on...

  • Page 62
    ... Enterprise Services; product support services; Visual Studio; System Center products; Forefront Security products; Biz Talk Server; MSDN; and TechNet, among others. Online Services Business - MSN Search; MapPoint; MSN Internet Access; MSN Premium Web Services (consisting of MSN Internet Software...

  • Page 63
    ...of fiscal year 2007 revenue. Sales to Dell and its subsidiaries accounted for approximately 11% and 10% of fiscal year 2006 and 2005 revenue, respectively. These sales were made primarily through our OEM and volume licensing channels and cover a broad array of products including Windows PC operating...

  • Page 64
    ...Technology guarantee programs and pre-shipments of Windows Vista and the 2007 Microsoft Office system. Includes $1.64 billion of revenue discussed above and charges totaling $296 million (pre-tax) related to various legal matters. Includes $1.06 billion charge related to the Xbox 360 warranty policy...

  • 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, 2007 and 2006, and the related consolidated statements of...

  • Page 66
    ... of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2007 of the Company and our report dated August 3, 2007 expressed an unqualified opinion on those financial statements. /s/ DELOITTE & TOUCHE LLP Seattle...

  • Page 67
    ... EXECUTIVE OFFICERS OF MICROSOFT CORPORATION DIRECTORS William H. Gates III Chairman of the Board, Microsoft Corporation Steven A. Ballmer Chief Executive Officer, Microsoft Corporation James I. Cash Jr., PhD. 1,2,5 Former James E. Robison Professor, Harvard Business School Dina Dublon 1,2,3 Former...

  • Page 68
    ...access the annual report and proxy statement online. The service gets you the information you need faster and also gives you the power and convenience of online proxy voting. To sign up for this free service, visit the Annual Report site on the Investor Relations website at: http://www.microsoft.com...

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