Microsoft 2007 Annual Report Download - page 16

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR FISCAL YEARS 2007, 2006, 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, the
Zune digital music and entertainment device, PC games, and PC peripherals. Online communication and
information services are delivered through our MSN portals, channels around the world, and through our search
products.
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. In fiscal year 2007, our revenue was highest in the third quarter due to the recognition of
$1.67 billion of revenue previously deferred from the Express Upgrade to Windows Vista and Microsoft Office
Technology Guarantee programs and pre-shipments of Windows Vista and the 2007 Microsoft Office system. The
technology guarantee programs provided customers who purchased current products with free or discounted
rights to Windows Vista and the 2007 Microsoft Office system when those products became available to
consumers. Our Entertainment and Devices Division is particularly seasonal as its products are aimed at the
consumer market and are in highest demand during the holiday shopping season. Typically, the Entertainment
and Devices Division has generated over 40% of its yearly segment revenues in our second fiscal quarter. With
the exception of fiscal year 2007, 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 and to
develop operating system versions targeted at emerging markets. We also are increasing our focus on selling our
products in emerging markets and reducing the amount of unlicensed software used in those markets. In addition,
we continue to develop innovative software applications and solutions that we believe will 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 – software that is easiest to deploy and
manage, and that is most secure – with the lowest total cost of ownership.
We continue to invest in research and development in existing and new lines of business, including business
solutions, mobile computing, communication, entertainment, and other areas that we believe may contribute to
our long-term growth. We also invest in research and development of advanced technologies for future software
products. We believe that delivering innovative 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
products, creating opportunities for partners, improving customer satisfaction with key audiences, and improving
our internal business processes. Our focus in fiscal year 2008 is building on this foundation and executing well in
key areas, including continuing to innovate on our integrated software platform, 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:
• Consumer technology. We are focused on delivering consumer software products that we believe are
compelling in terms of design and features. We are also working to define the next era of consumer
electronics through innovating software that powers today’s consumer devices.