Microsoft 2007 Annual Report Download - page 17

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PAGE 16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
• Software plus services. The ability to combine the power of desktop and server software with the reach
of the Internet represents an opportunity across every one of our businesses. We believe our software plus
services approach will enable us to deliver new experiences to end users and new value to businesses.
• Expanding our presence on the desktop and server. Through our ability to deliver additional value in
security, messaging, systems management, and collaboration, and new technology for high performance
computing, unified communications, healthcare, and business intelligence, we believe we are well-
positioned to build on our strength with businesses of all sizes. The expansion of our Unlimited Potential
program provides the foundation for our efforts to reach the five billion people around the globe who do not
have access to PCs and digital technology today.
Summary of Results for Fiscal Years 2007, 2006, and 2005
(In millions, except percentages) 2007 2006 2005
Percent
Change 2007
versus 2006
Percent
Change 2006
versus 2005
Revenue $51,122 $44,282 $39,788 15% 11%
Operating income $18,524 $16,472 $14,561 12% 13%
Fiscal year 2007 compared to fiscal year 2006
Revenue growth was driven 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 year.
Operating income growth was driven primarily by the increased revenue and decreased costs for legal
settlements and legal contingencies, partially offset by increased cost of revenue associated with Xbox 360 and
Windows Vista, increased OSB data centers costs, and increased sales and marketing expenses. In July 2007,
we expanded our global Xbox 360 warranty coverage to three years from the date of purchase for a general
hardware failure indicated by three flashing red lights. As a result, we recorded a $1.06 billion charge for
anticipated costs under the warranty policy, inventory write-downs, and product returns. The increase in sales and
marketing expenses was primarily driven by increased headcount-related costs and marketing costs related to
recent product launches. Headcount-related costs increased 15%, driven by a 10% increase in headcount over
the past twelve months and an increase in salaries and benefits for existing headcount.
Fiscal year 2006 compared to fiscal year 2005
Revenue growth was driven primarily by growth in SQL Server following the launch of SQL Server 2005 in the
second quarter of fiscal year 2006, Windows Server and other server applications, increased Xbox revenue
resulting from the Xbox 360 launch in November 2005, growth in licensing of Windows PC operating systems
through OEMs, and increased licensing of Office and other MBD software. Foreign currency exchange rates did
not have a significant impact on consolidated or operating segment revenue during the fiscal year.
Operating income increased primarily reflecting the revenue increase and a decrease in costs for legal
settlements and legal contingencies. These changes were partially offset by an increase in cost of revenue
primarily related to Xbox 360 and an increase in sales and marketing expenses primarily as a result of increased
investments in partner marketing and product launch-related spending. Headcount-related costs increased 7%,
driven by an increase in salaries and benefits for existing headcount and a 16% growth in headcount.
Fiscal Year 2008 Outlook
Worldwide macroeconomic factors have a strong correlation to business and consumer demand for our software,
services, games, and Internet service offerings. We expect a broad continuation in the economic conditions and
demand in fiscal year 2008. We also expect continued double digit revenue growth. Given our product launches in
the second half of fiscal year 2007, we expect revenue growth to be higher in the first half of fiscal year 2008 than
in the second half. We estimate worldwide PC shipments will grow between 9% and 11%. We do not expect a
significant impact from changes in year-over-year foreign currency exchange rates in fiscal year 2008. We expect
our operating income growth rate to exceed our revenue growth rate.