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PAGE 17
SEGMENT PRODUCT REVENUE/OPERATING INCOME (LOSS)
In July 2006, we announced a change in our operating segments reflecting previously announced
reorganizations. We have five operating segments: Client, Server and Tools, the Online Services Business, the
Microsoft Business Division, and the Entertainment and Devices Division. Prior fiscal year information has been
recast to conform to the way we internally managed and monitored performance at the business group level in
fiscal year 2007.
The revenue and operating income/(loss) amounts in this section are presented on a basis consistent with U.S.
Generally Accepted Accounting Principles (“GAAP”) and include certain reconciling items attributable to each of
the segments. The segment information appearing in Note 18 – Segment Information of the Notes to Financial
Statements is presented on a basis consistent with the Company’s internal management reporting, in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an
Enterprise and Related Information. Certain corporate-level activity has been excluded from our segment
operating results and is analyzed separately.
Client
(In millions, except percentages) 2007 2006 2005
Percent
Change 2007
versus 2006
Percent
Change 2006
versus 2005
Revenue $14,972 $13,089 $12,042 14% 9%
Operating income $11,603 $10,297 $ 9,442 13% 9%
Client offerings consist of premium edition and standard Windows operating systems. Premium offerings are
those that include additional functionality and are sold at a price above our standard versions. Premium offerings
include Windows XP Professional, XP Media Center Edition, XP Tablet PC Edition, Vista Business, Vista Home
Premium, and Vista Ultimate. Standard Windows operating systems include Windows XP Home and Windows
Vista Home Basic. Client revenue growth correlates with the growth of purchases of PCs from OEMs that pre-
install versions of Windows operating systems because the OEM channel accounts for approximately 80% of total
Client revenue. The differences between unit growth rates and revenue growth rates from year to year are
affected by changes in the mix of OEM Windows operating systems licensed with premium edition operating
systems as a percentage of total OEM Windows operating systems licensed (“OEM premium mix”), changes in
the geographical mix, and changes in the channel mix of products sold by large, multi-national OEMs versus
those sold by local and regional system builders.
Fiscal year 2007 compared to fiscal year 2006
Client revenue increased primarily reflecting licensing of Windows Vista. OEM revenue increased $1.46 billion or
13% driven by 13% growth in OEM license units while revenue from commercial and retail licensing of Windows
operating systems increased $422 million or 21%. During the year, the OEM Premium Mix increased 16
percentage points to 68%. Based on our estimates, total worldwide PC shipments from all sources grew 10% to
12% driven by demand in both emerging and mature markets.
Client operating income increased reflecting the increased revenue and decreased research and development
costs, partially offset by increased Windows Vista product costs and increased sales and marketing expenses for
launch-related programs. The decrease in research and development costs reflects the capitalization of certain
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 reflecting $1.18 billion or 12% growth in OEM revenue driven by 17% growth in OEM
license units from increased PC unit shipments, partially offset by a $118 million or 6% decrease in revenue from
commercial and retail licensing of Windows operating systems. During the year, the OEM premium mix increased
two percentage points to 52%. OEM revenue growth included an increase to revenue of $89 million resulting from
the alignment of our billings associated with OEM distributors in our system builder channel with both industry
standards and other Microsoft channels.