Microsoft 2007 Annual Report Download - page 23

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
related to settlements with Novell, Inc., Gateway, IBM, and other antitrust and competition law matters.
Headcount-related costs increased 5%, driven by a 23% increase in headcount and an increase in salaries and
benefits for existing headcount, partially offset by a decrease in stock-based compensation.
Outlook
Our outlook for fiscal year 2008 is as follows:
Client We expect revenue to grow reflecting improvement in the commercial and retail portion of the business
due to increased acceptance of Windows Vista. We expect PC shipments to grow 9% to 11% for fiscal year 2008.
We believe that PC unit growth rates will be higher in the consumer segment than in the business segment and
higher in emerging markets than in mature markets.
Server and Tools We expect continued momentum from recent product launches and to benefit from the
upcoming launches of the new versions of SQL Server, Windows Server, and Visual Studio in the second half of
fiscal year 2008.
Online Services Business We expect increased growth in online advertising revenue as the portals, channels,
and communications services continue to expand globally and the overall Internet advertising industry continues
to expand. In May 2007, we agreed to acquire aQuantive, Inc., a digital marketing company, for approximately $6
billion in cash. We expect to complete this transaction in August 2007. This acquisition will enable us to
strengthen relationships with advertisers, agencies and publishers by enhancing our advertising platforms and
services. The acquisition also provides us with increased depth in building and supporting next generation
advertising solutions and environments such as cross media planning and video-on-demand.
Microsoft Business Division We expect revenue to continue to increase in fiscal year 2008 due to increased
customer acceptance of the 2007 Microsoft Office system. We continue to develop plans to grow revenue in new
areas such as unified communications, enterprise content management, collaboration tools, business intelligence,
and through our existing portfolio of Microsoft Dynamics products.
Entertainment and Devices Division We expect revenue to increase due to the increased installed base of
the Xbox 360 console and from the release of Halo 3, a new Xbox 360 game. Revenue from existing mobility and
embedded devices is expected to increase due to unit volume increases of Windows Mobile software driven by
increased market demand for phone-enabled devices and Windows Embedded operating systems.
Operating Expenses
Cost of Revenue
(In millions, except percentages) 2007 2006 2005
Percent
Change 2007
versus 2006
Percent
Change 2006
versus 2005
Cost of revenue $10,693 $7,650 $6,031 40% 27%
As a percent of revenue 21% 17% 15% 4ppt 2ppt
Cost of revenue includes manufacturing and distribution costs for products sold and programs licensed, operating
costs related to product support service centers and product distribution 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 product costs, increased OSB data center costs, and costs associated with the
growth in consulting services. Cost of revenue increased in fiscal year 2006 mainly due to a $1.64 billion increase
in EDD as a result of an increase in the number of total Xbox consoles sold and higher Xbox 360 unit costs.