Microsoft 2008 Annual Report Download

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Table of contents

  • Page 1

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  • Page 3
    ... number of retail and hotel locations. We unveiled new products and services for the healthcare industry. We announced important changes to our technology and business practices to increase the openness of our products and drive greater interoperability and choice for developers, partners, customers...

  • Page 4
    ... health queries. Live Search for Windows Mobile added new features for mobile users, such as voice input and dynamic rerouting of driving directions based on real-time traffic information. Microsoft Search Server Express 2008 optimizes search for business data. Our efforts in software plus services...

  • Page 5
    ... in the future. With Chief Software Architect Ray Ozzie and Chief Research and Strategy Officer Craig Mundie guiding the company's technical strategy and a new generation of leaders stepping up to lead in areas such as online advertising, search, business strategy, and marketing, we look forward...

  • Page 6
    ... open market purchases and pursuant to a trading plan under Rule 10b5-1. We repurchased common stock in each quarter of fiscal year 2008 using available cash resources as follows: Period Total number of shares purchased Average price paid per share July 1, 2007 - September 30, 2007 October 1, 2007...

  • Page 7
    ... PRICE INFORMATION, ISSUER PURCHASES OF EQUITY SECURITIES, AND STOCK PERFORMANCE (CONTINUED) Common stock repurchases in the fourth quarter of fiscal year 2008 were as follows: (c) Total number of shares purchased as part of publicly announced plans or programs (d) Approximate dollar value of shares...

  • Page 8
    ... Hosted Services, Exchange Online, and SharePoint Online. We enable the delivery of online advertising across our broad range of digital media properties and on Live Search through our proprietary adCenter® platform. We also research and develop advanced technologies for future software products...

  • Page 9
    ... platform, and security and identity software. The segment also builds standalone and software development lifecycle tools for software architects, developers, testers, and project managers. Server products can be run on-site, in a hosting environment, or in a Web-based environment. We offer...

  • Page 10
    ...us build and support next-generation advertiser and publisher solutions for cross media planning, video-on-demand, and Internet protocol television. Products. Live Search; MSN; MapPoint; MSN Internet Access; MSN Premium Web Services (consisting of MSN Internet Software Subscription, MSN Hotmail Plus...

  • Page 11
    ... to add value to the core Office product set and to continue to expand our product offerings in other information worker areas such as content management, enterprise search, collaboration, unified communications and business intelligence. Microsoft Dynamics products provide business solutions for...

  • Page 12
    ...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 software; mobile...

  • Page 13
    ...; and the centers in Fargo, North Dakota, Puerto Rico, Redmond, Washington, and Reno, Nevada support Latin America and North America. We contract most of our manufacturing activities for Xbox 360 and related games, Zune, various retail software packaged products, and Microsoft hardware to third...

  • Page 14
    ... versions of certain software product over the contract period is called Software Assurance. Software Assurance also provides support, tools, and training to help customers deploy and use software efficiently. Under the Open program, customers can acquire licenses only, or licenses with Software...

  • Page 15
    ... versions of certain software products, support, tools, and training over a specified time period (generally three years). Online. We distribute online content and services through Live Search, Windows Live, Office Live, our MSN portals and channels, the Microsoft Online Services platform, which...

  • Page 16
    ... We provide consulting and product support services, and we train and certify computer system integrators and developers. We also design and sell hardware including the Xbox 360 video game console, the Zune digital music and entertainment device, and peripherals. Online offerings and information are...

  • Page 17
    ... 2008 compared with fiscal year 2007 Revenue growth was driven primarily by increased licensing of the 2007 Microsoft Office system, increased Xbox 360 platform sales, increased revenue associated with Windows Server and SQL Server, and increased licensing of Windows Vista. Foreign currency exchange...

  • Page 18
    ... 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 2008 compared with fiscal year 2007 Client revenue increased reflecting growth in licensing of Windows Vista. By the end of...

  • Page 19
    ... access licenses ("CAL") for Windows Server, Microsoft SQL Server, and other server products. We also offer developer tools, training, certification, Microsoft Press, Premier and Professional product support services, and Microsoft Consulting Services. Server products can be run on-site, in a hosted...

  • Page 20
    ... protocol television. aQuantive was consolidated into our results of operations starting August 10, 2007, the acquisition date. Proposed Acquisition of Yahoo! Inc. To accelerate our advertising strategy, during fiscal year 2008 we submitted a proposal to the Yahoo! Inc. board of directors to acquire...

  • Page 21
    ... over 90% of MBD revenue, depends on our ability to add value to the core Office product set and to continue to expand our product offerings in other information worker areas such as enterprise content management, collaboration, unified communications, and business intelligence. Microsoft PAGE 20

  • Page 22
    ... applications. Fiscal year 2009 represents an important year in delivering on our software plus services strategy with the upcoming releases of Exchange Online, SharePoint Online, and Office Communication Server Online. Entertainment and Devices Division Percentage Change 2008 versus 2007 Percentage...

  • Page 23
    ... Live, and Xbox 360 accessories), the Zune digital music and entertainment platform, PC software games, online games and services, Mediaroom (our Internet protocol television software), the Surface computing platform, mobile and embedded device platforms, and other devices. EDD leads the development...

  • Page 24
    ... primarily driven by the Xbox 360 warranty charge, increased Windows Vista product costs, increased OSB data center costs, and costs associated with the growth in consulting services. Research and Development Percentage Change 2008 versus 2007 Percentage Change 2007 versus 2006 (In millions, except...

  • Page 25
    ... payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international...

  • Page 26
    ... value is determined to be other-thantemporary, an impairment charge is recorded and a new cost basis in the investment is established. We lend certain fixed-income and equity securities to increase investment returns. The loaned securities continue to be carried as investments on our balance sheet...

  • Page 27
    .... The decreased rate in fiscal year 2008 resulted from resolution of tax positions related to our settlement with the Internal Revenue Service ("IRS") for its 2000-2003 examination. This decline was partially offset by the tax effect of the European Commission fine of $1.4 billion (â,¬899 million...

  • Page 28
    ... - Represents payments for post-delivery support and consulting services to be performed in the future, online advertising for which the advertisement has yet to be displayed, Microsoft Dynamics business solutions products, Xbox Live subscriptions, Mediaroom, and other offerings for which we have...

  • Page 29
    ...areas of technology. Additions to property and equipment will continue, including new facilities, data centers, and computer systems for research and development, sales and marketing, support, and administrative staff. Commitments for constructing new buildings were $1.2 billion on June 30, 2008. We...

  • Page 30
    ... penalties associated with tax positions, and income tax disclosures. Upon adoption, we recognized a $395 million charge to our beginning retained deficit as a cumulative effect of a change in accounting principle. See Note 11 - Income Taxes of the Notes to Financial Statements. On July 1, 2007, we...

  • Page 31
    ...and development costs, accounting for contingencies, accounting for income taxes, accounting for stock-based compensation, and accounting for product warranties. We account for the licensing of software in accordance with American Institute of Certified Public Accountants Statement of Position ("SOP...

  • Page 32
    ...our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. We account for research and development costs in accordance with applicable accounting pronouncements, including SFAS No. 2, Accounting for Research and Development Costs, and...

  • Page 33
    ... hardware warranty terms and conditions vary depending upon the product sold and country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranty, we estimate the costs to provide bug fixes, such as security...

  • Page 34
    ... and related information that are presented in this report. The consolidated financial statements, which include amounts based on management's estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company designs...

  • Page 35
    ... accounting losses, including determinations of other-than-temporary losses in fair value in accordance with U.S. GAAP. VaR numbers are shown separately for interest rate, currency rate, equity price, and commodity price risks. These VaR numbers include the underlying portfolio positions and related...

  • Page 36
    ...STATEMENTS (In millions, except per share amounts) Year Ended June 30, 2008 2007 2006 Revenue Operating expenses: Cost of revenue Research and development Sales... per share: Basic Diluted Weighted average shares outstanding: Basic Diluted Cash dividends declared per common share See accompanying...

  • Page 37
    BALANCE SHEETS (In millions) June 30, 2008 2007 Assets Current assets: Cash and cash equivalents Short-term investments (including securities pledged as collateral of $2,491 and $2,356) Total cash, cash equivalents, and short-term investments Accounts receivable, net of allowance for doubtful ...

  • Page 38
    ... 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 Net cash from (used in) investing Effect of exchange rates on cash and cash equivalents Net change in cash...

  • Page 39
    STOCKHOLDERS' EQUITY STATEMENTS (In millions) Year Ended June 30, 2008 2007 2006 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 40
    ... are accounted for as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the billing coverage period. Certain multi-year licensing arrangements include rights to receive future versions of software product on a when-and-if-available basis under Open and...

  • Page 41
    ...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, and Microsoft Developer Network subscriptions are also accounted...

  • Page 42
    ... compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award (generally three to five years) using the straight-line method. INCOME TAXES Income tax expense includes U.S. and international...

  • Page 43
    ... are stated at the lower of cost or market, using the average cost method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the...

  • Page 44
    ...are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of inprocess research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS...

  • Page 45
    ...) Year Ended June 30, 2008 2007 2006 Net income available for common shareholders (A) Weighted average outstanding shares of common stock (B) Dilutive effect of employee stock options and awards Common stock and common stock equivalents (C) Earnings per share: Basic (A/B) Diluted (A/C) $17,681...

  • Page 46
    ...-than-temporary impairments of $312 million, $25 million, and $408 million in fiscal years 2008, 2007, and 2006, respectively. Realized gains and losses from sales of available-forsale securities (excluding other-than-temporary impairments) were $751 million and $93 million, respectively, in fiscal...

  • Page 47
    ... Equity and other investments (In millions) June 30, 2008 Cost basis Cash Mutual funds Commercial paper Certificates of deposit U.S. Government and Agency securities Foreign government bonds Mortgage-backed securities Corporate notes and bonds Municipal securities Common stock and equivalents...

  • Page 48
    ... equity securities, and $11 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 49
    ... with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, did not have a significant impact on earnings for fiscal years 2008, 2007, or 2006. During fiscal year 2008, $274 million in gains on fair-value hedges from changes in time value and $324 million in losses on cash-flow...

  • Page 50
    ... the future development of our Online Services Business. We also believe the acquisition will help us build and support next-generation advertiser and publisher solutions in environments such as cross media planning, video-on-demand, and Internet protocol television. aQuantive was consolidated into...

  • Page 51
    ...the estimated fair values of the assets acquired and liabilities assumed at the dates of the aQuantive and FAST acquisitions: (In millions) aQuantive as of August 10, 2007 FAST as of April 24, 2008 Cash and cash equivalents Accounts receivable, net Other current assets Property, plant and equipment...

  • Page 52
    ... Changes in the carrying amount of goodwill for fiscal years 2008 and 2007 by segment were as follows: (In millions) Balance as of June 30, 2008 Balance as of June 30, 2007 Balance as of June 30, 2006 Acquisitions Other Acquisitions Other Client Server and Tools Online Services Business...

  • Page 53
    ... The components of finite-lived intangible assets acquired during fiscal years 2008 and 2007 were as follows: (In millions) Year Ended June 30, Amount 2008 Weighted average life Amount 2007 Weighted average life Contract-based Technology-based Marketing-related Customer-related Total $ 91 787 116...

  • Page 54
    ... in prior periods, related primarily to favorable developments in an IRS position and multiple foreign audit assessments. The components of the deferred income tax assets and liabilities were as follows: (In millions) June 30, 2008 2007 Deferred income tax assets: Stock-based compensation expense...

  • Page 55
    ... 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 for as subscriptions with revenue...

  • Page 56
    ... - Represents payments for post-delivery support and consulting services to be performed in the future, online advertising for which the advertisement has yet to be displayed, Microsoft Dynamics business solutions products, Xbox Live subscriptions, Mediaroom, and other offerings for which we have...

  • Page 57
    ... material costs as a result of these obligations and have not accrued any liabilities related to these indemnifications in our financial statements. Product Warranty In July 2007, we announced the expansion of our global Xbox 360 warranty coverage to three years from the date of purchase for...

  • Page 58
    ... Office family of products and the inclusion of various capabilities in our Windows operating system software, including Web browsing software. These investigations were precipitated by complaints filed with the Commission by a trade association of Microsoft's competitors and a firm that offers Web...

  • Page 59
    ... patents is set for January 2009. • In February 2007, we filed a complaint against Alcatel-Lucent with the International Trade Commission claiming Alcatel-Lucent is infringing four Microsoft patents related to our unified communications technology and seeking to prevent the import into the U.S. of...

  • Page 60
    ... on July 20, 2004 to buy back up to $30.0 billion in Microsoft common stock. On July 20, 2006, we also announced that our Board of Directors authorized two new share repurchase programs: a $20.0 billion tender offer, which was completed on August 17, 2006; and authorization for up to an additional...

  • Page 61
    ...11, 2008 The dividend declared on June 11, 2008 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, 2008. In fiscal year 2007, our Board of Directors declared the following dividends: Declaration Date Dividend Per Share Record...

  • Page 62
    ... 2008 2007 2006 Shares purchased Average price per share At June 30, 2008, 107 million shares were reserved for future issuance. 18 $26.78 17 $25.36 17 $23.02 Savings Plan. We have a savings plan in the United States that qualifies under Section 401(k) of the Internal Revenue Code, and a number...

  • Page 63
    ...plans: (In millions, except fair values) 2007 2006 Stock awards granted Weighted average grant-date fair value Shared performance stock awards granted Weighted average grant-date fair value 57 $25.15 11 $25.18 47 $24.70 3 $24.80 Stock Options. In fiscal year 2004, we began granting employees SAs...

  • Page 64
    ... from stock option exercises were $3.0 billion and $365 million, respectively, for fiscal year 2008. NOTE 19 SEGMENT INFORMATION Segment revenue and operating income (loss) was as follows: (In millions) Year Ended June 30, 2008 2007 2006 Revenue: Client Server and Tools Online Services Business...

  • Page 65
    ... GP; Microsoft Dynamics NAV; Microsoft Dynamics SL; Microsoft Dynamics Retail Management System; Microsoft Partner Program; and Microsoft Office Accounting. Entertainment and Devices Division - Xbox 360 console and games; Xbox Live; Zune; Mediaroom; numerous consumer software and hardware products...

  • Page 66
    ... customer accounted for more than 10% of fiscal year 2008 or fiscal year 2007 revenue. Sales to Dell and its subsidiaries accounted for approximately 11% of fiscal year 2006 revenue. These sales were made primarily through our OEM and volume licensing channels and cover a broad array of products...

  • Page 67
    ...) related to the fine imposed by the European Commission in February 2008. Reflects $1.6 billion of revenue deferred to the third quarter of fiscal year 2007 for the Express Upgrade to Windows Vista and Microsoft Office Technology guarantee programs and pre-shipments of Windows Vista and the 2007...

  • Page 68
    ... 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, 2008 and 2007, and the related consolidated statements of...

  • Page 69
    ... of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the company's internal control over financial reporting was effective as of June 30, 2008. There were no changes in our internal control over financial reporting during the quarter ended June...

  • Page 70
    ... Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2008 of the Company and our report dated July 31, 2008 expressed an unqualified...

  • Page 71
    ...General Partner, August Capital Helmut Panke 2,5 Former Chairman of the Board of Management, BMW AG Jon A. Shirley 3 Former President, Chief Operating Officer, Microsoft Corporation Robert L. Muglia Robert J. (Robbie) Bach President, Entertainment and Devices Senior Vice President, Server and Tools...

  • Page 72
    ...Our mailing address is: Investor Relations Microsoft Corporation One Microsoft Way Redmond, Washington 98052-6399 Annual Meeting 8:00 a.m. Pacific Time November 19, 2008 Meydenbauer Center th 11100 NE 6 Street Bellevue, Washington 98004 Registered Shareholder Services American Stock Transfer & Trust...

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