Microsoft 2009 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ...2009 saw the successful launch of key products including Microsoft SQL Server 2008, ® Microsoft Internet Explorer 8, and Bing, the newest version of our Web search technology. With Silverlight™ 2, ® Microsoft Business Productivity Online Suite, Microsoft Exchange Online, and Microsoft SharePoint...

  • Page 3
    ..., and networking infrastructure services. These technologies - which allow developers to build applications that enable people to store and share information easily and securely in the cloud and access it on any device from any location - are key to Microsoft's software plus services strategy and...

  • Page 4
    ...edge software and Internet development technologies for free. In fiscal 2009, we launched BizSparkâ„¢, which provides startup companies with fast and easy access to Microsoft development tools and server products with no upfront costs, and offers special technical support and marketing programs that...

  • Page 5
    ... to Financial Statements. QUARTERLY STOCK PRICE Our common stock is traded on the NASDAQ Stock Market under the symbol MSFT. On July 27, 2009, there were 142,468 registered holders of record of our common stock. The high and low common stock sales prices per share were as follows: Quarter Ended Sep...

  • Page 6
    ... STOCK PRICE INFORMATION, ISSUER PURCHASES OF EQUITY SECURITIES, DIVIDENDS, AND STOCK PERFORMANCE (CONTINUED) We repurchased the following shares of common stock under the above-described repurchase plans: (In millions) Year Ended June 30, 2009(a) Shares Amount Shares 2008(b) Amount Shares 2007...

  • Page 7
    STOCK PERFORMANCE COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Microsoft Corporation, The S&P 500 Index And The NASDAQ Computer Index Total Cumulative Return* 6/04 6/05 6/06 6/07 6/08 6/09 Microsoft Corporation S&P 500 NASDAQ Computer 100.00 97.64 92.80 118.99 112.68 99.74 100.00 106.32 ...

  • 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 Bing through our proprietary adCenter platform. We also conduct research and develop advanced technologies for future software products...

  • Page 9
    ... architecture 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 partner-hosted environment, or in a Microsoft-hosted...

  • Page 10
    ... 2009. Products and Services: Windows Server operating system; Microsoft SQL Server; Visual Studio; Silverlight; System Center products; Forefront security products; Biz Talk Server; Microsoft Consulting Services; Premier product support services; and other products and services. Competition...

  • Page 11
    ...; Microsoft adCenter/adExpert; Microsoft Media Network (MMN); MSN portals, channels, and mobile services; Windows Live suite of applications and mobile services; Atlas online tools for advertisers and publishers; MSN Premium Web Services (consisting of MSN Internet Software Subscription, MSN Hotmail...

  • Page 12
    ... retail sales and marketing for Microsoft Office and the Windows operating systems. Products: Xbox 360 console and games; Xbox Live; Zune; Mediaroom; numerous consumer software and hardware products (such as mice and keyboards); Windows Mobile software and services platform; Windows Embedded device...

  • Page 13
    ... software design. Before releasing new software platforms, we provide application vendors with a range of resources and guidelines for development, training, and testing. Investing in Business and Product Development Innovation is the foundation for Microsoft's success. Our model for growth is based...

  • Page 14
    ...Windows and Office that are designed to support a wide range of connected scenarios; solutions for businesses that can be deployed by a customer, by a service provider like Microsoft, or by a Microsoft partner; tools for developers and Web designers; and consumer products including Xbox 360 and Zune...

  • Page 15
    ... end-user customer to acquire multiple licenses of products. Organizations license our products primarily through large account resellers ("LARs") and value-added resellers ("VARs"). Many organizations that license products through enterprise agreements transact directly with us, with sales support...

  • Page 16
    ... • Press releases on quarterly earnings, product and service announcements, legal developments, and international news. • Corporate governance information including our articles, bylaws, governance guidelines, committee charters, codes of conduct and ethics, and other governance-related policies...

  • Page 17
    ... offerings for businesses, such as Microsoft Dynamics CRM Online, Exchange Hosted Services, Exchange Online, and SharePoint Online. We enable the delivery of online advertising across our broad range of digital media properties and on Bing through our proprietary adCenter platform. Our revenue...

  • Page 18
    ... research and development, marketing, sales, finance, legal, human resources, and information technology by June 30, 2010. During the twelve months ended June 30, 2009, we recorded employee severance charges of $330 million for the expected reduction in employee headcount. Diluted earnings per share...

  • Page 19
    ... 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 rates accounted for a $1.6 billion or three...

  • Page 20
    ...group level in fiscal years 2009, 2008, and 2007. Effective July 1, 2009, we reorganized the Windows Live operations from Online Services Business to Client to better align our strategies and focus in those areas. Server and Tools Percentage Change 2009 Versus 2008 Percentage Change 2008 Versus 2007...

  • Page 21
    ... software licenses and client access licenses ("CAL") for Windows Server, Microsoft SQL Server, and other server products. We also offer developer tools, training, certification, Microsoft Press, Premier product support services, and Microsoft Consulting Services. Server products can be run on-site...

  • Page 22
    ... the prior year-end. Other The segment information discussed above is presented the way we internally managed and monitored performance at the business group level in fiscal years 2009, 2008, and 2007. Effective July 1, 2009, we reorganized the Windows Live operations from OSB to Client to better...

  • Page 23
    ... management, enterprise search, collaboration, unified communications, and business intelligence. Microsoft Dynamics products provide business solutions for financial management, customer relationship management, supply chain management, and analytics applications for small and mid-size businesses...

  • Page 24
    ... games, online games and services, Mediaroom (our Internet protocol television software), the Microsoft Surface computing platform, mobile and embedded device platforms, and other devices. EDD leads the development efforts for our line of consumer software and hardware products including application...

  • Page 25
    ... support and maintain Internet-based products and services, warranty costs, inventory valuation adjustments, costs associated with the delivery of consulting services, and the amortization of capitalized research and development costs associated with software products that have reached technological...

  • Page 26
    ... 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 markets, the amortization of purchased software code and services content...

  • Page 27
    ... management program to reduce discretionary operating expenses, employee headcount, and capital expenditures. As part of this program, we announced the elimination of up to 5,000 positions in research and development, marketing, sales, finance, legal, human resources, and information technology...

  • Page 28
    ... derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to enhance investment returns; and to facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedges are recognized...

  • Page 29
    ...markets for identical assets or liabilities to determine fair value. This pricing methodology applies to our Level 1 investments, such as exchange-traded mutual funds, domestic and international equities, U.S. treasuries, and agency securities. If quoted prices in active markets for identical assets...

  • Page 30
    ... of Microsoft Internet Explorer on a when-and-ifavailable basis and free post-delivery telephone support. This revenue deferral is applicable for Windows XP and prior versions shipped as retail packaged products, products licensed to OEMs, and perpetual licenses for current products under our Open...

  • Page 31
    Other 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 32
    ..., and equity and other investments, reflects our views on potential future capital requirements relating to research and development, creation and expansion of sales distribution channels, investments and acquisitions, share dilution management, legal risks, and challenges to our business model. We...

  • Page 33
    ... about fair value measurements and impairments of securities. FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 and FAS 124-2 establishes a new model for measuring...

  • Page 34
    ..., including changes in the way assets and liabilities are recognized as a result of business combinations. It also requires the capitalization of in-process research and development at fair value and requires the expensing of acquisition-related costs as incurred. In April 2009, the FASB issued FSP...

  • Page 35
    ... of investment securities, impairment of goodwill, accounting for research and development costs, accounting for contingencies, accounting for income taxes, accounting for stock-based compensation, and accounting for product warranties. Revenue Recognition We account for the licensing of software in...

  • Page 36
    ... Research and Development Costs, and SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. SFAS No. 86 specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological...

  • Page 37
    ...we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and country in which we do business, but...

  • Page 38
    ... 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 39
    ...among foreign currency exchange rates, interest rates, equity prices, and commodity prices, assuming normal market conditions. The VaR is calculated as the total loss that will not be exceeded at the 97.5 percentile confidence level or, alternatively stated, the losses could exceed the VaR in 25 out...

  • Page 40
    ... (In millions, except per share amounts) Year Ended June 30, 2009 2008 2007 Revenue Operating expenses: Cost of revenue Research and development Sales and marketing General and administrative Employee severance Total operating expenses Operating income Other income (expense) Income before...

  • Page 41
    ... Short-term unearned revenue Securities lending payable Other Total current liabilities Long-term debt Long-term unearned revenue Other long-term liabilities Commitments and contingencies Stockholders' equity: Common stock and paid-in capital - shares authorized 24,000; outstanding 8,908 and 9,151...

  • Page 42
    ... stock cash dividends Excess tax benefits from stock-based compensation Other Net cash used in financing 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...

  • Page 43
    ...' EQUITY STATEMENTS (In millions) Year Ended June 30, 2009 2008 2007 Common stock and paid-in capital Balance, beginning of period Common stock issued Common stock repurchased Stock-based compensation expense Stock-based compensation income tax benefits (deficiencies) Other, net Balance, end of...

  • Page 44
    ... values are accounted for under the cost method. ESTIMATES AND ASSUMPTIONS Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples include estimates of loss contingencies, product...

  • Page 45
    ... 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 for as subscriptions. Revenue related...

  • Page 46
    ... made to the plan. STOCK-BASED COMPENSATION We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award...

  • Page 47
    ... INVENTORIES $ 153 360 (62 ) $ 451 $ 117 88 (52) $ 153 $ 142 64 (89 ) $ 117 Inventories 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...

  • Page 48
    ... about fair value measurements and impairments of securities. FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 and FAS 124-2 establishes a new model for measuring...

  • Page 49
    ..., except earnings per share) Year Ended June 30, 2009 2008 2007 Net income available for common shareholders (A) Weighted average outstanding shares of common stock (B) Dilutive effect of stock-based awards Common stock and common stock equivalents (C) Earnings per share: Basic (A/B) Diluted...

  • Page 50
    ...Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments (In millions) June 30, 2009 Cost Basis Cash Mutual funds Commercial paper Certificates of deposit U.S. Government and Agency securities Foreign government bonds Mortgage-backed securities Corporate...

  • Page 51
    ...) June 30, 2008 Cost Basis Unrealized Gains Unrealized Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments Cash Mutual funds Commercial paper Certificates of deposit U.S. Government and Agency securities Foreign government bonds Mortgage...

  • Page 52
    ... STATEMENTS (CONTINUED) At June 30, 2009, unrealized losses of $285 million consisted of: $79 million related to investment grade fixedincome securities, $24 million related to investments in high yield and emerging market fixed-income securities, $110 million related to domestic equity securities...

  • Page 53
    ... non-designated equity contracts purchased and sold were immaterial. INTEREST RATE Securities held in our fixed-income portfolio are subject to different interest rate risks based on their various maturities. The average maturity of the fixed-income portfolio is managed to achieve economic returns...

  • Page 54
    ... STATEMENTS (CONTINUED) GROSS FAIR VALUES OF DERIVATIVE INSTRUMENTS (EXCLUDING FIN NO. 39(A) NETTING) Foreign Exchange Contracts June 30, 2009 Interest Credit Rate Contracts Contracts (In millions) Equity Contracts Commodity Contracts Total Derivatives Assets Derivatives not designated...

  • Page 55
    ... (losses) for foreign exchange, equity, interest rate, credit, and commodity contracts presented in other income statement line items were immaterial for fiscal year 2009 and have been excluded from the table above. NOTE 6 FAIR VALUE MEASUREMENTS SFAS No. 157 defines fair value as the price that...

  • Page 56
    ... securities, commercial paper, and certain agency securities. Our Level 3 assets primarily include investments in certain corporate bonds. We value the Level 3 corporate bonds using internally developed valuation models, inputs to which include interest rate curves, credit spreads, stock prices...

  • Page 57
    ... No. 10 and FASB Statement No. 105, permits the netting of derivative assets and derivative liabilities when a legally enforceable master netting agreement exists. These amounts include fair value adjustments related to our own credit risk and counterparty credit risk. CHANGES IN LEVEL 3 INSTRUMENTS...

  • Page 58
    ... was $164 million. This fair value was determined using models with significant unobservable inputs. In accordance with the provisions of Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, we review the carrying values of our investments when...

  • Page 59
    ... as of June 30, 2007 Purchase Accounting Adjustments and Other Balance as of June 30, 2008 Purchase Accounting Adjustments and Other Balance as of June 30, 2009 (In millions) Acquisitions Acquisitions Client Server and Tools Online Services Business Microsoft Business Division Entertainment and...

  • Page 60
    ... value related to our intangible assets. The components of intangible assets acquired during fiscal years 2009 and 2008 were as follows: (In millions) Year Ended June 30, Amount 2009 Weighted Average Life Amount 2008 Weighted Average Life Contract-based Technology-based Marketing-related Customer...

  • Page 61
    ... to support the commercial paper program. In November 2008, we replaced the six-month credit facility with a $2.0 billion 364-day credit facility. This credit facility expires on November 6, 2009. In March 2009, we entered into an additional credit facility. This $1.0 billion 364-day credit facility...

  • Page 62
    ... taxes computed at the federal statutory rate and the provision for income taxes were as follows: Year Ended June 30, 2009 2008 2007 Federal statutory rate Effect of: Foreign earnings taxed at lower rates Internal Revenue Service settlement European Commission fine Other reconciling items, net...

  • Page 63
    ...300) (513) (729) (2,542) $ 2,966 $ 2,017 949 $ 2,966 Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are actually paid or...

  • Page 64
    ... revenue related to the Windows 7 Upgrade Option program. OTHER 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...

  • Page 65
    ...In millions) June 30, 2009 2008 Volume licensing programs Undelivered elements Other Total Unearned revenue by segment was as follows: (In millions) June 30, $ 11,350 1,083 1,851 $ 14,284 $ 12,232 1,396 1,669 $ 15,297 2009 2008 Client Server and Tools Microsoft Business Division Other segments...

  • Page 66
    ... server protocol technology to our competitors. In March 2007, the European Commission issued a statement of objections claiming that the pricing terms we proposed for licensing the technology as required by the March 2004 decision were "not reasonable." Following additional steps we took to address...

  • Page 67
    ... and unfair competition class action lawsuits have been filed against us in various state, federal, and Canadian courts on behalf of various classes of direct and indirect purchasers of our PC operating system and certain other software products. We obtained dismissals of damages claims of indirect...

  • Page 68
    ...-Lucent has appealed that ruling. In October 2003, Uniloc USA Inc., a subsidiary of a Singapore-based security technology company, filed a patent infringement suit in U.S. District Court in Rhode Island, claiming that product activation technology in Windows XP and certain other Microsoft programs...

  • Page 69
    ... resources. The repurchase program may be suspended or discontinued at any time without prior notice. We repurchased the following shares of common stock under the above-described repurchase plans: (In millions) Year Ended June 30, 2009(a) Shares Amount 2008(b) Shares Amount 2007(c) Shares Amount...

  • Page 70
    ... report on Form 10-K and was included in other current liabilities as of June 30, 2009. In fiscal year 2008, our Board of Directors declared the following dividends: Declaration Date Dividend Per Share Record Date Total Amount (in millions) Payment Date September 12, 2007 December 19, 2007 March...

  • Page 71
    ... income NOTE 20 EMPLOYEE STOCK AND SAVINGS PLANS $437 502 30 $969 $ 135 735 270 $1,140 $ 117 1,388 149 $1,654 Stock-based compensation expense and related income tax benefits were as follows: (In millions) Year Ended June 30, 2009 2008 2007 Total stock-based compensation expense Income...

  • Page 72
    ... three anniversaries of the grant date. Following the end of the fiscal year 2008 and 2007 performance periods, the Compensation Committee of the Board of Directors determined that the number of shares of SPSAs to be issued were 18 million and 11 million respectively, based on the actual performance...

  • Page 73
    ... year 2009. The number of shares subject to the SA portion of the award will be determined by dividing the value of the award by the closing price of Microsoft common stock on August 31, 2009. Activity for All Stock Plans We measure the fair value of SAs and SPSAs based upon the market price of...

  • Page 74
    ... options, respectively, in conjunction with business acquisitions during fiscal years 2009, 2008, and 2007. Employee stock options outstanding were as follows: Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In millions) Shares (In millions) Weighted Average Exercise...

  • Page 75
    ... payments Balance, end of period NOTE 22 SEGMENT INFORMATION AND GEOGRAPHIC DATA $ - 330 (203) $ 127 Segment revenue and operating income (loss) was as follows: (In millions) Year Ended June 30, 2009 2008 2007 Revenue: Client Server and Tools Online Services Business Microsoft Business Division...

  • Page 76
    ...Visual Studio; Silverlight; System Center products; Forefront security products; Biz Talk Server; Microsoft Consulting Services; Premier product support services; and other products and services. Online Services Business - Bing; Microsoft adCenter/adExpert; Microsoft Media Network (MMN); MSN portals...

  • Page 77
    ...) Year Ended June 30, 2009 2008 2007 United States(a) Other countries Total (a) $33,052 25,385 $58,437 $35,928 24,492 $60,420 $31,346 19,776 $51,122 Includes shipments to customers in the United States and licensing to certain OEMs and multinational organizations. Long-lived assets, excluding...

  • Page 78
    ...) charge related to the Xbox 360 warranty policy, inventory write-downs, and product returns. NOTE 24 SUBSEQUENT EVENT On July 29, 2009, Microsoft and Yahoo! announced a 10-year agreement under which Microsoft will provide the exclusive algorithmic and paid search platform for Yahoo! Web sites. As...

  • Page 79
    ... 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, 2009 and 2008, and the related consolidated statements of...

  • Page 80
    ... 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, 2009. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2009...

  • Page 81
    ... 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, 2009, of the Company and our report dated July 29, 2009, expressed an unqualified...

  • Page 82
    ... Ph.D. President, Online Services Division Steven J. Sinofsky President, Windows Division Robert J. (Robbie) Bach President, Entertainment and Devices Division Lisa E. Brummel Robert L. Muglia Bradford L. Smith Senior Vice President, Human Resources President, Server and Tools Business Senior Vice...

  • Page 83
    ... of growth and value to our customers, shareholders, and employees. This work also provides a framework through which our business addresses new markets, technologies, and business models. For more about Microsoft's corporate citizenship, including the annual report, please visit the website at: www...

  • Page 84