Microsoft 2009 Annual Report Download - page 26

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PAGE 26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Fiscal year 2008 compared with fiscal year 2007
Cost of revenue increased reflecting increased data center and equipment costs, online content expenses, and
increased costs associated with the growth in our consulting services, partially offset by decreased Xbox 360 costs.
Xbox 360 costs decreased because of the $1.1 billion charge in fiscal year 2007 (which primarily related to the
expansion of our Xbox 360 warranty coverage), partially offset by increased Xbox 360 product costs, reflecting
growth in unit console sales.
Research and Development
(In millions, except percentages) 2009 2008 2007
Percentage
Change 2009
Versus 2008
Percentage
Change 2008
Versus 2007
Research and development $9,010 $8,164 $7,121 10%
15%
As a percent of revenue 15% 14% 14% 1ppt
–ppt
Research and development expenses include 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 markets, the amortization of purchased software code and services content, and in-process research
and development.
Fiscal year 2009 compared with fiscal year 2008
Research and development expenses increased during the twelve months ended June 30, 2009, primarily reflecting
a 13% increase in headcount-related costs.
Fiscal year 2008 compared with fiscal year 2007
Research and development expenses increased reflecting increased headcount-related expenses, increased
product development costs, and in-process research and development expenses related to acquisitions during fiscal
year 2008. Headcount-related expenses increased 12%, reflecting an increase in headcount from the prior year-end.
Sales and Marketing
(In millions, except percentages) 2009 2008 2007
Percentage
Change 2009
Versus 2008
Percentage
Change 2008
Versus 2007
Sales and marketing $12,879 $13,260 $11,541 (3)%
15%
As a percent of revenue 22% 22% 23% –ppt
(1)ppt
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other
headcount-related expenses associated with sales and marketing personnel and advertising, promotions, trade
shows, seminars, and other programs.
Effective July 1, 2008, we began presenting gains and losses resulting from foreign currency remeasurements as
a component of other income (expense). Prior to July 1, 2008, we included gains and losses resulting from foreign
currency remeasurements as a component of sales and marketing expense. We changed our presentation because
this better reflects how we manage these foreign currency exposures, as such gains and losses arising from the
remeasurement of foreign currency transactions are incidental to our operations. For the twelve months ended
June 30, 2009, $509 million of losses were reported as other income (expense). For the twelve months ended
June 30, 2008 and 2007, $221 million and $86 million of gains, respectively, were previously recorded as a
component of sales and marketing expense and have been recast as other income (expense).