Microsoft 2010 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... Dynamics® CRM Online, Microsoft® Office 2010, SharePoint® Online, Exchange Online and Office Communications Online, but we are delivering entirely new cloud computing platform innovations such as Windows Azure™, SQL Azure™ and Windows Intune™. The Windows Azure Platform Appliance is...

  • Page 3
    ... Office 2010 had been downloaded by more than 9 million beta customers. In our Server & Tools Business, Windows Server®, SQL Server™ and Visual Studio® product advances all help IT professionals save time, reduce costs and build dynamic and efficient data centers. In our Online Services Division...

  • Page 4
    ... PURCHASES OF EQUITY SECURITIES, DIVIDENDS, AND STOCK PERFORMANCE FINANCIAL HIGHLIGHTS (In millions, except per share data) Year Ended June 30, 2010 2009 2008 2007 2006 Revenue Operating income Net income Diluted earnings per share Cash dividends declared per share Cash and cash equivalents and...

  • Page 5
    ... year 2008 were repurchased under the plan approved by our Board of Directors during the first quarter of fiscal year 2007. Dividends In fiscal year 2010, our Board of Directors declared the following dividends: Declaration Date Dividend Per Share Record Date Total Amount (In millions) Payment...

  • Page 6
    STOCK PERFORMANCE COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Microsoft Corporation, The S&P 500 Index And The NASDAQ Computer Index 6/05 6/06 6/07 6/08 6/09 6/10 Microsoft Corporation S&P 500 NASDAQ Computer 100.00 95.03 121.86 115.40 102.15 100.77 100.00 108.63 131.00 113.81 83.98 ...

  • Page 7
    ... users to upload and organize photos, make movies, communicate via email and messaging and enhance online safety; and Xbox LIVE service, which enables online gaming, social networking, and content access. Our current cloud-based services for business users include: • • Microsoft Office Web...

  • Page 8
    ...• Microsoft Dynamics Online family of customer relationship management ("CRM") and enterprise resources planning services; and our Azure family of services, including a scalable operating system with compute, storage, hosting and management capabilities, a relational database, and a platform that...

  • Page 9
    ... provides training and certification to developers and information technology professionals for our Server and Tools, Microsoft Business Division, and Windows & Windows Live Division products and services. Approximately 50% of Server and Tools revenue comes from annuity volume licensing agreements...

  • Page 10
    ... tools, and compatibility with a broad base of hardware and software applications, security, and manageability. Online Services Division The Online Services Division ("OSD") consists of online information offerings such as Bing, MSN portals and channels, as well as an online advertising platform...

  • Page 11
    ... platform; application software for Apple's Macintosh computers, Microsoft PC hardware products and other devices. EDD is also responsible for all retail sales and marketing for retail packaged versions of the Microsoft Office system and the Windows operating systems. Products and Services: Xbox 360...

  • Page 12
    ... published for non-Xbox platforms, our games business also competes with numerous companies that we have licensed to develop and publish software for the Xbox consoles. Windows Phone faces competition from Apple, Google, Nokia, Openwave Systems, Palm, QUALCOMM, Research In Motion, and Symbian...

  • Page 13
    ... 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 and services including Xbox 360, Xbox LIVE, Windows Live services and Zune. Natural user interfaces The next few years will...

  • Page 14
    ... software to organizations under arrangements that allow the end-user customer to acquire multiple licenses of products and services. Organizations license our products and services primarily through large account resellers ("LARs"), distributors, value-added resellers ("VARs"), OEMs, system builder...

  • Page 15
    ... Web Apps, our MSN portals and channels, and Xbox LIVE. We provide content and services to business users through the Microsoft Online Services platform, which includes cloudbased services such as Windows Azure, SQL Azure, Microsoft Dynamics CRM Online, SharePoint Online, Exchange Online, and Office...

  • Page 16
    ... Bing, Windows Live, Microsoft Office Web Apps, our MSN portals and channels, and to businesses through Microsoft Online Services offerings, such as Microsoft Dynamics CRM Online, Exchange Online, Windows Azure, SQL Azure and SharePoint Online. We enable the delivery of online advertising across our...

  • Page 17
    .... Cost of revenue increased $240 million or 2%, primarily reflecting increased online costs and charges resulting from the discontinuation of the KIN phone, offset in part by decreased Xbox 360 console costs and reductions in other costs due to resource management efforts. Research and development...

  • Page 18
    ... increased server and server application revenue, reflecting recognition of deferred revenue from previously signed agreements and continued adoption of the Windows Server Platform and applications through SQL Server, Enterprise CAL Suites, and System Center products. Foreign currency exchange rates...

  • Page 19
    ...by growth in Windows Server, SQL Server and Enterprise CAL Suites revenue, reflecting increased revenue from annuity volume licensing agreements and continued adoption of Windows platform applications, offset in part by a decline in developer tools revenue. Enterprise Services revenue was relatively...

  • Page 20
    ...Online Services Division ("OSD") offerings include Bing, MSN, and advertiser and publisher tools. Yahoo! Commercial Agreement On December 4, 2009, we entered into a definitive agreement with Yahoo! whereby Microsoft will provide the exclusive algorithmic and paid search platform for Yahoo! Web sites...

  • Page 21
    ... organizations, and divisions of global enterprises. We evaluate our results based upon the nature of the end user in two primary parts: business revenue, which includes Microsoft Office system revenue generated through volume licensing agreements and Microsoft Dynamics revenue; and consumer revenue...

  • Page 22
    ..., Xbox LIVE, and Xbox 360 accessories), the Zune digital music and entertainment platform ("Zune"), PC software games, online games and services, Mediaroom (our Internet protocol television software), Windows Phone and Windows Embedded device platforms, application software for Apple's Macintosh...

  • Page 23
    ... distribution centers; costs incurred to include software on PCs sold by OEMs, to drive traffic to our Web sites and to acquire online advertising space ("traffic acquisition costs"); costs incurred to support and maintain Internet-based products and services; warranty costs; inventory valuation...

  • Page 24
    ... decreased third-party development and programming costs and the capitalization of certain Microsoft Office system software development costs. These decreases were offset in part by the capitalization of certain software and development costs related to Windows 7 product development in the prior...

  • Page 25
    ... a resource management program to reduce employee headcount. We completed this program in fiscal year 2010, reducing our overall headcount by approximately 5,300 in various functions, including research and development, marketing, sales, finance, legal, human resources, and information technology...

  • Page 26
    ..., Federal Home Loan Mortgage Corporation, and Government National Mortgage Association. 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. Cash and/or security interests are received as...

  • Page 27
    ... used to repay outstanding commercial paper, leaving $1.0 billion of commercial paper outstanding as of June 30, 2010. Each $1,000 principal amount of notes is convertible into 29.94 shares of Microsoft common stock at a conversion price of $33.40 per share. Prior to March 15, 2013, the notes will...

  • Page 28
    ... services to be performed in the future, Xbox LIVE subscriptions; unspecified upgrades/enhancements of Microsoft Internet Explorer on a when-and-if-available basis for Windows XP; Microsoft Dynamics business solutions products; technology guarantee programs, including the 2010 Microsoft Office...

  • Page 29
    ...remainder were repurchased under the 2008 Program. Dividends During fiscal years 2010 and 2009, our Board of Directors declared the following dividends: Declaration Date Dividend Per Share Record Date Total Amount (In millions) Fiscal Year 2010 Payment Date September 18, 2009 December 9, 2009 March...

  • Page 30
    ... 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. We have operating leases for most U.S. and international sales and support offices and...

  • Page 31
    ... elements. 2007 Microsoft Office system revenue is subject to deferral as a result of the 2010 Microsoft Office system technology guarantee program, which started March 5, 2010. This program allows customers who purchased certain versions of the 2007 Microsoft Office system to receive an upgrade to...

  • Page 32
    ... analysis of our Online Services Division goodwill balance during the first quarter of fiscal year 2010 in connection with the disposal of Razorfish. No impairment of goodwill was identified. Research and Development Costs Costs incurred internally in researching and developing a computer software...

  • Page 33
    ... We provide for the estimated costs of hardware and software warranties at the time the related revenue is recognized. For hardware warranty, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product...

  • Page 34
    ... careful selection and training of qualified personnel, and a program of internal audits. The Company engaged Deloitte & Touche LLP, an independent registered public accounting firm, to audit and render an opinion on the consolidated financial statements and internal control over financial reporting...

  • Page 35
    .... The VaR model is not intended to represent actual losses in fair value, including determinations of other-than-temporary losses in fair value in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), but is used as a risk estimation and management tool. The...

  • Page 36
    ... AND SUPPLEMENTARY DATA INCOME STATEMENTS (In millions, except per share amounts) Year Ended June 30, 2010 2009 2008 Revenue Operating expenses: Cost of revenue Research and development Sales and marketing General and administrative Employee severance Total operating expenses Operating income...

  • Page 37
    BALANCE SHEETS (In millions) June 30, 2010 2009 Assets Current assets: Cash and cash equivalents Short-term investments (including securities loaned of $62 and $1,540) Total cash, cash equivalents, and short-term investments Accounts receivable, net of allowance for doubtful accounts of $375 and $...

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

  • Page 39
    ...principle relating to costs of certain compensated absences Net income Other comprehensive income: Net unrealized gains on derivatives Net unrealized gains (losses) on investments Translation adjustments and other Comprehensive income Common stock cash dividends Common stock repurchased Balance, end...

  • Page 40
    ... and Windows 7 is not subject to a similar deferral because there are no significant undelivered elements. Revenue for products under the technology guarantee programs, which provide free or significantly discounted rights to use upcoming new versions of a software product if an end user licenses...

  • Page 41
    ... distribution centers; costs incurred to include software on PCs sold by OEMs, to drive traffic to our Web sites and to acquire online advertising space ("traffic acquisition costs"); costs incurred to support and maintain Internet-based products and services; warranty costs; inventory valuation...

  • Page 42
    ... option pricing models and discounted cash flow models. Our Level 3 non-derivative assets primarily comprise investments in certain corporate bonds. We value these corporate bonds using internally developed valuation models, inputs to which include interest rate curves, credit spreads, stock prices...

  • Page 43
    ... are not publicly traded are recorded at cost or using the equity method. 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. Cash and/or security interests are received as collateral for...

  • Page 44
    ... Charged to costs and other Write-offs Balance, end of period Inventories $ 451 45 (121 ) $ 375 $ 153 360 (62) $ 451 $ 117 88 (52) $ 153 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...

  • Page 45
    ... research and development at fair value and requires the expensing of acquisition-related costs as incurred. We have applied this guidance to business combinations completed since July 1, 2009. On July 1, 2009, we adopted guidance issued by the FASB that changes the accounting and reporting for...

  • Page 46
    ...Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments (In millions) June 30, 2010 Cost Basis Cash Mutual funds Commercial paper Certificates of deposit U.S. Government and Agency securities Foreign government bonds Mortgage-backed securities Corporate...

  • Page 47
    ... 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-backed securities Corporate notes and bonds Municipal securities Common and preferred stock...

  • Page 48
    ... 3,952 $ 34,003 We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently...

  • Page 49
    ... they are a low cost method of managing exposure to individual credit risks or groups of credit risks. As of June 30, 2010 and 2009, the total notional amounts of credit contracts purchased and sold were immaterial. Commodity We use broad-based commodity exposures to enhance portfolio returns and to...

  • Page 50
    ... master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk: Foreign Exchange Contracts Equity Contracts Interest Rate Contracts Credit Contracts Commodity Contracts Total Derivatives (In millions) June 30, 2010 Assets Derivatives...

  • Page 51
    ... Exchange Contracts Equity Contracts Interest Rate Contracts Credit ...losses) on contracts designated as fair value hedges and their related hedged items: (In millions) Year Ended June 30, Foreign Exchange Contracts 2010 2009 Derivatives Hedged items Total Equity Contracts $ (57) 60 $ 3 $ 121...

  • Page 52
    ...below are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities. (In millions) Year Ended June 30, 2010 2009 Foreign exchange contracts Equity contracts Interest-rate contracts Credit contracts Commodity contracts Total $ 106 12 (4) 22 (1) $ 135...

  • Page 53
    ... 2 Level 3 Netting (a) Net Fair Value 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 and preferred stock Derivatives Total Liabilities $ 982...

  • Page 54
    ... securities classified as available-for-sale with changes in fair value included in OCI. Corporate Notes and Bonds Common and Preferred Stock (In millions) Year Ended June 30, 2010 Derivative Assets Total Balance, beginning of period Total realized and unrealized gains (losses): Included...

  • Page 55
    ... 8 - PROPERTY AND EQUIPMENT The components of property and equipment were as follows: (In millions) June 30, $ 172 16 552 $ 740 $ 170 45 502 $ 717 2010 2009 Land Buildings and improvements Leasehold improvements Computer equipment and software Furniture and equipment Total, at cost Accumulated...

  • Page 56
    ... as of June 30, 2009 Purchase Accounting Adjustments and Other Balance as of June 30, 2010 Acquisitions Acquisitions Windows & Windows Live Division Server and Tools Online Services Division Microsoft Business Division Entertainment and Devices Division Total $ 153 738 6,274 4,191 752 $ 1 233...

  • Page 57
    ... paper program. In June 2010, we reduced the size of our credit facility from $2.25 billion to $1.0 billion due to the reduction in commercial paper outstanding. As of June 30, 2010, we were in compliance with the financial covenant in the credit facility agreement, which requires a coverage ratio...

  • Page 58
    ... used to repay outstanding commercial paper, leaving $1.0 billion of commercial paper outstanding as of June 30, 2010. Each $1,000 principal amount of notes is convertible into 29.94 shares of Microsoft common stock at a conversion price of $33.40 per share. Prior to March 15, 2013, the notes will...

  • Page 59
    ...items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows: Year Ended June 30, 2010 2009 2008 Federal statutory rate Effect of: Foreign earnings taxed at lower rates Internal Revenue Service settlement European...

  • Page 60
    ...if recognized, would affect our effective tax rate. Interest on unrecognized tax benefits was $193 million, $230 million, and $121 million in fiscal years 2010, 2009 and 2008, respectively. As of June 30, 2010, 2009 and 2008, we had accrued interest related to uncertain tax positions of $747 million...

  • Page 61
    ... of Microsoft Internet Explorer on a when-and-if-available basis for Windows XP, and technology guarantee programs. Other Also included in unearned revenue are payments for post-delivery support and consulting services to be performed in the future; Xbox LIVE subscriptions; Microsoft Dynamics...

  • Page 62
    ... related to these indemnifications in our financial statements. Yahoo! Commercial Agreement On December 4, 2009, we entered into a definitive agreement with Yahoo! whereby Microsoft will provide the exclusive algorithmic and paid search platform for Yahoo! Web sites. The transaction received...

  • Page 63
    ... paid search services prior to migration to Microsoft's platform. Product Warranty The changes in our aggregate product warranty liabilities, which are included in other current liabilities and other long term-liabilities on our balance sheets, were as follows: (In millions) Year Ended June 30, 2010...

  • Page 64
    ...of December 2010. 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 violated a Uniloc...

  • Page 65
    ... Texas claiming that various Microsoft products including Windows client and server operating systems software and communications software infringe two patents related to technology for securely communicating over the Internet. This case was tried by a jury in March 2010. The jury returned a verdict...

  • Page 66
    ... year 2008 were repurchased under the plan approved by our Board of Directors during the first quarter of fiscal year 2007. Dividends In fiscal year 2010, our Board of Directors declared the following dividends: Declaration Date Dividend Per Share Record Date Total Amount (In millions) Payment...

  • Page 67
    ...In millions) Year Ended June 30, 2010 2009 2008 Total stock-based compensation expense Income tax benefits related to stock-based compensation Employee Stock Purchase Plan $ 1,891 $ 662 $ 1,708 $ 598 $ 1,479 $ 518 We have an employee stock purchase plan for all eligible employees. Shares of our...

  • Page 68
    ... by the closing price of Microsoft common stock on August 31 of each year. Activity for All Stock Plans The fair value of each award is estimated on the date of grant using the following assumptions: Year Ended June 30, 2010 2009 2008 Dividends per share (quarterly amounts) Interest rates range...

  • Page 69
    ...average grant-date fair value Stock Options 10 $ 25.93 19 $ 27.82 In fiscal year 2004, we began granting employees and non-employee directors SAs rather than non-qualified and incentive stock options as part of our equity compensation plans. Since then, stock options issued to employees have been...

  • Page 70
    ... a resource management program to reduce discretionary operating expenses, employee headcount, and capital expenditures. As part of this program, we announced the elimination of 5,000 positions in research and development, marketing, sales, finance, legal, human resources, and information technology...

  • Page 71
    ...Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with accounting principles generally accepted in the U.S. ("U.S. GAAP"). Our five segments are Windows & Windows Live Division; Server and Tools; Online Services...

  • Page 72
    ...Xbox 360 platform, the Zune digital music and entertainment platform, PC software games, online games and services, Mediaroom (our Internet protocol television software), Windows Phone, Windows Embedded device platforms, application software for Apple's Macintosh computers, and Microsoft PC hardware...

  • Page 73
    ...organizations. Revenues from external customers, classified by significant product and service offerings were as follows: (In millions) Year Ended June 30, 2010 2009 2008 Microsoft Office system Windows PC operating systems Server products and tools Xbox 360 platform Consulting and product support...

  • Page 74
    ...$276 million of revenue deferred to future periods relating to the Windows 7 Deferral. Includes employee severance of $290 million and $40 million (pre-tax) in the third and fourth quarters of the year ended June 30, 2009, respectively. Includes charge of $1.4 billion (â,¬899 million) related to the...

  • Page 75
    ... 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, 2010 and 2009, and the related consolidated statements of income, cash...

  • Page 76
    ... by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL...

  • Page 77
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Microsoft Corporation: We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2010, based on criteria established in Internal Control - Integrated...

  • Page 78
    ... President, Human Resources Stephen A. Elop President, Microsoft Business Division Peter S. Klein Chief Financial Officer Robert L. Muglia President, Server and Tools Craig J. Mundie Chief Research and Strategy Officer Steven J. Sinofsky President, Windows & Windows Live Division Bradford L. Smith...

  • Page 79
    ... to access the annual report and proxy statement online. The service gets you the information you need faster and also gives you the power and convenience of online proxy voting. To sign up for this free service, visit the Annual Report site on the Investor Relations website at: www.microsoft.com...

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