Microsoft 2011 Annual Report Download

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Table of contents

  • Page 1
    1

  • Page 2
    ...business spending increase and strong demand for Windows 7, Office 2010, SharePoint, Exchange, Lync, Microsoft Dynamics, Windows Server, System Center, and SQL Server. Windows 7 and Office 2010 continue to sell at record rates. At the end of fiscal year 2011, more than 400 million Windows 7 licenses...

  • Page 3
    ... on the cloud for both businesses and consumers. For businesses, we're focused on enabling all of our products for the cloud including continuing our work with Windows Azure, Office 365, and Microsoft Dynamics services. For consumers, we're focused on Skype, Bing, Windows Live and Xbox Live. 3

  • Page 4
    ..., we have always believed that technology creates opportunities for people and organizations to achieve their dreams. We're excited about what we will be able to accomplish next year and beyond. Thank you for your continued support. Steven A. Ballmer Chief Executive Officer September 2, 2011 4

  • Page 5
    ... STOCK PRICE INFORMATION, ISSUER PURCHASES OF EQUITY SECURITIES, DIVIDENDS, AND STOCK PERFORMANCE FINANCIAL HIGHLIGHTS (In millions, except per share data) Year Ended June 30, 2011 2010 2009 2008 2007 Revenue Operating income Net income Diluted earnings per share Cash dividends declared per share...

  • Page 6
    ... under the plan approved by our Board of Directors on September 22, 2008. Dividends In fiscal year 2011, our Board of Directors declared the following dividends: Declaration Date Dividend Per Share Record Date Total Amount (In millions) Payment Date September 21, 2010 December 15, 2010 March 14...

  • Page 7
    ... Microsoft Corporation S&P 500 Index NASDAQ Computer Index 100.00 100.00 100.00 128.23 120.59 126.19 121.43 104.77 117.22 107.48 77.30 98.11 106.04 88.46 119.30 122.71 115.61 157.48 * $100 invested on 6/30/06 in stock or index, including reinvestment of dividends...

  • Page 8
    ... Office, Exchange, SharePoint, and Lync; Microsoft Dynamics CRM Online customer relationship management services for sales, service and marketing professionals provided through a familiar Microsoft Outlook interface; and the Azure family of platform and database services that helps developers...

  • Page 9
    ..., and internal processes. OPERATING SEGMENTS We operate our business in five segments: Windows & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. Our segments provide management with a comprehensive financial view...

  • Page 10
    ... 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 primarily from multi-year volume licensing...

  • Page 11
    ... generally accounts for nearly all of OSD's annual revenue. We provide updated and new online offerings on a frequent basis. In December 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 12
    ...with Microsoft Office, Microsoft Exchange, and Microsoft SharePoint, including its FAST enterprise search technology. The OpenOffice.org project provides a freely downloadable cross-platform application that also has been adapted by various commercial software vendors to sell under their brands. Web...

  • Page 13
    ... businesses compete with both Apple and Google in offering content products and services to the consumer. We believe the Xbox 360 entertainment platform is positioned well against competitive products and services based on significant innovation in hardware architecture, new developer tools, online...

  • Page 14
    ...across a wide spectrum of technologies, tools, and platforms spanning communication and collaboration; information access and organization; entertainment; business and e-commerce; advertising; and devices. While our main research and development facilities are located in Redmond, Washington, we also...

  • Page 15
    ..., Exchange Online, Microsoft Dynamics CRM Online, Microsoft Lync, Microsoft Office 365, Microsoft Office Communications Online, Microsoft Office Live Meeting, SQL Azure, SharePoint Online, Windows Azure, and Windows Intune. Other services delivered online include our online advertising platform with...

  • Page 16
    ...Open program, the Select program allows customers to acquire licenses only, acquire licenses with software assurance, or renew software assurance upon the expiration of existing volume licensing agreements. Online services are also available for purchase through the Select program, and subscriptions...

  • Page 17
    ...; 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, global corporate citizenship initiatives...

  • Page 18
    ... Kinect, Windows, Windows Azure, Windows Phone, Windows Server, and Xbox. Cloud computing transforming the data center and information technology Cloud-based solutions provide customers with software, services and content over the Internet by way of shared computing resources located in centralized...

  • Page 19
    ... to services. We invest significant resources in Dynamics, Exchange, Lync, Office, Office 365, SharePoint, and Windows Live. Economic Conditions, Challenges and Risks As discussed above, our industry is dynamic and highly competitive. We must anticipate changes in technology and business models. Our...

  • Page 20
    ...% 28% 7% 18% 30% Fiscal year 2011 compared with fiscal year 2010 Revenue increased primarily due to strong sales of the Xbox 360 entertainment platform, the 2010 Microsoft Office system, and Server and Tools products, offset in part by lower Windows revenue. Revenue also increased due to the $254...

  • Page 21
    ... Devices Division to Microsoft Business Division, as well as implementing intersegment cost allocations between all segments related to the collaborative investment in mobile platform development. Windows & Windows Live Division Percentage Change 2011 Versus 2010 Percentage Change 2010 Versus 2009...

  • Page 22
    ... support services and Microsoft Consulting Services. We also offer developer tools, training and certification. Approximately 50% of Server and Tools revenue comes primarily from multi-year volume licensing agreements, approximately 30% is purchased through transactional volume licensing programs...

  • Page 23
    ...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 24
    ...Division ("MBD") develops and markets software and services designed to increase personal, team, and organization productivity. MBD offerings include the Microsoft Office system (comprising mainly Office, SharePoint, Exchange and Lync), which generates over 90% of MBD revenue, and Microsoft Dynamics...

  • Page 25
    ... Xbox 360 platform marketing activities. Research and development expenses increased $54 million or 6%, primarily reflecting increased headcount-related expenses, offset in part by decreased third-party development and programming costs. Corporate-Level Activity Percentage Change 2011 Versus 2010...

  • Page 26
    ... programs licensed; operating costs related to product support service centers and product 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...

  • Page 27
    ...fiscal year 2010 Sales and marketing expenses increased primarily as a result of increased advertising and marketing of the Xbox 360 platform, Windows Phone, and Windows and Windows Live, a 5% increase in headcount-related expenses, and increased fees paid to third party enterprise software advisors...

  • Page 28
    ... gains on sales of fixed-income securities. Derivative losses decreased due primarily to higher gains on commodity derivatives offset in part by higher losses on currency contracts used to hedge foreign currency revenue. Fiscal year 2010 compared with fiscal year 2009 Dividends and interest income...

  • Page 29
    ...-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given...

  • Page 30
    ... to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as exchange-traded mutual funds, domestic and international equities, and U.S. treasuries. If quoted prices in active markets for identical assets or liabilities are...

  • Page 31
    ... purchases, sales, and maturities along with a $1.1 billion decrease in additions to property and equipment. Debt Short-term debt During fiscal year 2011, we repaid $1.0 billion of commercial paper, leaving zero outstanding. On November 5, 2010, our $1.0 billion 364-day credit facility expired...

  • Page 32
    ... revenue at June 30, 2011 also included payments for: post-delivery support and consulting services to be performed in the future; Xbox LIVE subscriptions and prepaid points; Microsoft Dynamics business solutions products; OEM minimum commitments; unspecified upgrades/enhancements of Windows Phone...

  • Page 33
    ... amount. The repurchase program may be suspended or discontinued at any time without notice. During the periods reported, we repurchased with cash resources: 447 million shares for $11.5 billion during fiscal year 2011; 380 million shares for $10.8 billion during fiscal year 2010; and 318 million...

  • Page 34
    ... 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 35
    ... material impacts on our financial statements upon adoption. In January 2010, the FASB issued guidance to amend the disclosure requirements related to fair value measurements. The guidance requires the disclosure of roll forward activities on purchases, sales, issuance, and settlements of the assets...

  • Page 36
    ... other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, and for equity securities, our intent and ability to hold, or plans to sell, the investment. For fixed-income securities, we also evaluate whether...

  • Page 37
    ... could materially impact our financial statements. Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of stock-based awards at the grant...

  • Page 38
    STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the preparation of the consolidated financial statements and related information that are presented in this report. The consolidated financial statements, which include amounts based on management's ...

  • 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
    ... 30, 2011: (In millions) June 30, 2011 Risk Categories June 30, 2010 Average Year Ended June 30, 2011 High Low Foreign currency Interest rate Equity Commodity $ $ $ $ 86 58 212 28 $ $ $ $ 57 58 183 19 $ $ $ $ 67 56 211 22 $ $ $ $ 121 65 230 30 $ $ $ $ 40 50 184 18 Total one-day VaR for...

  • Page 41
    ... AND SUPPLEMENTARY DATA INCOME STATEMENTS (In millions, except per share amounts) Year Ended June 30, 2011 2010 2009 Revenue Operating expenses: Cost of revenue Research and development Sales and marketing General and administrative Total operating expenses Operating income Other income (expense...

  • Page 42
    ...including securities loaned of $1,181 and $62) Total cash, cash equivalents, and short-term investments Accounts receivable, net of allowance for doubtful accounts of $333 and $375 Inventories Deferred income taxes Other Total current assets Property and equipment, net of accumulated depreciation of...

  • Page 43
    ... 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 44
    STOCKHOLDERS' EQUITY STATEMENTS (In millions) Year Ended June 30, 2011 2010 2009 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 deficiencies Other, net Balance, end of ...

  • Page 45
    ... 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 warranties, product life cycles, product returns, and stock-based compensation forfeiture rates...

  • Page 46
    ... programs licensed; operating costs related to product support service centers and product 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...

  • Page 47
    ...over the vesting or service period, as applicable, of the stock award (generally four to five years) using the straight-line method. Employee Stock Purchase Plan Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value of the stock on the last...

  • Page 48
    ... or 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...

  • Page 49
    ... Equipment Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired...

  • Page 50
    ... material impacts on our financial statements upon adoption. In January 2010, the FASB issued guidance to amend the disclosure requirements related to fair value measurements. The guidance requires the disclosure of roll forward activities on purchases, sales, issuance, and settlements of the assets...

  • Page 51
    ... Gains Unrealized Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments (In millions) June 30, 2011 Cost Basis Cash $ 1,648 $ Mutual funds 1,752 Commercial 639 paper Certificates of 598 deposit U.S. government and agency 33,607 securities Foreign...

  • Page 52
    ...In millions) June 30, 2010 Cost Basis Unrealized Gains Unrealized Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Cash $ 1,661 $ Mutual funds 1,120 Commercial paper 188 Certificates of deposit 348 U.S. government and 21,036 agency securities Foreign government 518 bonds...

  • Page 53
    ... of June 30, 2010, the total notional amounts of these foreign exchange contracts purchased and sold were $7.8 billion and $5.3 billion, respectively. Equity Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is managed relative to broad...

  • Page 54
    ... 2011 and 2010. The fair values exclude the impact of netting derivative assets and liabilities when a legally enforceable 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...

  • Page 55
    (In millions) Foreign Exchange Contracts Equity Contracts Interest Rate Contracts Credit Contracts Commodity Contracts Total Derivatives Designated hedge derivatives: Short-term investments Other current assets Total Total assets Liabilities $ $ $ 6 123 129 216 $ $ $ 0 0 0 179 $ $ $ 0 0...

  • Page 56
    ... gains (losses) related to fair value hedges and their related hedged items: (In millions) Year Ended June 30, Foreign Exchange Contracts 2011 2010 2009 Derivatives Hedged items Total Equity Contracts $ $ (92) $ 85 (7) $ (57) $ 60 3 $ 121 (120) 1 Derivatives Hedged items Total Cash Flow Hedge...

  • Page 57
    ... by unrealized gains (losses) in the underlying available-for-sale securities. (In millions) Year Ended June 30, 2011 2010 2009 Foreign exchange contracts Equity contracts Interest-rate contracts Credit contracts Commodity contracts Total NOTE 6 - FAIR VALUE MEASUREMENTS Assets and Liabilities...

  • Page 58
    ... master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk. The table below reconciles the total Net Fair Value of assets above to the balance sheet presentation of these same assets in Note 4 - Investments for June 30, 2011 and 2010. (In...

  • Page 59
    ... components of property and equipment were as follows: (In millions) June 30, $ 232 $ 56 1,084 1,372 $ 172 16 552 740 $ 2011 2010 Land Buildings and improvements Leasehold improvements Computer equipment and software Furniture and equipment Total, at cost Accumulated depreciation Total, net...

  • Page 60
    ... millions) Purchase Accounting Adjustments and Other Balance as of June 30, 2010 Purchase Accounting Adjustments and Other Balance as of June 30, 2011 Acquisitions Acquisitions Windows & Windows Live Division Server and Tools Online Services Division Microsoft Business Division Entertainment and...

  • Page 61
    ... 787 28 182 1,158 $ Technology-based intangible assets included $179 million and $249 million as of June 30, 2011 and 2010, respectively, of net carrying amount of software to be sold, leased, or otherwise marketed. We estimate that we have no significant residual value related to our intangible...

  • Page 62
    ... outstanding. On November 5, 2010, our $1.0 billion 364-day credit facility expired. This facility served as a back-up for our commercial paper program. No amounts were drawn against the credit facility during any of the periods presented. Long-term Debt As of June 30, 2011, the total carrying value...

  • Page 63
    ...semi-annual interest record and payment dates were as follows as of June 30, 2011: Stated Interest Rate Effective Interest Rate Interest Record Date Interest Pay Date Interest Record Date Interest Pay Date Due Date Face Value (In millions) Notes September 27, 2013 June 1, 2014 September 25, 2015...

  • Page 64
    ... in the aggregate relate to the total number of shares of our common stock underlying the notes, with a strike price equal to the conversion price of the notes and with a cap price equal to $37.16. The purchased capped calls were valued at $40 million and recorded to stockholders' equity. NOTE 13...

  • Page 65
    ... at the U.S. federal statutory rate and our effective rate were as follows: Year Ended June 30, 2011 2010 2009 Federal statutory rate Effect of: Foreign earnings taxed at lower rates Internal Revenue Service settlement Other reconciling items, net Effective rate 35.0% (15.6)% (1.7)% (0.2)% 17...

  • Page 66
    ... over the billing coverage period. Other Also included in unearned revenue are payments for post-delivery support and consulting services to be performed in the future; Xbox LIVE subscriptions and prepaid points; Microsoft Dynamics business solutions products; technology guarantee programs; OEM...

  • Page 67
    ...(In millions) June 30, 2011 2010 Volume licensing programs Other Total Unearned revenue by segment was as follows: (In millions) June 30, $ $ 14,625 $ 2,495 17,120 $ 12,180 2,650 14,830 2011 2010 Windows & Windows Live Division Server and Tools Microsoft Business Division Other segments Total...

  • Page 68
    ... 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 term of the agreement...

  • Page 69
    ...held in July 2011. In October 2003, Uniloc USA Inc. ("Uniloc"), a subsidiary of a Singapore-based company, filed a patent infringement suit in U.S. District Court in Rhode Island, claiming that product activation technology supporting Windows XP and certain other Microsoft programs violated a Uniloc...

  • Page 70
    ... adverse impact on our financial statements for the period in which the effects become reasonably estimable. NOTE 18 - STOCKHOLDERS' EQUITY Shares Outstanding Shares of common stock outstanding were as follows: (In millions) Year Ended June 30, 2011 2010 2009 Balance, beginning of year Issued...

  • Page 71
    ...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 using cash resources: (In millions) Year Ended June 30, Shares Amount 2011 (a) Shares Amount 2010 (a) Shares Amount...

  • Page 72
    ..., 2011 2010 2009 Stock-based compensation expense Income tax benefits related to stock-based compensation Stock Plans (Excluding Stock Options) Stock awards $ $ 2,166 $ 758 $ 1,891 $ 662 $ 1,708 598 Stock awards ("SAs") are grants that entitle the holder to shares of Microsoft common stock as...

  • Page 73
    ... officers in cash, and the remaining 80% is converted into an SA for shares of Microsoft common stock. The number of shares subject to the SA portion of the award is determined by dividing the value of 80% of the total award by the closing price of Microsoft common stock on the last business day...

  • Page 74
    ... years and expire 10 years from the date of grant. Employee stock options activity during 2011 was as follows: Weighted Average Remaining Contractual Term (Years) Shares (In millions) Weighted Average Exercise Price Aggregate Intrinsic Value (In millions) Balance, July 1, 2010 Exercised Canceled...

  • Page 75
    ... segmented internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. The segment information within this note is reported on that basis. Our five segments are Windows & Windows Live Division; Server and Tools; Online Services Division; Microsoft Business Division; and...

  • Page 76
    ...) Year Ended June 30, Revenue 2011 2010 2009 Windows & Windows Live Division Server and Tools Online Services Division Microsoft Business Division Entertainment and Devices Division Unallocated and other Consolidated (In millions) Year Ended June 30, Operating Income (Loss) $ 18,778 $ 17,107...

  • Page 77
    ...2011 2010 2009 Microsoft Office system Windows PC operating systems Server products and tools Xbox 360 platform Consulting and product support services Advertising... segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an ...

  • Page 78
    ... the tax returns filed and recorded an income tax benefit which lowered our effective tax rate. Reflects $1.7 billion of revenue recognized for sales of Windows Vista with a guarantee to be upgraded to Windows 7 at minimal or no cost and of Windows 7 to original equipment manufacturers and retailers...

  • Page 79
    ... and Stockholders of Microsoft Corporation: We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2011 and 2010, and the related consolidated statements of income, cash flows, and stockholders' equity for each of...

  • Page 80
    .... 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 REPORTING Our management is responsible for establishing and maintaining adequate...

  • Page 81
    ... internal control over financial reporting of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management...

  • Page 82
    ... Financial Officer Steven Sinofsky President, Windows & Windows Live Division Bradford L. Smith Senior Vice President, General Counsel and Secretary B. Kevin Turner Chief Operating Officer Lisa E. Brummel Senior Vice President, Human Resources Kurt D. DelBene President, Microsoft Office Division...

  • Page 83
    ... to have their accounts consolidated. Shareholders who own Microsoft stock through a brokerage account can contact their broker to request consolidation of their accounts. Shareholders can sign up for electronic alerts to access the annual report and proxy statement online. The service gets you the...