Microsoft 2012 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... fiscal year 2012, revenue grew to a record $73.7 billion. We also maintained strong cost discipline resulting in cash flow from operations of $31.6 billion, an increase of 17 percent from the prior year. In addition, we returned $10.7 billion to shareholders through stock buybacks and dividends. We...

  • Page 3
    ... number of personal and corporate devices. To address these opportunities, businesses turn to Microsoft. They count on our world-class business applications like Microsoft Dynamics, Office, Exchange, SharePoint, Lync, and our business intelligence solutions. They rely on our technology to manage...

  • Page 4
    ...Microsoft - an era of incredible opportunity for us, for the 8 million developers building apps for our devices, for the more than 640,000 partners worldwide and, most important, for the people and businesses using... thank you for your support. Steven A. Ballmer Chief Executive Officer October 9, 2012

  • Page 5
    ..., ISSUER PURCHASES OF EQUITY SECURITIES, DIVIDENDS, AND STOCK PERFORMANCE FINANCIAL HIGHLIGHTS (In millions, except per share data) Year Ended June 30, 2012 2011 2010 2009 2008 Revenue Operating income Net income Diluted earnings per share Cash dividends declared per share Cash, cash equivalents...

  • Page 6
    ... the following dividends: Declaration Date Dividend Per Share Record Date Total Amount (In millions) Payment Date September 20, 2011 December 14, 2011 March 13, 2012 June 13, 2012 $ $ $ $ 0.20 0.20 0.20 0.20 November 17, 2011 February 16, 2012 May 17, 2012 August 16, 2012 $ $ $ $ 1,683 1,683...

  • Page 7
    ... 6/12 Microsoft Corporation S&P 500 NASDAQ Computer 100.00 100.00 100.00 94.69 86.88 96.38 83.82 64.10 93.36 82.69 73.35 102.86 95.69 95.87 139.68 115.66 101.09 162.75 * $100 invested on 6/30/07 in stock or index, including reinvestment of dividends

  • Page 8
    ...; software development tools; video games; and online advertising. We also design and sell hardware including the Xbox 360 gaming and entertainment console, Kinect for Xbox 360, Xbox 360 accessories, and Microsoft PC hardware products. We provide consulting and product and solution support services...

  • 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
    ... the server platform, database, business intelligence, storage, management and operations, virtualization, service-oriented architecture platform, security and identity software. Server and Tools also builds standalone and software development lifecycle tools for software architects, developers...

  • Page 11
    ...the sale of search and display advertising, accounting for nearly all of OSD's annual revenue. Expanding Bing beyond a standalone consumer search engine, we continue to expand our use of Bing's technology by integrating the platform into other Microsoft products, including Xbox 360 and Windows Phone...

  • Page 12
    ...and divisions of global enterprises. Approximately 80% of MBD revenue is generated from sales to businesses, which includes Microsoft Office system revenue generated through volume licensing agreements and Microsoft Dynamics revenue. Revenue from sales to businesses generally depends upon the number...

  • Page 13
    ... Microsoft Office and Xbox LIVE. Through a strategic alliance, Windows Phone and Nokia are jointly creating new mobile products and services and extending established product and services to new markets. Principal Products and Services: Xbox 360 gaming and entertainment console, Kinect for Xbox 360...

  • Page 14
    ... actively in the U.S. and internationally to ensure the enforcement of copyright, trademark, trade secret, and other protections that apply to our software and hardware products, services, business plans, and branding. We are a leader among technology companies in pursuing patents and currently have...

  • Page 15
    ..., but most operate at a local or regional level. Distributors and Resellers Many organizations that license our products and services through enterprise agreements transact directly with us, with sales support from solution integrators, independent software vendors, web agencies, and developers that...

  • Page 16
    ...renew software assurance upon the expiration of existing volume licensing agreements. Online services are also available for purchase through the Select Plus Program, and subscriptions are generally structured with terms between one and three years. Services Provider Licensing The Microsoft Services...

  • 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
    ... revenue by developing, licensing, and supporting a wide range of software products and services, including cloud-based services, by designing and selling hardware, and by delivering relevant online advertising to a global audience. Our most significant expenses are related to compensating employees...

  • Page 19
    ... - Dynamics, Exchange, Lync, Skype, Office, Office 365, SharePoint, Windows Live, and Windows Phone. 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...

  • Page 20
    ... our OSD business segment. Other key changes in operating expenses were: • Cost of revenue increased $2.0 billion or 13%, reflecting higher costs associated with providing Server and Tools products and services, payments made to Nokia related to joint strategic initiatives, higher Xbox 360 royalty...

  • Page 21
    ... costs associated with our online offerings, including traffic acquisition costs, and increased volumes of Xbox 360 consoles and Kinect for Xbox 360 sold. Sales and marketing expenses increased $726 million or 5%, primarily reflecting increased advertising and marketing of the Xbox 360 platform...

  • Page 22
    ... support services and Microsoft Consulting Services. We also offer developer tools, training, and certification. Approximately 55% of Server and Tools revenue comes primarily from multi-year volume licensing agreements, approximately 25% is purchased through transactional volume licensing programs...

  • Page 23
    ...-party enterprise software advisors and increased corporate marketing activities. Online Services Division Percentage Change 2012 Versus 2011 Percentage Change 2011 Versus 2010 (In millions, except percentages) 2012 2011 2010 Revenue Operating loss * Not meaningful $ 2,867 $ (8,121 ) $ 2,607...

  • Page 24
    ... the Yahoo! Commercial Agreement. Research and development increased $123 million or 11% due to increased headcount-related costs. Microsoft Business Division Percentage Change 2012 Versus 2011 Percentage Change 2011 Versus 2010 (In millions, except percentages) 2012 2011 2010 Revenue Operating...

  • Page 25
    ..., Kinect for Xbox 360, Xbox 360 video games, Xbox LIVE, and Xbox 360 accessories), Mediaroom (our Internet protocol television software), Skype, and Windows Phone, including related patent licensing revenue. In November 2010, we released Kinect for Xbox 360. We acquired Skype on October 13, 2011...

  • Page 26
    ...revenue includes: manufacturing and distribution costs for products sold and 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 websites, and to acquire online...

  • Page 27
    ... include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel and the costs of advertising, promotions, trade shows, seminars, and other programs. Fiscal year 2012 compared with fiscal year 2011 Sales and...

  • Page 28
    ... expenses associated with the inception of the Yahoo! Commercial Agreement. Goodwill Impairment We conducted our annual goodwill impairment test as of May 1, 2012 for all reporting units. This test, which was based on our most recent cash flow forecast, indicated that OSD's carrying value exceeded...

  • Page 29
    ... resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico, which have lower income tax rates. Our fiscal year 2012 effective rate increased by 6% from fiscal year 2011 mainly due to a nonrecurring...

  • Page 30
    ... loaned are mainly due to fluctuations in the demand for the securities. Valuation In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level...

  • Page 31
    ... in cash used for net purchases, maturities, and sales of investments. Fiscal year 2011 compared with fiscal year 2010 Cash flows from operations increased $2.9 billion during the current fiscal year to $27.0 billion due mainly to increased revenue and cash collections from customers. Cash used in...

  • Page 32
    ... and shares of our common stock, at our election. Because the convertible debt may be wholly or partially settled in cash, we are required to separately account for the liability and equity components of the notes in a manner that reflects our nonconvertible debt borrowing rate when interest costs...

  • Page 33
    ... price. The purchased capped calls were valued at $40 million and recorded to stockholders' equity. Unearned Revenue Unearned revenue at June 30, 2012 comprised mainly unearned revenue from volume licensing programs. Unearned revenue from volume licensing programs represents customer billings...

  • Page 34
    ... lawsuits) from the amounts presented, as the amounts that will be settled in cash are not known and the timing of any payments is uncertain. We have also excluded unearned revenue of $1.4 billion and non-cash items of $202 million. Other Planned Uses of Capital On July 18, 2012, we acquired Yammer...

  • Page 35
    ...-forward activities on purchases, sales, issuances, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). Adoption of this new guidance did not have a material impact on our financial statements. On January 1, 2012, we adopted...

  • Page 36
    ...benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on...

  • Page 37
    ... been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences 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...

  • Page 38
    ...are reliable for preparing financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities, careful selection and training of qualified personnel, and a program of internal audits. The...

  • Page 39
    ... to economic risk from foreign currency exchange rates, interest rates, credit risk, equity prices, and commodity prices. A portion of these risks is hedged, but they may impact our financial statements. Foreign Currency Certain forecasted transactions, assets, and liabilities are exposed to foreign...

  • Page 40
    ... forth the one-day VaR for substantially all of our positions as of June 30, 2012 and June 30, 2011 and for the year ended June 30, 2012: (In millions) June 30, 2012 Risk Categories June 30, 2011 Average Year Ended June 30, 2012 High Low Foreign currency Interest rate Equity Commodity $ 98 $ 71...

  • Page 41
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INCOME STATEMENTS (In millions, except per share amounts) Year Ended June 30, 2012 2011 2010 Revenue Operating expenses: Cost of revenue Research and development Sales and marketing General and administrative Goodwill impairment Total operating expenses ...

  • Page 42
    BALANCE SHEETS (In millions) June 30, 2012 2011 Assets Current assets: Cash and cash equivalents Short-term investments (including securities loaned of $785 and $1,181) Total cash, cash equivalents, and short-term investments Accounts receivable, net of allowance for doubtful accounts of $389 and $...

  • Page 43
    ... to property and equipment Acquisition of companies, net of cash acquired, and purchases of intangible and other assets 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...

  • Page 44
    ... comprehensive income: Net unrealized gains (losses) on derivatives Net unrealized gains (losses) on investments Translation adjustments and other Comprehensive income Common stock cash dividends Common stock repurchased Balance, end of period Total stockholders' equity See accompanying notes. $ 63...

  • Page 45
    ... 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 of estimates include: loss contingencies; product warranties; the fair value of...

  • Page 46
    ...revenue includes; manufacturing and distribution costs for products sold and 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 websites, and to acquire online...

  • Page 47
    ... corporate bonds and goodwill when it is recorded at fair value due to an impairment charge. We value the Level 3 corporate bonds using internally developed valuation models, inputs to which include interest rate curves, credit spreads, stock prices, and volatilities. Our Level 3 derivative assets...

  • Page 48
    ... than one year 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...

  • Page 49
    ... 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 for internal use, three years; computer equipment, two to three years; buildings and improvements, five to...

  • Page 50
    ...-forward activities on purchases, sales, issuances, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). Adoption of this new guidance did not have a material impact on our financial statements. On January 1, 2012, we adopted...

  • Page 51
    ... 30, 2012 2011 2010 Shares excluded from calculations of diluted EPS 1 21 28 In June 2010, we issued $1.25 billion of zero-coupon debt securities that are convertible into shares of our common stock if certain conditions are met. As of June 30, 2012, none of these securities had met price or...

  • Page 52
    ..., including associated derivatives, were as follows: Unrealized Gains Unrealized Losses Recorded Basis $ (298 ) 1,418 (556 ) 564 $ (80 ) 734 (215 ) 439 $ (69 ) 605 (188 ) 348 $ $ $ (In millions) June 30, 2012 Cost Basis Cash and Cash Equivalents Short-term Investments Equity and Other...

  • Page 53
    ... rates. Unrealized losses from domestic and international equities are due to market price movements. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of June 30, 2012. At June 30, 2012 and 2011...

  • Page 54
    ... as hedging instruments are also used to manage the variability in exchange rates on accounts receivable, cash, and intercompany positions, and to manage other foreign currency exposures. As of June 30, 2012, the total notional amounts of these foreign exchange contracts purchased and sold were...

  • Page 55
    ... swaps as they are a low cost method of managing exposure to individual credit risks or groups of credit risks. As of June 30, 2012, the total notional amounts of credit contracts purchased and sold were $318 million and $456 million, respectively. As of June 30, 2011, the total notional amounts of...

  • Page 56
    ... enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk: (In millions) June 30, 2012 Assets Foreign Exchange Contracts Equity Contracts Interest Rate Contracts Credit Contracts Commodity Contracts Total Derivatives Non...

  • Page 57
    ... offset by unrealized gains (losses) in the underlying available-for-sale securities. (In millions) Year Ended June 30, 2012 2011 2010 Foreign exchange contracts Equity contracts Interest-rate contracts Credit contracts Commodity contracts Total $ (119 ) (85 ) 93 (7 ) (121 ) $ (239 ) $ (27 ) 35...

  • Page 58
    ... 2011 Assets Level 1 Level 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...

  • Page 59
    ... total Net Fair Value of assets above to the balance sheet presentation of these same assets in Note 4 - Investments. (In millions) June 30, 2012 2011 Net fair value of assets measured at fair value on a recurring basis Cash Common and preferred stock measured at fair value on a nonrecurring basis...

  • Page 60
    ... shares of Skype Global S.á r.l. ("Skype"), a leading global provider of software applications and related Internet communications products based in Luxembourg, for $8.6 billion, primarily in cash. The major classes of assets and liabilities to which we allocated the purchase price were goodwill...

  • Page 61
    ...the reporting unit level using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses. Upon completion of the annual test, OSD goodwill...

  • Page 62
    ... these assets and liabilities included the discount rates, royalty rates, and obsolescence rates used in valuing the intangible assets, and pricing of comparable transactions in the market in valuing the tangible assets. No other instances of impairment were identified in our May 1, 2012 test. NOTE...

  • Page 63
    ... as of June 30, 2012 and 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 February 8, 2016 June 1, 2019 October 1, 2020...

  • Page 64
    ... and shares of our common stock, at our election. Because the convertible debt may be wholly or partially settled in cash, we are required to separately account for the liability and equity components of the notes in a manner that reflects our nonconvertible debt borrowing rate when interest costs...

  • Page 65
    ...$ 25,013 The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows: Year Ended June 30, 2012 2011 2010 Federal statutory rate Effect of: Foreign earnings taxed at lower rates Goodwill impairment I.R.S. settlement...

  • Page 66
    ... in the table above relates to a portion of a $2.0 billion net operating loss carryforward generated primarily in foreign countries and acquired primarily through our acquisition of Skype that may not be realized. Deferred income tax balances reflect the effects of temporary differences between...

  • Page 67
    ... revenue are payments for post-delivery support and consulting services to be performed in the future; Xbox LIVE subscriptions and prepaid points; sales of Windows 7 with an option to upgrade to Windows 8 at a discounted price (the "Windows Upgrade Offer"); Microsoft Dynamics business solutions...

  • Page 68
    ... antimalware solution, from Server and Tools to the Microsoft Business Division. NOTE 15 - OTHER LONG-TERM LIABILITIES (In millions) June 30, 2012 2011 Tax contingencies and other tax liabilities Legal contingencies Other Total NOTE 16 - COMMITMENTS AND GUARANTEES Construction and Operating Leases...

  • Page 69
    ...liabilities related to these indemnifications in our financial statements. Yahoo! Commercial Agreement On December 4, 2009, we entered into a 10-year agreement with Yahoo! Inc. ("Yahoo!") whereby Microsoft will provide the exclusive algorithmic and paid search platform for Yahoo! websites. Microsoft...

  • Page 70
    ... annual revenue. Patent and Intellectual Property Claims Motorola Litigation In October 2010, Microsoft filed patent infringement complaints against Motorola Mobility ("Motorola") with the International Trade Commission ("ITC") and in U.S. District Court in Seattle for infringement of nine Microsoft...

  • Page 71
    ... many Microsoft products including Windows Mobile 6.5 and Windows Phone 7, Windows Marketplace, Silverlight, Windows Vista and 7, Exchange Server 2003 and later, Exchange ActiveSync, Windows Live Messenger, Lync Server 2010, Outlook 2010, Office 365, SQL Server, Internet Explorer 9, Xbox, and Kinect...

  • Page 72
    ... ActiveSync protocol employed by Windows Phone 7, Outlook Mobile, Hotmail Mobile, Exchange Online, Exchange Server, and Hotmail Server. Motorola seeks damages and an injunction. In May 2012, the Court invited further argument and evidence from the parties relating to Microsoft's "prior use" defense...

  • Page 73
    .... We repurchased the following shares of common stock under the above-described repurchase plan using cash resources: (In millions) Year Ended June 30, Shares Amount 2012 Shares Amount 2011 Shares Amount 2010 First quarter Second quarter Third quarter Fourth quarter Total Dividends 38 39 31 34 142...

  • Page 74
    The dividend declared on June 15, 2011 was included in other current liabilities as of June 30, 2011. NOTE 19 - OTHER COMPREHENSIVE INCOME (LOSS) The activity in other comprehensive income (loss) and related income tax effects were as follows: (In millions) Year Ended June 30, Net Unrealized Gains (...

  • Page 75
    ... is payable to the executive 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...

  • Page 76
    ... Weighted average grant-date fair value Following are the fair values of stock plan awards vested during the periods reported: (In millions) 2012 2011 2010 Total vest-date fair value of stock awards vested Total vest-date fair value of shared performance stock awards vested Stock Options $ 1,971...

  • Page 77
    ... price of $9.33. During the periods reported, the following stock option exercise activity occurred: (In millions) 2012 2011 2010 Total intrinsic value of stock options exercised Cash received from stock option exercises Tax benefit realized from stock option exercises Employee Stock Purchase Plan...

  • Page 78
    ... Division offerings include Microsoft Office, SharePoint, Exchange, Lync, and Microsoft Dynamics business solutions. Entertainment and Devices Division - Entertainment and Devices Division offerings include the Xbox 360 entertainment platform, including Kinect for Xbox 360, Skype, and Windows Phone...

  • Page 79
    ... operating income (loss) were as follows during the periods presented: (In millions) Year Ended June 30, Revenue 2012 2011 2010 Windows & Windows Live Division Server and Tools Online Services Division Microsoft Business Division Entertainment and Devices Division Unallocated and other Consolidated...

  • Page 80
    ... offerings were as follows: (In millions) Year Ended June 30, 2012 2011 2010 Microsoft Office system Windows PC operating systems Server products and tools Xbox 360 platform Consulting and product support services Advertising Other Total $ 22,299 17,320 14,232 8,045 3,976 3,181 4,670 $ 73,723...

  • Page 81
    ... charge related to our OSD business segment which decreased net income by $6.2 billion and diluted earnings per share by $0.73. Includes a partial settlement of an I.R.S. audit of tax years 2004 to 2006, which increased net income by $461 million. Reflects an effective tax rate of 7% due mainly to...

  • Page 82
    ... consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2012 and 2011, and the related consolidated statements of income, cash flows, and stockholders' equity for each of the three years in the period ended June 30, 2012. These financial statements...

  • Page 83
    ... as required 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...

  • Page 84
    ...of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls...

  • Page 85
    ... Live Division Bradford L. Smith Executive Vice President, General Counsel and Secretary B. Kevin Turner Chief Operating Officer Lisa E. Brummel Chief People Officer Craig J. Mundie Chief Research and Strategy Officer Satya Nadella President, Server & Tools Kurt D. DelBene President, Microsoft...

  • Page 86
    ...com You can also send mail to the transfer agent at: Microsoft Corporation c/o American Stock Transfer & Trust Company P.O. Box 2362 New York, NY 10272-2362 Shareholders can sign up for electronic alerts to access the annual report and proxy statement online. The service gets you the information you...

  • Page 87