Microsoft 2014 Annual Report Download

Download and view the complete annual report

Please find the complete 2014 Microsoft annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 88

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88

Table of contents

  • Page 1

  • Page 2
    ... Microsoft Devices Group that includes Nokia phones, Xbox hardware, Surface, Perceptive Pixel products and accessories. We also announced Office on iPad, which led to 35 million downloads of Word, Excel, PowerPoint and OneNote - becoming many of the most popular applications in the Apple App Store...

  • Page 3
    ... time, it is equally important to evolve our culture - becoming more customer-obsessed across all our products, focusing on leading indicators like usage, and ensuring Microsoft continues to be the best place for smart, curious people to do great work. I believe reinventing productivity and building...

  • Page 4
    ... PURCHASES OF EQUITY SECURITIES, DIVIDENDS, AND STOCK PERFORMANCE FINANCIAL HIGHLIGHTS (In millions, except per share data) Year Ended June 30, 2014 (a) 2013 2012 2011 2010 Revenue Operating income Net income Diluted earnings per share Cash dividends declared per share Cash, cash equivalents, and...

  • Page 5
    ... years 2013 and 2012 were repurchased under the repurchase plan that was announced on September 22, 2008 and expired on September 30, 2013. The above table excludes shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards. Dividends In fiscal year 2014...

  • Page 6
    STOCK PERFORMANCE COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Microsoft Corporation, the S&P 500 Index, and the NASDAQ Computer Index 6/09 6/10 6/11 6/12 6/13 6/14 Microsoft Corporation S&P 500 NASDAQ Computer 100.00 100.00 100.00 98.65 114.43 119.95 114.16 149.55 158.82 137.98 ...

  • Page 7
    ... provide customers with software, services, and content over the Internet by way of shared computing resources located in centralized data centers. Examples of cloud-based computing services we offer include Bing, Microsoft Azure, Microsoft Dynamics CRM Online, Microsoft Office 365, OneDrive, Skype...

  • Page 8
    ... and services provided by the D&C Licensing segment are: Windows, including original equipment manufacturer ("OEM") licensing ("Windows OEM") and other non-volume licensing and academic volume licensing of the Windows operating system and related software; non-volume licensing of Microsoft Office...

  • Page 9
    ... of hardware and software applications, including those that enable productivity, and the largest support network for any operating system. Competitors to the versions of Office included in D&C Licensing include global application vendors such as Apple and Google, numerous web-based competitors, and...

  • Page 10
    ... and software development lifecycle tools for software architects, developers, testers, and project managers. Revenue comes from product revenue, including purchases through volume licensing programs, licenses sold to OEMs, and retail packaged product. CAL provide access rights to certain server and...

  • Page 11
    ... to intelligent systems, including the Internet of Things, by delivering specialized operating systems, tools, and services. Windows Commercial revenue is mainly affected by the demand from commercial customers for volume licensing and software assurance, often reflecting the number of information...

  • Page 12
    ... Office online offerings, Dynamics CRM Online, and Microsoft Azure. Enterprise Services, including Premier product support services and Microsoft Consulting Services assist customers in developing, deploying, and managing Microsoft server and desktop solutions and provide training and certification...

  • Page 13
    ... center in Singapore supports the Japan, India, Greater China, and Asia-Pacific region; and the centers in Fargo, North Dakota, Fort Lauderdale, Florida, Puerto Rico, Redmond, Washington, and Reno, Nevada support Latin America and North America. In addition to the operations centers, we also operate...

  • Page 14
    ... of technologies, tools, and platforms spanning communication and collaboration, information access and organization, entertainment, business and ecommerce, advertising, and devices. While our main research and development facilities are located in Redmond, Washington, we also operate research and...

  • Page 15
    ..., Skype, and Windows Store. We also provide commercial cloud-based services such as Microsoft Dynamics CRM Online, Microsoft Azure, and Office 365 consisting of online versions of Microsoft Office, Exchange, SharePoint, Lync, and Yammer. Other services delivered online include our online advertising...

  • Page 16
    ... time period (generally three years or less). Similar to Open Programs, the Select Plus Program allows customers to acquire licenses only, acquire licenses with software assurance, or renew software assurance upon the expiration of existing volume licensing agreements. A subset of online services...

  • Page 17
    ... press releases on quarterly earnings, product and service announcements, legal developments, and international news; corporate governance information including our articles of incorporation, bylaws, governance guidelines, committee charters, codes of conduct and ethics, global corporate citizenship...

  • Page 18
    ...online advertising to a global audience. Our most significant expenses are related to compensating employees, designing, manufacturing, marketing, and selling our products and services, datacenter costs in support of our cloud-based services, and income taxes. Industry Trends Our industry is dynamic...

  • Page 19
    ... satisfied, or connect with customers in new and compelling ways. They work to unlock business insights from a world of data. They rely on our technology to manage employee corporate identity, and to manage and secure corporate information accessed and stored across a growing number of devices. To...

  • Page 20
    ... platform across the PC, tablet, phone, server, other devices, and the cloud to drive a thriving ecosystem of developers, unify the cross-device user experience, and increase agility when bringing new advances to market. Building and running cloud-based services in ways that unleash new experiences...

  • Page 21
    ... Office, Exchange, SharePoint, Lync, and related CALs ("Office Commercial"); Microsoft Dynamics business solutions, excluding Dynamics CRM Online; and Skype; and Commercial Other, comprising: Enterprise Services, including Premier Support Services and Microsoft Consulting Services; Commercial Cloud...

  • Page 22
    ... in cost of revenue. Cost of revenue increased mainly due to higher volumes of Xbox consoles and Surface devices sold, and $575 million higher datacenter expenses, primarily in support of Commercial Cloud revenue growth. Cost of revenue also increased due to the acquisition of NDS. Operating income...

  • Page 23
    ... OF OPERATIONS Devices and Consumer Percentage Change 2014 Versus 2013 Percentage Change 2013 Versus 2012 (In millions, except percentages) Revenue 2014 2013 2012 Licensing Hardware: Computing and Gaming Hardware Phone Hardware Total D&C Hardware Other Total D&C revenue Gross Margin $ 18...

  • Page 24
    ...2013. Online advertising revenue increased $497 million or 14%. Search advertising revenue increased 39%, due primarily to increased revenue per search resulting from ongoing improvements in advertising products, higher search volume, and the expiration of North American revenue per search guarantee...

  • Page 25
    ... were offset in part by lower Yahoo! reimbursement costs. Commercial Percentage Change 2014 Versus 2013 Percentage Change 2013 Versus 2012 (In millions, except percentages) Revenue 2014 2013 2012 Licensing Other Total Commercial revenue Gross Margin $ 42,027 7,547 $ 49,574 $ 39,686 5,660 $ 45...

  • Page 26
    ... in Microsoft SQL Server, System Center, and Windows Server. Office Commercial revenue increased $622 million or 4%, reflecting growth in Office revenue from volume licensing agreements with software assurance. Windows Commercial revenue increased $379 million or 13%, reflecting continued support of...

  • Page 27
    ..., 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...

  • Page 28
    ... 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 2014 compared with fiscal year 2013 Sales and marketing...

  • Page 29
    ... cost of capital. No impairment of goodwill was identified as of May 1, 2014 or May 2013. Our goodwill impairment test as of May 1, 2012, indicated that the carrying value of our previous Online Services Division reporting unit (in Devices and Consumer Other under our current segment structure...

  • Page 30
    ... years. In February 2012, the I.R.S. withdrew its 2011 Revenue Agents Report and reopened the audit phase of the examination. As of June 30, 2014, the primary unresolved issue relates to transfer pricing which could have a significant impact on our consolidated financial statements if not resolved...

  • Page 31
    ... years. In February 2012, the I.R.S. withdrew its 2011 Revenue Agents Report and reopened the audit phase of the examination. As of June 30, 2013, the primary unresolved issue relates to transfer pricing which could have a significant impact on our consolidated financial statements if not resolved...

  • Page 32
    ...billion increase in capital expenditures for property and equipment. Fiscal year 2013 compared with fiscal year 2012 Cash flows from operations decreased $2.8 billion during the current fiscal year to $28.8 billion, due mainly to changes in working capital, including increases in inventory and other...

  • Page 33
    ...-up for our commercial paper program. As of June 30, 2014, we were in compliance with the only financial covenant in the credit agreement, which requires us to maintain a coverage ratio of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense, as...

  • Page 34
    ... at inception of the agreement or annually at the beginning of each coverage period and accounted for as subscriptions with revenue recognized ratably over the coverage period. Unearned revenue at June 30, 2014 also included payments for: post-delivery support and consulting services to be performed...

  • Page 35
    ... excluded unearned revenue and non-cash items. Other Planned Uses of Capital We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology. Additions to property and equipment will continue, including new facilities, data centers, and...

  • Page 36
    ... not anticipate material impacts on our consolidated financial statements upon adoption. In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition. Under the new...

  • Page 37
    ...which started June 2, 2012. The offer provided significantly discounted rights to purchase Windows 8 Pro to qualifying end-users that purchased Windows 7 PCs during the eligibility period. Microsoft was responsible for delivering Windows 8 Pro to the end customer. Accordingly, revenue related to the...

  • Page 38
    ... impact our consolidated financial statements. Inventories Inventories are stated at average cost, subject to the lower of cost or market. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on...

  • Page 39
    ... 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 estimates and judgments, have been prepared in conformity with accounting principles generally accepted...

  • Page 40
    ... AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK RISKS We are exposed 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 consolidated financial statements. Foreign Currency...

  • Page 41
    ... sets forth the one-day VaR for substantially all of our positions as of June 30, 2014 and 2013 and for the year ended June 30, 2014: (In millions) June 30, 2014 Risk Categories June 30, 2013 Average Year Ended June 30, 2014 High Low Foreign currency Interest rate Equity Commodity $ 179 $ 73 $ 176...

  • Page 42
    ... STATEMENTS AND SUPPLEMENTARY DATA INCOME STATEMENTS (In millions, except per share amounts) Year Ended June 30, 2014 2013 2012 Revenue Cost of revenue Gross margin Research and development Sales and marketing General and administrative Goodwill impairment Integration and restructuring Operating...

  • Page 43
    COMPREHENSIVE INCOME STATEMENTS (In millions) Year Ended June 30, 2014 2013 2012 Net income Other comprehensive income (loss): Net unrealized gains (losses) on derivatives (net of tax effects of $(4), $(14), and $137) Net unrealized gains (losses) on investments (net of tax effects of $936, $195, ...

  • Page 44
    ... loaned of $541 and $579) Total cash, cash equivalents, and short-term investments Accounts receivable, net of allowance for doubtful accounts of $301 and $336 Inventories Deferred income taxes Other Total current assets Property and equipment, net of accumulated depreciation of $14,793 and $12,513...

  • Page 45
    ...June 30, 2014 2013 2012 Operations Net income Adjustments to reconcile net income to net cash from operations: Goodwill impairment Depreciation, amortization, and other Stock-based compensation expense Net recognized losses (gains) on investments and derivatives Excess tax benefits from stock-based...

  • Page 46
    STOCKHOLDERS' EQUITY STATEMENTS (In millions) Year Ended June 30, 2014 2013 2012 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...

  • Page 47
    ... to the way we internally managed and monitored segment performance during fiscal year 2014. This change impacted Note 10 - Goodwill, Note 14 - Unearned Revenue, and Note 21 - Segment Information and Geographic Data, with no impact on our consolidated financial statements. Foreign Currencies Assets...

  • Page 48
    ... when ownership is transferred to the resellers or to end customers when selling directly through Microsoft retail stores and online marketplaces. A portion of revenue may be deferred when these products are combined with software elements, and/or services. Revenue related to licensing for games...

  • Page 49
    ... costs are capitalized and amortized to cost of revenue over the estimated lives of the products. Sales and Marketing Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel...

  • Page 50
    ... and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be...

  • Page 51
    ... 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 52
    ... 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 for internal use...

  • Page 53
    ...and stock awards. The components of basic and diluted EPS are as follows: (In millions, except earnings per share) Year Ended June 30, 2014 2013 2012 Net income available for common shareholders (A) Weighted average outstanding shares of common stock (B) Dilutive effect of stock-based awards Common...

  • Page 54
    ... Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments (In millions) June 30, 2014 Cost Basis Cash Mutual funds Commercial paper Certificates of deposit U.S. government and agency securities Foreign government bonds Mortgage-backed securities Corporate notes...

  • Page 55
    ... 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, 2014. Debt Investment Maturities (In millions) June 30, 2014 Cost Basis...

  • Page 56
    ...2013, the total notional amounts of these foreign exchange contracts purchased and sold were $5.0 billion and $7.9 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-based global...

  • Page 57
    ...0 0 Foreign exchange contracts Equity contracts Total $ 167 0 $ 167 $ 254 $ (140) $ (284) $ 244 $ 109 $ 247 $ (135) Gross derivatives either offset or subject to an enforceable master netting agreement Gross amounts offset in the balance sheet Net amounts presented in the balance sheet Gross...

  • Page 58
    ...exchange contracts designated as cash flow hedges (our only cash flow hedges during the periods presented): (In millions) Year Ended June 30, Effective Portion 2014 2013 2012 Gains recognized in OCI, net of tax effects of $2, $54 and $127 Gains (losses) reclassified from AOCI into revenue... statement...

  • Page 59
    ...exists and fair value adjustments related to our own credit risk and counterparty credit risk. In connection with the transaction to acquire substantially all of Nokia Corporation's ("Nokia") Devices and Services Business ("NDS"), on September 23, 2013 we provided Nokia â,¬1.5 billion ($2.1 billion...

  • Page 60
    ... (In millions) June 30, $ 944 266 1,450 $ 328 201 1,409 $ 2,660 $ 1,938 2014 2013 Land Buildings and improvements Leasehold improvements Computer equipment and software Furniture and equipment Total, at cost Accumulated depreciation Total, net $ 541 8,867 3,560 11,430 3,406 27,804 (14,793...

  • Page 61
    ...-related (trade names) Fair value of intangible assets acquired $ 2,493 1,500 359 157 $ 4,509 9 years 9 years 3 years 2 years 8 years Our consolidated income statement for fiscal year 2014 includes revenue and operating loss of $2.0 billion and $692 million, respectively, attributable to NDS...

  • Page 62
    ...under our current segment structure. Yammer was consolidated into our results of operations starting on the acquisition date. Skype On October 13, 2011, we acquired Skype Global S.á r.l. ("Skype"), a leading global provider of software applications and related Internet communications products based...

  • Page 63
    ..., as applicable. As discussed in Note 21 - Segment Information and Geographic Data, during the first quarter of fiscal year 2014, we changed our organizational structure as part of our transformation to a devices and services company. This resulted in a change in our operating segments and reporting...

  • Page 64
    ... of capitalized software was $200 million, $210 million, and $117 million for fiscal years 2014, 2013, and 2012, respectively. The following table outlines the estimated future amortization expense related to intangible assets held at June 30, 2014: (In millions) Year Ending June 30, 2015 2016 2017...

  • Page 65
    ...-up for our commercial paper program. As of June 30, 2014, we were in compliance with the only financial covenant in the credit agreement, which requires us to maintain a coverage ratio of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense, as...

  • Page 66
    ... unsecured debt outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest is paid annually. Cash paid for interest on our debt for fiscal years 2014, 2013, and 2012 was $509 million, $371 million, and $344 million, respectively. As...

  • Page 67
    ... 2014, 2013, and 2012, there were no individually significant other reconciling items. The components of the deferred income tax assets and liabilities were as follows: (In millions) June 30, Deferred Income Tax Assets 2014 2013 Stock-based compensation expense Other expense items Unearned revenue...

  • Page 68
    ... years. In February 2012, the I.R.S. withdrew its 2011 Revenue Agents Report and reopened the audit phase of the examination. As of June 30, 2014, the primary unresolved issue relates to transfer pricing, which could have a significant impact on our consolidated financial statements if not resolved...

  • Page 69
    ... international sales and support offices, research and development facilities, manufacturing facilities, and certain equipment. Rental expense for facilities operating leases was $874 million, $711 million, and $639 million, in fiscal years 2014, 2013, and 2012, respectively. Future minimum rental...

  • Page 70
    ... status of individual matters are summarized below. International Trade Commission In May 2012, the ITC issued a limited exclusion order against Motorola on one Microsoft patent, which became effective in July 2012 and was affirmed on appeal in December 2013. In July 2013, Microsoft filed an action...

  • Page 71
    ... stayed these cases on agreement of the parties. • • In the transferred cases, Motorola asserts 15 patents are infringed by a range of Microsoft products including mobile and PC operating system, productivity, server, communication, browser and gaming products. In the Motorola action originally...

  • Page 72
    ... property claims In addition to these cases, there are approximately 90 other patent infringement cases pending against Microsoft. Product-Related Litigation U.S. cell phone litigation Nokia, along with other handset manufacturers and network operators, is a defendant in 19 lawsuits filed...

  • Page 73
    ... we assumed as a result of the NDS acquisition. NOTE 18 - STOCKHOLDERS' EQUITY Shares Outstanding Shares of common stock outstanding were as follows: (In millions) Year Ended June 30, 2014 2013 2012 Balance, beginning of year Issued Repurchased Balance, end of year Share Repurchases 8,328 86 (175...

  • Page 74
    ... years 2013 and 2012 were repurchased under the repurchase plan that was announced on September 22, 2008 and expired on September 30, 2013. The above table excludes shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards. Dividends In fiscal year 2014...

  • Page 75
    ...June 30, 2014 2013 2012 Stock-based compensation expense Income tax benefits related to stock-based compensation Stock Plans Stock awards $ 2,446 $ 830 $ 2,406 $ 842 $ 2,244 $ 785 Stock awards ("SAs") are grants that entitle the holder to shares of Microsoft common stock as the award vests. SAs...

  • Page 76
    ... of June 30, 2014, there was approximately $5.2 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of 3 years. During fiscal years 2013 and 2012, the following activity occurred under our stock plans: (In...

  • Page 77
    ... Microsoft common stock. NOTE 21 - SEGMENT INFORMATION AND GEOGRAPHIC DATA In its operation of the business, management, including our chief operating decision maker, the company's Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements...

  • Page 78
    ... Office, Exchange, SharePoint, Lync, and related CALs ("Office Commercial"); Microsoft Dynamics business solutions, excluding Dynamics CRM Online; and Skype; and Commercial Other, comprising: Enterprise Services, including Premier Support Services and Microsoft Consulting Services; Commercial Cloud...

  • Page 79
    ...,193 Commercial Licensing Other Total Commercial Corporate and Other Total gross margin Following is operating expenses by segment group. As discussed above, we do not allocate operating expenses below cost of revenue to our segments. (In millions) Year Ended June 30, 2014 2013 2012 Devices and...

  • Page 80
    ... relate to revenue recognition, income statement classification, and depreciation. Corporate and Other activity was as follows: (In millions) Year Ended June 30, 2014 2013 2012 Corporate Other (adjustments to U.S. GAAP): Revenue reconciling amounts (b) Cost of revenue reconciling amounts Operating...

  • Page 81
    Revenue from external customers, classified by significant product and service offerings were as follows: (In millions) Year Ended June 30, 2014 2013 2012 Microsoft Office system Windows PC operating system Server products and tools Xbox Platform Consulting and product support services Advertising ...

  • Page 82
    ... (e) NDS has been included in our consolidated results of operations starting on April 25, 2014, the date of acquisition. Includes a tax provision adjustment recorded in the fourth quarter of fiscal year 2014 related to adjustments to prior years' liabilities for intercompany transfer pricing which...

  • Page 83
    ... balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2014 and 2013, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the three years in the period ended June 30, 2014. These financial...

  • Page 84
    ... conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of Nokia Corporation's Devices and Services business, acquired on April 25, 2014, which is included in our 2014 consolidated financial statements and represented approximately 9% of...

  • Page 85
    ... over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Nokia Corporation's Devices and Services business, acquired on April 25, 2014 and whose financial statements constitute 9% of total assets as of June 30, 2014 and 2% of total revenues...

  • Page 86
    ... List-Stoll 1 Executive Vice President and Chief Financial Officer, Kraft Foods Group, Inc. David F. Marquardt 3 General Partner, August Capital G. Mason Morfit 1 President, ValueAct Capital Satya Nadella Chief Executive Officer, Microsoft Corporation Charles H. Noski 1,3 Former Vice Chairman, Bank...

  • Page 87
    ... 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 need...

  • Page 88