Microsoft 2015 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... of the Dynamics CRM Online installed base and the overall Dynamics business growing revenue by double digits. We delivered innovative new cloud services at an increasing pace spanning enterprise mobility, big data, cloud infrastructure and application developer services. • • • • • In...

  • Page 3
    ... financial decisions using Dynamics CRM Online, Office 365, Power BI and Skype for Business. Customers like Metro are proving that we are at the dawn of a new generation, one with productivity and business process systems that fundamentally changes the nature of work, and more importantly drives...

  • Page 4
    ... open source communities. Visual Studio Online now provides a leading set of services for modern development. I am excited about the growth opportunities ahead. We've broadened our addressable market by building and acquiring technologies in key growth categories like security, data and analytics...

  • Page 5
    ... track to reach two important goals for fiscal year 2018: a commercial cloud revenue annual run rate of $20 billion and 1 billion Windows 10 active devices per month. Our approach to growth is simple - we'll make products and services that are differentiated in markets that are large and growing and...

  • Page 6
    ...OF EQUITY SECURITIES, DIVIDENDS, AND STOCK PERFORMANCE FINANCIAL HIGHLIGHTS (In millions, except per share data) Year Ended June 30, 2015 2014 (b) 2013 2012 2011 Revenue Gross margin Operating income Net income Diluted earnings per share Cash dividends declared per share Cash, cash equivalents, and...

  • Page 7
    ... the share repurchase program 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 2015, our Board of Directors declared...

  • Page 8
    STOCK PERFORMANCE COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Microsoft Corporation, the S&P 500 Index and the NASDAQ Computer Index 6/10 6/11 6/12 6/13 6/14 6/15 Microsoft Corporation S&P 500 NASDAQ Computer 100.00 100.00 100.00 115.72 130.69 132.06 139.87 137.81 155.24 162.77 ...

  • Page 9
    ... productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. We also design and sell hardware including PCs, tablets, gaming and entertainment consoles, phones, other intelligent devices, and related...

  • Page 10
    ... that manage employee corporate identity and manage and secure corporate information accessed and stored across a growing number of devices, rich data storage and analytics services, machine learning services, media services, web and mobile backend services, and developer productivity services. To...

  • Page 11
    ... an original equipment manufacturer ("OEM") ecosystem that creates exciting new hardware designs for Windows 10; our own commitment to the health and profitability of our first-party premium device portfolio; and monetization opportunities such as services, subscriptions, gaming, and search. Our OEM...

  • Page 12
    ...Hardware, Phone Hardware, and D&C Other. D&C Licensing The principal products and services provided by the D&C Licensing segment are: Windows, including all OEM licensing ("Windows OEM") and other non-volume licensing and academic volume licensing of the Windows operating system and related software...

  • Page 13
    ... 365 Home and Office 365 Personal; Studios, comprising first-party video games; Mojang; and non-Microsoft products sold in our retail stores. Our online application marketplaces are designed to benefit our developer and partner ecosystems by providing access to a large customer base and benefit...

  • Page 14
    ... tools for software architects, developers, testers, and project managers. Revenue comes from purchases through volume licensing programs, licenses sold to OEMs, and retail packaged product. CALs provide access rights to certain server products, including Windows Server and SQL Server. CAL revenue...

  • Page 15
    ... Microsoft Dynamics products provide business solutions for financial management, customer relationship management, supply chain management, and analytics applications for small and mid-size businesses, large organizations, and divisions of global enterprises. Revenue is largely driven by the number...

  • Page 16
    ... and divisions of global enterprises. Revenue is largely driven by the number of information workers licensed. Enterprise Services, including Premier Support Services and Microsoft Consulting Services, assist customers in developing, deploying, and managing Microsoft server and desktop solutions and...

  • Page 17
    ...applications and services for enterprises. Windows and Devices Engineering Group, focuses on our Windows platform across devices of all types, hardware development of our devices, including Xbox consoles, Surface devices, Lumia phones, nonLumia phones, Surface Hub, Microsoft Band, and other hardware...

  • Page 18
    ... a direct agreement or relationship with Microsoft. 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...

  • Page 19
    ...the expiration of other existing volume licensing agreements. Under the Open Value and Open Value Subscription programs, customers can acquire perpetual or subscription licenses, respectively, over a three-year period. Online services are available in each of the Open Programs. Microsoft Product and...

  • Page 20
    ...in-product tools to directly provision, manage, and support their customer subscriptions. Partners can easily package their own tools, products, and services, and combine them into one monthly or annual customer bill. The Microsoft Services Provider License Agreement is a program targeted at service...

  • Page 21
    ... exceeded 20% U.S. market share as we focused our advertising business on search. In June 2015, we entered into agreements with AOL and AppNexus to outsource our display sales efforts. In hardware, we released Surface 3 and expanded distribution of Surface Pro and the related gross margin percentage...

  • Page 22
    ... pre-sales of Windows to original equipment manufacturers ("OEMs") and retailers before general availability. Revenue deferred on bundled products and services ("Bundled Offerings"). Revenue deferred on sales of Windows 7 with an option to upgrade to Windows 8 Pro at a discounted price (the "Windows...

  • Page 23
    ...'s hardware and software. Our Commercial segments are: • Commercial Licensing, comprising: server products, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and related Client Access Licenses ("CALs"); Windows Embedded; volume licensing of the Windows operating system...

  • Page 24
    ... year of Phone Hardware sales and growth in revenue from our Commercial Cloud, Surface, server products, search advertising, and Xbox Live transactions. These increases were offset in part by a decline in revenue from Office Commercial, Windows OEM, licensing of Windows Phone operating system, and...

  • Page 25
    ... year 2014 D&C revenue increased $3.9 billion or 10%, primarily due to a full year of Phone Hardware sales, as well as higher revenue from Surface, search advertising, and Xbox Live transactions, offset in part by a decrease in revenue from Windows OEM, licensing of Windows Phone operating system...

  • Page 26
    ... per search and search volume. Xbox Live and other store transaction revenue increased $531 million, driven by increased Xbox Live users and revenue per user. First-party video games revenue increased $367 million, mainly due to sales of Minecraft following the acquisition of Mojang in November 2014...

  • Page 27
    ...2013. Online advertising revenue increased $497 million or 14%. Search advertising revenue increased 39%, primarily due 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 28
    ... XP end of support in the prior year, customers transitioning to Office 365 Commercial, and declines in Japan. Our server products revenue grew $1.1 billion or 7%, primarily driven by higher premium mix of Microsoft SQL Server, Windows Server, and System Center. Commercial Licensing gross margin...

  • Page 29
    ... related to the Windows Upgrade Offer. The revenue was recognized upon expiration of the offer. Corporate and Other gross margin decreased $863 million, mainly due to decreased revenue. OPERATING EXPENSES Research and Development Percentage Change 2015 Versus 2014 Percentage Change 2014 Versus 2013...

  • Page 30
    ... 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 2015 compared with fiscal year 2014 Sales and...

  • Page 31
    ...commodity contracts, the gains (losses) are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities and gains (losses) on certain balance sheet amounts from foreign exchange rate changes. Fiscal year 2015 compared with fiscal year 2014 Dividends and...

  • Page 32
    ...our products and services. We supply our Windows PC operating system to customers through our U.S. regional operating center, while we supply the Microsoft Office system and our server products and tools to customers through our foreign regional operations centers. In fiscal years 2015 and 2014, our...

  • Page 33
    ..., 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 1 investments, such as exchange-traded mutual funds, domestic and international equities, and...

  • Page 34
    ... Notes to Financial Statements for further discussion. Unearned Revenue Unearned revenue at June 30, 2015 was comprised mainly of unearned revenue from volume licensing programs. Unearned revenue from volume licensing programs represents customer billings for multi-year licensing arrangements paid...

  • Page 35
    ...staff. We expect capital expenditures to increase in coming years in support of our productivity and platform strategy. We have operating leases for most U.S. and international sales and support offices and certain equipment. We have not engaged in any related party transactions or arrangements with...

  • Page 36
    ...enhancements to existing products. Certain volume licensing arrangements include a perpetual license for current products combined with rights to receive unspecified future versions of software products and are accounted for as subscriptions, with billings recorded as unearned revenue and recognized...

  • Page 37
    ...the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Application of the...

  • Page 38
    ... forecasts, product life cycle status, product development plans, current sales levels, pricing strategy, and component cost trends. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue. The determination...

  • Page 39
    ... firm, to audit and render an opinion on the consolidated financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Board of Directors, through its Audit Committee, consisting solely of...

  • Page 40
    ... and management tool. The distribution of the potential changes in total market value of all holdings is computed based on the historical volatilities and correlations among foreign exchange rates, interest rates, equity prices, and commodity prices, assuming normal market conditions. The VaR is...

  • Page 41
    Total one-day VaR for the combined risk categories was $237 million at June 30, 2015 and $333 million at June 30, 2014. The total VaR is 29% less at June 30, 2015, and 25% less at June 30, 2014, than the sum of the separate risk categories in the table above due to the diversification benefit of...

  • Page 42
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INCOME STATEMENTS (In millions, except per share amounts) Year Ended June 30, 2015 2014 2013 Revenue Cost of revenue Gross margin Research and development Sales and marketing General and administrative Impairment, integration, and restructuring Operating ...

  • Page 43
    COMPREHENSIVE INCOME STATEMENTS (In millions) Year Ended June 30, 2015 2014 2013 Net income Other comprehensive income (loss): Net unrealized gains (losses) on derivatives (net of tax effects of $20, $(4), and $(14)) Net unrealized gains (losses) on investments (net of tax effects of $(197), $936, ...

  • Page 44
    ... taxes Short-term unearned revenue Securities lending payable Other Total current liabilities Long-term debt Long-term unearned revenue Deferred income taxes Other long-term liabilities Total liabilities Commitments and contingencies Stockholders' equity: Common stock and paid-in capital - shares...

  • Page 45
    CASH FLOWS STATEMENTS (In millions) Year Ended June 30, 2015 2014 2013 Operations Net income Adjustments to reconcile net income to net cash from operations: Goodwill and asset impairments Depreciation, amortization, and other Stock-based compensation expense Net recognized losses (gains) on ...

  • Page 46
    STOCKHOLDERS' EQUITY STATEMENTS (In millions) Year Ended June 30, 2015 2014 2013 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 Other, net Balance, end of period...

  • Page 47
    ... 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 48
    ...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 49
    ...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, and the costs of advertising, promotions, trade shows, seminars, and other programs...

  • Page 50
    ... assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies and commodities...

  • Page 51
    ...$ 336 16 (51) $ 301 $ 389 4 (57) $ 336 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 hand, future purchase...

  • Page 52
    ... millions, except earnings per share) Year Ended June 30, 2015 2014 2013 Net income available for common shareholders (A) Weighted average outstanding shares of common stock (B) Dilutive effect of stock-based awards Common stock and common stock equivalents (C) Earnings Per Share $ 12,193 8,177 77...

  • Page 53
    ...follows: Unrealized Gains Unrealized Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments (In millions) June 30, 2015 Cost Basis Cash Mutual funds Commercial paper Certificates of deposit U.S. government and agency securities Foreign government bonds...

  • Page 54
    ... estimate the fair value of these investments. We lend certain fixed-income and equity securities to increase investment returns. These transactions are accounted for as secured borrowings and the loaned securities continue to be carried as investments on our balance sheet. Cash and/or security...

  • 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, 2015. Debt Investment Maturities (In millions) June 30, 2015 Cost Basis...

  • Page 56
    ... 2015 and June 30, 2014, the total notional amounts of these foreign exchange contracts sold were $5.3 billion and $3.1 billion, respectively. Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet...

  • Page 57
    ... these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2015, our longterm unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be...

  • Page 58
    ... 30, 2014 Liabilities Other Current Liabilities (In millions) Non-designated Hedge Derivatives Short-term Investments Other Current Assets Short-term Investments Other Current Assets Foreign exchange contracts Equity contracts Interest rate contracts Credit contracts Commodity contracts Total...

  • Page 59
    ... underlying available-for-sale securities and gains (losses) from foreign exchange rate changes on certain balance sheet amounts. (In millions) Year Ended June 30, 2015 2014 2013 Foreign exchange contracts Equity contracts Interest-rate contracts Credit contracts Commodity contracts Total $ (483...

  • Page 60
    ..., 2014 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- and asset-backed securities Corporate notes and bonds Municipal securities Common and preferred stock...

  • Page 61
    ...Mojang Synergies AB ("Mojang"), the Swedish video game developer of the Minecraft gaming franchise, for $2.5 billion in cash, net of cash acquired. The addition of Minecraft and its community enhances our gaming portfolio across Windows, Xbox, and other ecosystems besides our own. Our purchase price...

  • Page 62
    ...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 During the fourth quarter of fiscal year 2015, we recorded $7.5 billion of goodwill and asset impairment charges related to our Phone Hardware business. These costs...

  • Page 63
    ... provided under a four-year license as they are rendered. Yammer On July 18, 2012, we acquired Yammer, Inc. ("Yammer"), a leading provider of enterprise social networks, for $1.1 billion in cash. Yammer added an enterprise social networking service to Microsoft's portfolio of complementary cloud...

  • Page 64
    ... values of the businesses. Upon completion of the annual testing as of May 1, 2015, Phone Hardware goodwill was determined to be impaired. In the second half of fiscal year 2015, Phone Hardware did not meet its sales volume and revenue goals, and the mix of units sold had lower margins than planned...

  • Page 65
    ..., 2015 and 2014, 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 assets. During fiscal year 2015, we recorded impairment charges of $2.2 billion related to our Phone Hardware...

  • Page 66
    ... value. We have two $5.0 billion credit facilities that expire on November 4, 2015 and November 14, 2018, respectively. These credit facilities serve as a back-up for our commercial paper program. As of June 30, 2015, we were in compliance with the only financial covenant in both credit agreements...

  • Page 67
    ..., except for the euro-denominated debt securities on which interest is paid annually. Cash paid for interest on our debt for fiscal years 2015, 2014, and 2013 was $620 million, $509 million, and $371 million, respectively. As of June 30, 2015 and 2014, the aggregate unamortized discount for our long...

  • Page 68
    ... from the federal statutory rate is primarily due to foreign earnings taxed at lower rates resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. In fiscal year 2015, this reduction was mostly...

  • Page 69
    .... If recognized, these tax benefits would affect our effective tax rates for fiscal years 2015, 2014, and 2013, by $7.9 billion, $7.0 billion, and $6.5 billion, respectively. As of June 30, 2015, 2014, and 2013, we had accrued interest expense related to uncertain tax positions of $1.7 billion...

  • Page 70
    ... 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, 2015, the primary unresolved issue relates to transfer pricing, which could have a significant impact on our consolidated financial statements if not resolved...

  • Page 71
    ...new buildings, building improvements, and leasehold improvements as of June 30, 2015. We have operating leases for most U.S. and international sales and support offices, research and development facilities, manufacturing facilities, retail stores, and certain equipment. Rental expense for facilities...

  • Page 72
    ... relief. The court has stayed these cases in Seattle 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. 71

  • Page 73
    ... certain syncing functionality in the ActiveSync protocol employed by Windows Phone 7, Outlook Mobile, Hotmail Mobile, Exchange Online, Exchange Server, and Hotmail Server. In 2013, the court stayed the case pending the outcome of parallel proceedings in which Microsoft is seeking to invalidate the...

  • Page 74
    ... stated the investigation relates to compatibility, bundle sales, and file verification issues related to Windows and Office software. Product-Related Litigation U.S. cell phone litigation Nokia, along with other handset manufacturers and network operators, is a defendant in 19 lawsuits filed in the...

  • Page 75
    ... adverse impact on our consolidated financial statements for the period in which the effects become reasonably estimable. NOTE 19 - STOCKHOLDERS' EQUITY Shares Outstanding Shares of common stock outstanding were as follows: (In millions) Year Ended June 30, 2015 2014 2013 Balance, beginning of year...

  • Page 76
    ... the share repurchase program 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 2015, our Board of Directors declared...

  • Page 77
    ...June 30, 2015 2014 2013 Stock-based compensation expense Income tax benefits related to stock-based compensation Stock Plans Stock awards $ 2,574 $ 868 $ 2,446 $ 830 $ 2,406 $ 842 Stock awards ("SAs") are grants that entitle the holder to shares of Microsoft common stock as the award vests. SAs...

  • Page 78
    ... fiscal years 2015, 2014, and 2013, respectively. Employee Stock Purchase Plan We have an employee stock purchase plan (the "Plan") for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of...

  • Page 79
    ...'s hardware and software. Our Commercial segments are: • Commercial Licensing, comprising: server products, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and related Client Access Licenses ("CALs"); Windows Embedded; volume licensing of the Windows operating system...

  • Page 80
    .... Certain revenue contracts are allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is directly charged to...

  • Page 81
    ... 370 Commercial Licensing Other Total Commercial Corporate and Other Total gross margin $ 60,542 $ 59,755 $ 57,464 Below are operating expenses by segment group. As discussed above, we do not allocate operating expenses to our segments. (In millions) Year Ended June 30, 2015 2014 2013 Devices...

  • Page 82
    ... the revenue. Revenue from external customers, classified by significant product and service offerings were as follows: (In millions) Year Ended June 30, 2015 2014 2013 Microsoft Office system Server products and tools Windows PC operating system Xbox Phone Consulting and product support services...

  • Page 83
    Our total Commercial Cloud revenue was $5.8 billion, $2.8 billion, and $1.3 billion in fiscal years 2015, 2014, and 2013, respectively. These amounts are included in their respective product categories in the table above. Assets are not allocated to segments for internal reporting presentations. A ...

  • Page 84
    ... FIRM To the Board of Directors and Stockholders of Microsoft Corporation Redmond, Washington We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2015 and 2014, and the related consolidated statements of income...

  • Page 85
    ... 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 86
    ...Board of Directors and Stockholders of Microsoft Corporation Redmond, Washington We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013...

  • Page 87
    ...1,3 Executive Vice President and Chief Financial Officer, DICK'S Sporting Goods, Inc G. Mason Morfit 1,2 President, ValueAct Capital Satya Nadella Chief Executive Officer, Microsoft Corporation Charles H. Noski 1,3 Former Vice Chairman, Bank of America Corporation Board Committees 1. Audit Committee...

  • Page 88
    ...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 89