To our shareholders, customers, partners and employees:
For Microsoft, fiscal 2004 was a great year, marked by strong growth and development of exciting new technologies. All of our businesses grew during the year, increasing total revenue by $4.65 billion, or 14 percent, to $36.8 billion. Profit margins from continuing operations improved, particularly in our emerging businesses.
In the past year we delivered amazing
new products and services, including Office System 2003, new versions of
Windowsâ XP for
We also made major progress in reducing our legal risks and strengthening relationships within our industry and with governments. Building on this progress, we are confident that Microsoft will continue to grow and create long-term value for shareholders.
Accordingly, the board of directors has approved a plan to return cash to investors on an unprecedented scale. During the next four years, the company is on track to return as much as $75 billion to shareholders, by increasing the regular dividend, expanding our stock buyback program, and declaring a special dividend of $3 per share, subject to shareholder approval as described in the proxy statement. We will continue to have ample resources to pursue the enormous growth opportunities that we see ahead. All of us at Microsoft are intensely focused on realizing these opportunities by continuing to deliver integrated, cutting-edge technology, and through operational excellence.
Microsoft was built on innovation, and our future depends on it. We are in an extraordinary position to deliver even greater value to customers through a broad set of technologies, designed to complement each other and many third-party products and services. This is what we mean by integrated innovation, which is key to our business strategy.
To drive innovation, Microsoft has a long-term commitment to research and development. Our investment to date has brought about many of the successful products we offer today, and has built an increasingly valuable store of intellectual property. In fiscal 2004, we applied for more than 2,000 patents on some of our recent innovations. During the coming year, we plan to file for another 3,000 patents, which will make us one of the largest patent filers in the world. Our innovations are available for broad use in others’ products through our patent licensing programs.
Security. A key focus of our innovation is security. Beyond the advances in Windows XP SP2, we are developing advanced technologies that will help isolate computers from Internet attacks and make them more resilient when they are attacked. We are making it easier for customers to keep their systems updated with our latest, most secure software.
We are also developing more secure techniques for authenticating network users and controlling their access. And we have implemented new software-development processes, tools, and training to promote engineering excellence and help ensure that new software is more secure by design.
In addition, we are collaborating with other industry leaders to develop more effective community responses to security threats, and working closely with governments around the world to bring cyber-criminals to justice. Through this broad, multi-pronged approach, our goal is to help bring significant improvements in security, and help preserve the benefits of technology for everyone.
Our innovation is also focused on exciting market opportunities across our businesses, which we believe hold great potential for growth over the next several years.
PC Market Growth. Today there are 600 million personal computers around the world; by 2010, we estimate the number will grow to one billion. Much of this growth will come from new generations of PCs with enhanced capabilities, such as the Media Center and Tablet PCs that Microsoft has pioneered. We are hard at work on Longhorn—the next generation of Windows—which will lead to exciting new innovations in software, hardware, and services, delivering experiences that should broaden PC adoption and accelerate upgrades.
Server Migration. Businesses are increasingly migrating their computer networks from UNIX servers to less expensive ones running on PC microprocessors. This trend has helped boost sales of Windows server products; revenue from our server and tools business increased 19 percent last year. During the past year, we have worked hard to communicate with customers about the unique value of the Windows platform compared with Linux and other open-source software. Several independent analysts have reported that Windows offers lower total cost of ownership, stronger security, and more comprehensive indemnification. We are continuing to innovate in servers and tools, particularly in areas such as manageability and security. This fiscal year, SQL Serverä 2005 will deliver a significantly improved database platform—more reliable, secure, scalable, and manageable. And Visual Studioâ 2005 aims to reduce complexity and cost for developers and other technology professionals.
Connected Productivity. Our Information Worker business continues to grow, with a 17 percent increase in revenue during 2004. We believe that Word, Excel, Outlookâ, and other Office 2003 applications only begin to fulfill the potential of software to help people be more productive. We have expanded the toolset with new technologies and services such as Office SharePoint Portal Server 2003, Windows SharePointâ Services, Office Live Meeting, Office Online, Office OneNote 2003, and Office InfoPathä 2003. We are also providing our partners with new tools, through the Office Solution Accelerator program, that enable them and us to jointly bring new productivity solutions to customers. There is an enormous market for further improvements in individual, group and organizational productivity through advances in collaboration, communication, business intelligence, planning, and analysis.
Business Solutions. We are strongly positioned to provide software solutions tailored for the vast number of underserved small and mid-sized businesses. Our integrated applications enable these companies to accelerate growth and increase profits by more effectively managing their finances, supply chains, customer relationships, and other key business processes. Several years down the road, we envision powerful new capabilities from the development of a common platform for a new generation of business solutions highly integrated with Longhorn.
Online Search, Services, and Advertising. Our MSN business achieved its first full year of segment profitability in 2004, as advertising revenue increased 43 percent, exceeding $1 billion for the first time. This growth was driven by our MSN.com network’s success in attracting visitors by offering rich information and communication services—including news, sports, entertainment, search, MSN Messenger, and MSN Hotmailâ. We are investing in many new MSN services, including breakthrough search, communication, and music technologies that we believe will deliver superior customer benefits and provide us with significant revenue opportunities.
Smart Mobile Devices. The market for devices that combine a wireless phone with a handheld PC is expected to grow significantly over the next several years. We are vigorously pursuing this opportunity with strategic investments, to ensure that our mobile offerings provide the greatest benefit to consumers and device manufacturers. Our Windows Mobile software is the basis for new Portable Media Center devices from leading consumer electronics companies.
Entertainment. In the huge videogame industry, Xbox continues to show strong momentum, with 15.5 million consoles shipped since launch and more than 425 games published for it. Xbox now ranks second in units sold in the North American and European markets, and is gaining on the market leader. Xbox Liveä, our interactive service with more than one million subscribers in 24 countries, has revolutionized the online gaming business. Looking ahead, we see myriad opportunities to create other entertaining digital experiences via platforms such as Xbox, Windows XP Media Center, and Microsoft TV, a product family that supports a range of digital video services including interactive programming guides, digital video recording, high-definition TV, and on-demand programming.
Operational Excellence and Citizenship
As we innovate in technology, we are equally focused on crisp execution. In particular, we are working to deliver an unparalleled customer and partner experience. Across the company, we have created new listening, feedback, and response systems to help us get closer to customers and respond quickly and appropriately. Using automated error-reporting technologies, we have fixed a large majority of the computer crashes and hangs reported by customers, and our strengthened field response system has favorably resolved most non-technical issues reported by customers.
Microsoft competes vigorously, and we always will. At the same time, we are committed to maintaining positive relationships within our industry, including with competitors, and to forging strong relationships with governments. We are also committed to helping make technology safer and easier to use. We work to help protect the safety of children online, for example, through our partnership with the International Centre for Missing and Exploited Children. We are deeply engaged in industry efforts to protect peoples’ privacy online, counter the problem of identify theft, and curb the spam epidemic.
The fight against spam is a good example of our commitment to the development of industry standards, which accelerate the advance of technology by helping ensure that different devices and software work well together. Microsoft has collaborated on the Sender ID framework, a technology designed to prevent e-mail forgery, which is used to spread spam and perpetrate online fraud. Submitted for consideration as an Internet standard, the Sender ID framework will be freely available for widespread use.
Everywhere we do business, we aim to help strengthen local economies. One way is through our products, which help our customers be more productive and competitive. Another way is through our business model, which is based on partnering with more than 600,000 other technology firms throughout the world. They create applications, provide computer services, and, in many other ways, build their businesses on our platform, generating local jobs and billions of dollars in tax revenue. A global study of 22,000 technology companies found that Microsoft’s partners earn an average of $8 for every $1 that Microsoft earns.
We are partnering to bring the benefits of technology to communities and classrooms around the world. Last year alone, Microsoft provided more than $440 million in cash and software to more than 5,000 schools and nonprofit organizations. Through our Unlimited Potential and Partners in Learning initiatives, we are working with governments and communities in many countries to promote workforce development and lifelong digital literacy.
We are enormously excited by the tremendous possibilities that lie ahead. As ever, we thank you for your continued support.
Chairman and Chief Software Architect
Steven A. Ballmer
Chief Executive Officer