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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. Integrated Innovation 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.
Bill Gates Chairman and Chief Software Architect
Steven A. Ballmer Chief Executive Officer
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