Financial Review

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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 prepared on a basis not consistent with accounting principles generally accepted in the U.S. (“U.S. GAAP”). Our five segments are Windows & Windows Live Division; Server and Tools; Online Services Division; Microsoft Business Division; and Entertainment and Devices Division. We have recast certain prior period amounts within this note to conform to the way we internally managed and monitored segment performance during the current fiscal year, including moving Windows Live from Online Services Division to Windows & Windows Live Division and Razorfish from Online Services Division to Corporate. Razorfish was sold during the second quarter of fiscal year 2010.

Segment revenue and operating income (loss) were as follows:

(In millions)
Year Ended June 30, 2010 2009 2008
Windows & Windows Live Division $17,788 $14,690 $16,815
Server and Tools 14,878 14,276 13,217
Online Services Division 2,198 2,110 2,164
Microsoft Business Division 18,909 18,864 18,904
Entertainment and Devices Division 8,114 8,035 8,502
Unallocated and other 597 462 818
Consolidated $62,484 $58,437 $60,420
(In millions)
Year Ended June 30, 2010 2009 2008
Operating Income (Loss)
Windows & Windows Live Division $12,089 $9,569 $11,876
Server and Tools 4,990 4,638 3,845
Online Services Division (2,436) (1,760) (619)
Microsoft Business Division 11,664 11,454 11,681
Entertainment and Devices Division 589 (3) 314
Reconciling amounts (2,798) (3,535) (4,826)
Consolidated $24,098 $20,363 $22,271

The types of products and services provided by each segment are summarized below:

Windows & Windows Live Division – Windows & Windows Live Division offerings consist of Windows operating systems, including Windows 7, and online software and services through Windows Live. Windows Live primarily generates revenue from online advertising.

Server and Tools – Server and Tools product and service offerings consist of Windows Server, Microsoft SQL Server, Windows Azure and other cloud and server offerings. Server and Tools also offers Enterprise Services, which comprise Premier product support services and Microsoft Consulting Services.

Online Services Division – Online Services Division consists of an online advertising platform with offerings for both publishers and advertisers, online information offerings, such as Bing, and the MSN portals and channels around the world.

Microsoft Business Division – Microsoft Business Division offerings include Microsoft Office, SharePoint, and Microsoft Dynamics business solutions.

Entertainment and Devices Division – Entertainment and Devices Division offerings include the Xbox 360 platform, the Zune digital music and entertainment platform, PC software games, online games and services, Mediaroom (our Internet protocol television software), Windows Phone, Windows Embedded device platforms, application software for Apple’s Macintosh computers, and Microsoft PC hardware products.

Due to the integrated structure of our business, certain costs incurred by one segment may benefit other segments. The costs that are identifiable are allocated to the segments that benefit to incent cross-collaboration among our segments so that one segment is not solely burdened by the cost of a mutually beneficial activity. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. These cost allocations were not material in any period presented.

In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include costs of: field selling; employee benefits; shared facilities services; and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain other corporate-level activity is not allocated to our segments, including costs of: broad-based sales and marketing; product support services; human resources; legal; finance; information technology; corporate development and procurement activities; research and development; legal settlements and contingencies; and employee severance.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment and it is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

Reconciling amounts in the tables above and below include adjustments to conform our internal accounting policies to U.S. GAAP and corporate-level activity not specifically attributed to a segment. Significant internal accounting policies that differ from U.S. GAAP relate to revenue recognition, income statement classification, depreciation, and amortization of stock-based awards.

Significant reconciling items were as follows:

(In millions)
Year Ended June 30, 2010 2009 2008
Corporate-level activity(a) $(4,470) $(4,542) $(6,026)
Stock-based compensation expense 571 770 790
Revenue reconciling amounts 369 256 396
Other 732 (19) 14
Total $(2,798) $(3,535) $(4,826)
(a) Corporate-level activity excludes stock-based compensation expense and revenue reconciling amounts presented separately in those line items.

No sales to an individual customer accounted for more than 10% of fiscal year 2010, 2009, or 2008 revenue. Revenue, classified by the major geographic areas in which our customers are located, was as follows:

(In millions)
Year Ended June 30, 2010 2009 2008
United States(a) $36,173 $33,052 $35,928
Other countries 26,311 25,385 24,492
Total $62,484 $58,437 $60,420
(a) Includes shipments organizations. to customers in the United States and licensing to certain OEMs and multinational

Revenues from external customers, classified by significant product and service offerings were as follows:

(In millions)
Year Ended June 30, 2010 2009 2008
Microsoft Office system $17,754 $17,998 $18,083
Windows PC operating systems 18,225 14,653 16,838
Server products and tools 12,007 11,344 10,611
Xbox 360 platform 5,456 5,475 5,598
Consulting and product support services 3,036 3,024 2,743
Advertising 2,528 2,345 2,425
Other 3,478 3,598 4,122
Total $62,484 $58,437 $60,420

Long-lived assets, excluding financial instruments and deferred taxes, classified by the location of the controlling statutory company, were as follows:

(In millions)
June 30, 2010 2009 2008
United States $18,716 $ 19,362 $19,129
Other countries 2,466 2,435 1,194
Total $21,182 $ 21,797 $20,323