Microsoft 2005 Annual Report Download - page 26

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PAGE 25
Server and Tools
(In millions, except percentages) 2003 2004
Percent
Change
2005
Percent
Change
Revenue $7,192 $8,538 19%
$9,885 16%
Operating income $1,160 $1,418 22%
$3,259 130%
Server and Tools consists of server software licenses and client access licenses (CALs) for Windows Server, Microsoft SQL
Server®, Exchange Server, and other server products. It also includes developer tools, training, certification, Microsoft Press,
Premier and Professional product support services, and Microsoft Consulting Services. Server and Tools concentrates on
licensing products, applications, tools, content, and services that make information technology professionals and developers
more productive and efficient. The segment uses multiple channels for licensing including pre-installed OEM versions, licenses
through partners, and licenses directly to end customers. The licenses are sold both as one-time licenses and as multi-year
volume licenses depending upon the needs of different customers. Server and Tools uses product innovation and partnerships
with information technology professionals to drive the adoption and sales growth of its products. Server and Tools growth is
driven by performance of the overall market for information technology – both hardware and software. The operating results for
previous years have been restated for the reorganization of the Windows Security group from Server and Tools to Client and the
reorganization of Professional product support services from Information Worker to Server and Tools.
Server and Tools revenue growth in fiscal year 2005 was mainly driven by growth in Server and Server application revenue,
including CAL revenue, which grew $1.1 billion or 17% in fiscal year 2005 reflecting broad adoption of Windows Server System™
products, including Windows Server, SQL Server, Exchange Server, and Management Servers. We estimate that overall server
hardware shipments grew 13% to 14% during fiscal year 2005 and that Windows-based server shipments grew at a comparable
rate for the same period. Consulting and Premier and Professional product support services revenue increased $241 million or
19% compared to the previous year, primarily due to increased consultant utilization and new Premier customers. Foreign
currency exchange rate changes accounted for approximately $284 million or three percentage points of total Server and Tools
revenue growth, which was offset by a $314 million decline in Upgrade Advantage revenue earned. In fiscal year 2004, Server
and Server applications revenue, including CAL revenue, grew $1.28 billion or 25%. Foreign currency exchange rates
contributed approximately $350 million or five percentage points of Server and Tools revenue growth in fiscal year 2004
compared to fiscal year 2003. Consulting and Premier product support services revenue increased $192 million or 18%
compared to fiscal year 2003 due to increased customer penetration from new product offerings.
Server and Tools operating income growth for fiscal year 2005 was primarily due to an increase in revenue and a decrease in
stock-based compensation expense. This was partially offset by an increase in sales and marketing costs and headcount-
related costs from increased hiring and increases in salary and benefits. Operating income for the previous year has been
restated for a reclassification of $1.22 billion of legal settlements from Server and Tools to corporate expenses to conform to
the current year presentation. Server and Tools operating income for fiscal year 2004 increased slightly due to the revenue
increase offset by increased stock-based compensation charges, including $651 million related to the employee stock option
transfer program in the second quarter of fiscal year 2004.
We expect worldwide server hardware shipments to grow 11% to 13% in fiscal year 2006. However, we face strong
competition from Linux-based, Unix, and other server operating systems. We anticipate little or no year-over-year foreign
currency exchange rate impacts in fiscal year 2006. We also expect Server and Tools operating expenses to increase during
fiscal year 2006 due to expected investment in headcount and new marketing initiatives and upcoming product releases,
including SQL Server 2005 and Visual Studio 2005.
Information Worker
(In millions, except percentages) 2003 2004
Percent
Change 2005
Percent
Change
Revenue
$
9,113
$
10,653
17% $
11,013
3%
Operating income
$
6,389
$
7,410
16% $ 7,915
7%
Information Worker consists of the Microsoft Office System of programs, servers, services, and solutions designed to increase
personal, team, and organization productivity. Information Worker includes Microsoft Office, Microsoft Project, Microsoft Visio®,
SharePoint® Portal Server CALs, and other information worker products including Microsoft LiveMeeting® and OneNote®. Most
revenue from this segment comes from licensing our Office System products. Revenue growth depends on the ability to add
value to the core Office product set and expand our product offerings in other information worker areas such as document
lifecycle management, collaboration, and business intelligence.