Microsoft 2010 Annual Report Download - page 16

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The information found on our Web site is not part of this or any other report we file with or furnish to the SEC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND OUTLOOK
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results
of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be
read in conjunction with, our financial statements and the accompanying notes to the financial statements (“Notes”).
We generate revenue by developing, manufacturing, licensing, and supporting a wide range of software products and
services for many different types of computing devices. Our software products and services include operating
systems for personal computers, servers, and intelligent devices; server applications for distributed computing
environments; information worker productivity applications; business solutions applications; high-performance
computing applications; software development tools; and video games. We provide consulting and product and
solution support services, and we train and certify computer system integrators and developers. We also design and
sell hardware, including the Xbox 360 gaming and entertainment console and accessories, the Zune digital music
and entertainment device and accessories, and Microsoft PC hardware products. Online offerings and information
are delivered to consumers through Bing, Windows Live, Microsoft Office Web Apps, our MSN portals and channels,
and to businesses through Microsoft Online Services offerings, such as Microsoft Dynamics CRM Online, Exchange
Online, Windows Azure, SQL Azure and SharePoint Online. We enable the delivery of online advertising across our
broad range of digital media properties and on Bing through our proprietary adCenter platform.
Our revenue historically has fluctuated quarterly and has generally been the highest in the second quarter of our
fiscal year due to corporate calendar year-end spending trends in our major markets and holiday season spending by
consumers. Our Entertainment and Devices Division is particularly seasonal as its products are aimed at the
consumer market and are in highest demand during the holiday shopping season. Typically, the Entertainment and
Devices Division has generated approximately 40% of its annual segment revenues in our second fiscal quarter. In
addition, quarterly revenues may be impacted by the deferral of revenue. See the discussions below regarding the
deferral of revenue related to eligible sales of the 2007 Microsoft Office system with a guarantee to be upgraded to
the 2010 Microsoft Office system at minimal or no cost (the “Office 2010 Deferral”) and sales of Windows Vista with a
guarantee to be upgraded to Windows 7 at minimal or no cost and of Windows 7 to original equipment manufacturers
and retailers before general availability (the “Windows 7 Deferral”).
Global macroeconomic factors have a strong correlation to demand for our software, services, hardware, and online
offerings. The unfavorable global economic environment adversely affected our business in fiscal year 2009 as
consumers and businesses cut back on spending, which reduced PC shipments and IT investments. During fiscal
year 2010, the environment began to improve. However, the current macroeconomic factors remain dynamic and
uncertain and are likely to remain so into 2011. Irrespective of global economic conditions, we are positive about our
relative market position, our current product portfolio and future product pipeline. Because we offer a wide range of
products and services that enable companies to improve productivity and reduce costs, including cloud-based
services, we believe that Microsoft is well-positioned to create new opportunities to increase revenue as the global
economy improves. We remain focused on executing in the areas we can control by continuing to provide high value
products at the lowest total cost of ownership while managing our expenses.
Technological innovation is the foundation of our long-term growth and we intend to maintain our commitment to
investment in research and development, engineering excellence, and delivering high-quality products and services
to customers and partners. We continue to develop innovative software applications and solutions that we believe will
enhance information worker productivity, improve communication and collaboration in work groups, aid business
intelligence, and streamline processes for small and mid-sized businesses. To sustain growth in the face of