10-KPeriod: FY2004

MICROSOFT CORP Annual Report, Year Ended Jun 30, 2004

Filed September 1, 2004For Securities:MSFT

Summary

Microsoft Corporation's 2004 10-K filing reveals a company with strong revenue growth, driven primarily by its core Windows and Office products, alongside expanding server and online services. The company detailed its diverse business segments, including Client, Server and Tools, Information Worker, Microsoft Business Solutions, MSN, Mobile and Embedded Devices, and Home and Entertainment. Despite facing intense competition and legal challenges, Microsoft demonstrated resilience, with significant investments in research and development focused on future innovations like the Longhorn operating system and new device platforms. Financially, the company reported substantial cash reserves and robust operating cash flow, underscoring its financial strength. Key highlights include robust revenue growth, a significant increase in stock-based compensation expenses related to a stock option transfer program, and substantial charges from legal settlements. Microsoft also announced significant capital allocation plans, including a substantial special dividend and a multi-year share repurchase program, signaling confidence in its financial position and future prospects.

Key Highlights

  • 1Microsoft reported strong revenue growth, reaching $36.8 billion for fiscal year 2004, up from $32.2 billion in fiscal year 2003, indicating continued expansion across its product lines.
  • 2The company highlighted significant investments in research and development, with R&D expenses totaling $7.78 billion in fiscal year 2004, representing 21.1% of revenue, underscoring a commitment to innovation.
  • 3Microsoft announced a significant shift in its stock-based compensation strategy, with the adoption of fair value recognition for stock-based compensation and a notable employee stock option transfer program that incurred substantial expenses in fiscal year 2004.
  • 4The company faced substantial legal expenses and settlements, including a $1.95 billion payment to Sun Microsystems and a €497 million ($605 million) fine from the European Commission, impacting operating income.
  • 5Microsoft's financial position remained exceptionally strong, with cash and short-term investments totaling $60.59 billion as of June 30, 2004, complemented by robust operating cash flow.
  • 6In a significant shareholder return initiative, Microsoft's board approved a $3.00 per share special dividend (approximately $32 billion total) and a $30 billion share repurchase program over four years, subject to shareholder approval.
  • 7The company's business is organized into seven distinct segments: Client, Server and Tools, Information Worker, Microsoft Business Solutions, MSN, Mobile and Embedded Devices, and Home and Entertainment, with continuous strategic focus on expanding capabilities in each area.

Frequently Asked Questions

Microsoft's revenue growth in fiscal year 2004 was primarily driven by licensing of Windows Client operating systems through OEMs, Windows Server operating systems, Office, and other server applications. This was supported by growth in PC and server hardware shipments and the continuing impact from multi-year licensing agreements. The strong performance of the PC market, estimated to have grown approximately 13% in fiscal 2004, significantly benefited Microsoft's Client segment.

Legal issues had a notable impact on Microsoft's financial results. The company incurred significant charges related to the Sun Microsystems settlement ($1.95 billion) and a fine imposed by the European Commission ($605 million). These, along with stock-based compensation expenses from the employee stock option transfer program, contributed to a decline in operating income for fiscal year 2004 compared to fiscal year 2003, despite revenue growth.

Microsoft continues to make significant investments in research and development, with a strategic focus on innovation across its core businesses and new growth areas. Key areas of focus include enhancing the PC market with new designs and secure software, developing new information worker scenarios centered on collaboration and communication, strengthening its server offerings, simplifying IT complexity for professionals and developers, expanding business solutions for small and mid-market businesses, developing non-PC consumer electronics, and creating compelling entertainment experiences. The development of the next-generation Windows operating system, code-named 'Longhorn,' is a major ongoing investment.

Microsoft's board of directors approved a substantial return of capital to shareholders. This includes a one-time special dividend of $3.00 per share, totaling approximately $32 billion, subject to shareholder approval of related stock plan amendments. Additionally, the company announced a plan to repurchase up to $30 billion of its common stock over the next four years, utilizing its significant cash resources.