Fiscal 2008 10-K by the Numbers

[Editor's Note: I will be on vacation next week, so posting will be lighter than usual. But I can still be reached by cell phone or e-mail, as needed.]

Oh, the numbers are mind-boggling for a company with annual revenues of more than $60 billion, five major divisions and loads of products. Please consider this post the Cliff Notes version of Microsoft's annual filing with the Securities and Exchange Commission.

Divisional sales by channel:

• Client: More than 80 percent OEM. No single customer (presumably OEM) accounted for more than 10 percent of revenue in fiscal 2008, same as 2007. "Sales to Dell and its subsidiaries accounted for approximately 11 percent of fiscal year 2006 revenue," according to the 10-K. I find that to be interesting given the Windows SKU mix is now nearly three-quarters "premium" versions, which cost OEMs more per copy. I wonder: Just how many Linux desktops is Dell shipping? Also, PC sales were strong during fiscal 2008—up 12 percent to 14 percent, by Microsoft estimates—buoyed by the shift from desktops to laptops and increased shipments to emerging markets.
• Server: 45 percent volume licensing, 25 percent packaged products and 10 percent OEM.
• Business: 80 percent business, 20 percent consumer. Office accounts for more than 90 percent of the division's revenue.

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Revenue growth by division:

• Client: Microsoft shipped (the company says sold) 130 million Windows Vista licenses during fiscal 2008, for a lifetime total of 180 million on June 30. Hahaha. The filing says that "millions of enterprise seats had been deployed." Oh? How many? I'm surprised Microsoft didn't call out massive enterprise downgrades to Windows XP as a risk factor. OEM revenue increased $1.7 billion, or 13 percent, and commercial and retail licensing revenue increased $209 million, or 8 percent. Primary driver: Enterprise agreements, and that makes sense. Windows Vista Enterprise requires Software Assurance.
• Server: Revenue increased by $1.1 billion or 13 percent, primarily driven by Visual Studio, SQL Server and Windows Server, which is no surprise. Microsoft increasingly is getting into the consulting business, competing with its solution providers. "Consulting and Premier and Professional product support services revenue increased $428 million or 26 percent, primarily due to higher demand for Premier services by corporate enterprises," according to the 10-K.
• Business: The division's revenue increased by $2.6 billion, or 21 percent, "primarily as a result of growth in volume licensing agreement revenue and strong transactional license sales to businesses." But consumer revenue dipped 2 percent, or $80 million. Microsoft chocked up the decrease to a sales boost from the Office 2007 launch during the previous fiscal year. I don't believe it. Office 2007 was available for just half of fiscal 2007 but all of fiscal 2008. I believe this is sign of changes in the consumer market, as demand for dedicated productivity suites begins a gradual but later rapid decline. It's Web 2.0, baby, and commoditization of word processing and spreadsheet features by other products.

• Online Services: "Online advertising revenue increased $553 million or 31 percent, to $2.3 billion," according to the SEC filing. The figure includes $161 million from aQuantive. "Agency revenue, which is solely derived from aQuantive, was $345 million during the year." Microsoft investment increases far outpaced revenue gains. "Cost of revenue increased $796 million or 71 percent, primarily driven by increased data center and equipment costs, online content expenses and aQuantive-related expenses." Microsoft's Online Services group is a massive black hole of investment.
• Entertainment and Devices: Microsoft shipped 8.7 million Xbox 360 consoles in fiscal 2008, up from 6.6 million the previous year. Growth is impressive considering bad publicity coming from the Red Ring of Death and the huge success of Nintendo's Wii. "Xbox 360 platform and PC game revenue increased $1.7 billion or 41 percent as a result of increased Xbox 360 console sales, video game sales led by Halo 3, Xbox Live revenue, and Xbox 360 accessory sales," according to the 10-K.

Revenue by geography: OK, so whose chain is Microsoft pulling? I distinctly remember Microsoft CFO Chris Liddell quote a figure of about two-thirds for the proportion of non-U.S. to U.S. sales. But that's not how I read the numbers in the 10-K. Microsoft generated $60.4 billion in fiscal 2008, $35.9 billion from the United States and $24.92 billion from everywhere else.

I'm no math whiz, but doesn't that work out to 59 percent of revenue coming from a single market, the United States? Granted, other regions are contributing more to revenue. In fiscal 2007, Microsoft revenue topped $51 billion, $31.3 billion from the United States and $19.77 billion from other regions. The U.S. percentage was 61 percent. Mmmm, this topic needs to be a longer, separate blog post.

Revenue drivers:

• Fiscal 2008 compared with 2007: "Revenue growth was driven primarily by increased licensing of the 2007 Microsoft Office system, increased Xbox 360 platform sales, increased revenue associated with Windows Server and SQL Server, and increased licensing of Windows Vista."
• Fiscal 2007 compared with 2006: "Revenue growth was driven primarily by licensing of the 2007 Microsoft Office system and Windows Vista, increased revenue associated with SQL Server, Windows Server, and Visual Studio, and increased Xbox 360 platform sales."

R&D: Microsoft spent $8.2 billion on R&D in fiscal 2008, compared with $7.1 billion in 2007 and $6.6 billion in 2006.

Legal Charges: $1.8 billion—$1.4 billion from European Union fines—compared with $511 million in fiscal 2007.

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