Musings on Microsoft's financials

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A look at the Office suite numbers in the MSFT annual report.

Having trouble sleeping? Head over to the US Securities and Exchange Commission web site for the latest Annual Report from Microsoft. 95 pages of tedium guaranteed to have your eyelids slamming shut.

Among the dry numbers and drier prose there are some points of interest. These mandatory reports have to include a more pessimistic view, mostly to cover the board and executives against accusations of hiding facts from the market. There’s a section (page 14) headed ‘Risk Factors’ that you’d not usually see from such an otherwise upbeat company.

Sometimes the statements are really acknowledging something that’s widely known or quite obvious. For example “our Surface devices will compete with products made by our OEM partners, which may affect their commitment to our platform“. (bottom of page 14)

Others are genuinely new information like the release date of the first Surface device on 26 October 2012 … in a sentence at the bottom of page 4: “The next version of our operating system, Windows 8, will be generally available on October 26, 2012. At that time, we will begin selling the Surface, a series of Microsoft-designed and manufactured hardware devices.”  which took at few days for anyone to notice until a sharp-eyed staffer at Cnet saw it.

Our interest, in the moments before sleep arrived, was in some Office related stats.

Microsoft Office software is part of the Microsoft Business Division (MBD). That division has two parts; Office System (Office software, Office 365, SharePoint, Exchange Server and Lync) and Microsoft Dynamics.

Microsoft doesn’t break down the revenue generated from Office software sales alone but there are some indicators on page 7.

Over 90% of the Business Division revenue comes from the Office System. It’s reasonable to believe that the vast majority of that 90% is from sales of Office software (mostly Office 2010) but we could find nothing in the report to quantify that.

About 80% of the Business Division revenue is sales to businesses either volume licenses of Office System products or Dynamics products.

The other 20% of revenue is sales to consumers either boxed product or sales via computer makers. It’s probable that the margin to Microsoft is getting better on retail sales as the company continues to move towards direct online sales. Direct sales put more of the retail price in Microsoft’s pocket.

Down on page 30 there’s some hard numbers for those vague percentages.

In the year to 30 June 2012 the Business Division generated almost $24 billion of revenue and $15.7 billion in operating income.

That’s more than any other part of Microsoft, including the Windows division. (Total revenue to 30 June 2012 was $73.7 billion) If you’ve ever wondered why Microsoft so jealously guards its vast dominance of the Office suite market – now you know. See the per division breakdown on page 85.

More than half of sales are attributed to the USA (page 86). While that includes an unstated amount of multinational and OEM income, it still indicates what a consumption powerhouse the American economy is for global companies like Microsoft.

In several parts of the report there are notes about how the sales of Windows and Office are affected by release dates of new versions and PC sales. The cyclical nature of Windows and Office income is something Microsoft wants to smooth out. That’s just one reason why Office 2013 is being pushed more as an annual subscription with Office 365 because a software subscription means a more even flow of money to the Redmond coffers.

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