One of the key tenets of negotiation is “knowledge is power”. Analyzing Microsoft’s® financial reports will provide valuable information as you prepare to negotiate your licensing agreement. The statements can be found at: http://www.microsoft.com/investor/default.aspx

What to look out for:

When reading through the financial reports, focus on the following:

1.   Structure of Business Segments

Microsoft® is broken up into five business segments, each of which has its own set of targets. This provides you with necessary leverage, specifically if a new product is being launched or if that segment is falling behind in its targets.

The five segments are: Windows® and Windows® Live (PC operating systems, related software and online services, and PC hardware products);Server and Tools (Server software, software developer tools, Cloud-based services, and Consulting services);Online Services (generate revenue through the sale of search and display advertising); Microsoft Business (Microsoft® Office system and Microsoft® Dynamics business solutions); and the Entertainment and Devices Division (markets products and services designed to entertain and connect people).

2.   Competitive Landscape

As with any large organizations, competitors are a constant point of anxiety for Microsoft®. Most of the concessions made by Microsoft® are when they believe you are evaluating a competitive solution. Researching these competitive offerings thoroughly and being specific and detailed in communicating their key value propositions will help you significantly in your negotiations.

Key competitors include IBM®, Oracle®, Linux® and Google®.

3.   Microsoft’s® Revenue Streams

A significant portion of Microsoft’s® revenue is recurring. Their business model is based on predictable cash-flow.

To achieve this, in most of the enterprise licensing programs, Software Assurance is included which provides you with access to the latest software as it becomes available. Microsoft® also includes additional Software Assurance benefits to make the option of including the Software Assurance more attractive.

The Enterprise Agreement is a three year commitment and includes enrollments that allow you to license devices and users, your development and database environment as well as your security and systems management infrastructure. There is also the option of the Enterprise Subscription Agreement that allows your company to subscribe to—rather than purchase—Microsoft® software licenses.

For Cloud Computing, Microsoft® provides the option of integrating online services, specifically Office® 365 into the Enterprise Agreement; although you could also choose to make use of the cloud solutions offered through independent Microsoft® Hosting Providers, in which case you would make use of the Service Provider Licensing Agreement (SPLA).

The greatest discounts are available with the comprehensive licensing programs as they require long-term and in many cases enterprise-wide commitments.

4.   Microsoft® Risk Factors   

Spend some time understanding what Microsoft® has identified as their key risks. You will then be able to use this to your benefit when negotiating. There are two key risks that I would like to emphasize:

“Delays in product development schedules may adversely affect our revenue”:

Note: 

The value of Software Assurance relies on Microsoft’s® ability to deliver at least one new release within the three year period of your agreement. Having a clear view of the product roadmap will help you make the necessary ROI calculations.


We may experience outages, data loss and disruptions of our online services if we fail to maintain an adequate operations infrastructure. 

Microsoft® has invested significantly in its Online Services Infrastructure. Added to the cost element is the fact that Cloud Computing is highly competitive with alternative Software as a Service Solutions available through IBM®, Oracle®, Google®, Amazon® and Salesforce.com® to name just a few. If you are considering Office® 365 as part of your IT roadmap this is good news for you as Microsoft® is desperate to consolidate and grow its presence in this space.

5.  FY12 Predictions and Roadmap Information

As with the risk assessment, careful consideration of the FY 12 predictions and roadmap can provide you with valuable information you can use to maximize your licensing investment.

Two examples include:

Example One: “Twenty-five percent of enterprise desktops have already deployed Windows® 7, over 90% of enterprises have committed to a deployment plan.”

A key risk to Microsoft® is that the organization does not want to renew the licensing agreement, as they have not yet deployed the current set of products. The fact that only 25% of enterprise customers had deployed Windows® 7, a full two years after it was released would be of concern to Microsoft®. Many organizations chose to skip Windows® 7 in favor of waiting for Windows® 8. This raises questions around the value of Software Assurance and the required upfront commitment.

Example Two: “We expect multi-year licensing revenue and enterprise services revenue to grow low double-digits for the first quarter and full fiscal year.”

This once again emphasizes Microsoft’s® focus on its multi-year licensing programs. It is not clear in these predictions how much growth Microsoft® is expecting from online services within the context of these agreements but there are two important developments:

  • The release of Office® 365 – Microsoft® Office collaboration and productivity tools delivered through the cloud.
  • A recent change made to the Product Use Rights known as License Mobility, which allows you to deploy certain server application licenses on premises or in the cloud.

Summary of the Financial Results

Revenue and Operating Income (Annual FY11)

For the fiscal year ended June 30, 2011, Microsoft reported record revenue of $69.94 billion, a 12% increase from the previous year. Operating income increased by 13% to $27.16 billion, net income increased by 23% to $23.15 billion, and diluted earnings per share for the year increased by 28% to $2.69.

Revenue and Operating Income per Segment (Q4 FY11)

Microsoft® Business Division revenue for the fourth quarter grew 7% and 16% for the full year. Office® 2010 continues to be the fastest-selling version of Microsoft® Office in history with over 100 million licenses sold. In June, Microsoft® released Office® 365 their cloud version of the Microsoft® Office collaboration and productivity tools. Server & Tools revenue grew 12% for the fourth quarter, and grew 11% for the full year.

Windows® Server, System Center®, and SQL Server® continued to be responsible for most of the revenue growth in the segment.

 Other segment reporting for the quarter included:

  • Windows® and Windows® Live Division revenue declined 1% for the fourth quarter and revenue for the full year decreased 2%. Windows® 7 has sold over 400 million licenses and business deployments continue to accelerate.
  • Online Services Division revenue grew 17% for the fourth quarter and 15% for the full year, primarily driven by increases in search revenue.
  • Entertainment & Devices Division revenue grew 30% for the fourth quarter and 45% for the full year, due to the ongoing momentum of the console, Kinect, and Xbox Live. Xbox 360 has been the top-selling game console in the U.S. over the past twelve months.

 

Operating Segments

Segment

Description

Competitors

Windows® and Windows® Live

  • Develops and markets PC operating systems, related software and online services, and PC hardware products.
  • Designed to simplify everyday tasks through efficient Web browsing and seamless operations across the user’s hardware and software. 75% of total Windows® Division revenue comes from Windows®operating system software purchased by original equipment manufacturers (“OEMs”)
  • Google®
  • Apple®

Server and Tools

  • Develops and markets server software, software developer tools, services, and solutions that are designed to make information technology professionals and developers and their systems more productive and efficient.
  • Also builds standalone and software development lifecycle tools
  • Cloud-based services comprise a scalable operating system with computing, storage, and management capabilities and a relational database, which allow customers to run enterprise workloads and web applications in the cloud.
  • Server and Tools offers a broad range of enterprise consulting and product support services (“Enterprise Services”) that assist customers in developing, deploying, and managing Microsoft® server and desktop solutions.
  • Opensource®
  • Red-hat®
  • Hewlett-Packard®
  • IBM®
  • Intel®
  • Oracle®
  • CA® Technologies
  • BMC®
  • VMWare®

Online Services Division

  • Online Services Division (“OSD”) develops and markets information and content designed to help people simplify tasks and make more informed decisions online, and that help advertisers connect with audiences. OSD offerings include Bing, MSN, adCenter, and advertiser tools.
  • Bing and MSN generate revenue through the sale of search and display advertising. Search and display advertising generally accounts for nearly all of OSD’s annual revenue.
  • Google®
  • Apple®

Microsoft®Business Division

  • Consist of the Microsoft® Office system (comprising mainly Office®, SharePoint®, Exchange® and Lync®) and Microsoft® Dynamics®business solutions. Microsoft® Office system products are designed to increase personal, team, and organization productivity through a range of programs, services, and software solutions, which may be delivered either on premise or as a cloud-based service.
  • Approximately 80% of MBD revenue is generated from sales to businesses, which includes Microsoft® Office system revenue generated through volume licensing agreements and Microsoft® Dynamics® revenue.
  • Adobe®
  • Apple®
  • Corel®
  • Google®
  • IBM®
  • Oracle®
  • Infor®
  • Sage®
  • SAP®
 Entertainment and Devices Division
  •  Develops and markets products and services designed to entertain and connect people. The Xbox 360 entertainment platform, including Kinect, is designed to provide a unique variety of entertainment choices for individuals and families through the use of our devices, peripherals, content, and online services.
  • Windows® Phone is designed to bring users closer to the people, applications, and content they need, while providing unique capabilities such as Microsoft® Office and Xbox® LIVE functionality.

 

  • Nintendo®
  • Sony®
  • Apple®
  • Google®
  • Research in Motion®

 

Volume Licensing Revenue Summary (Q4 FY11)

Unearned revenue from volume licensing programs represents customer billings for multi-year licensing arrangements paid either at inception of the agreement or annually at the beginning of each billing coverage period. Also included in unearned revenue are payments for post-delivery support and consulting services to be performed in the future.

The components of unearned revenue were as follows:

(In millions)

June 30,

2011

2010

Volume licensing programs

$ 14,625

$ 12,180

Other

$  2,495

$ 2,650

Total

$ 17,120

$ 14,830

 

 Unearned revenue by segment was as follows:

(In millions)

June 30,

2011

2010

Windows® & Windows® Live Division

$ 1,782

$ 1,701

Server and Tools

$ 6,552

$ 5,282

Microsoft® Business Division

$ 7,950

 $ 7,004

Other segments

$ 836

 $ 843

Total

$ 17,120

$ 14,830

Risk Factors

Microsoft® identified the following risks:

  1. The cloud-based computing model presents execution and competitive risks.
  2. Challenges to our business models may reduce our revenue or operating margins.
  3. Intense competition: Competitors range in size from Fortune 100 companies to small, specialized single-product businesses and open source community-based projects.
  4. Protection of intellectual property rights.
  5. Security vulnerabilities could lead to reduced revenue, liability claims, or competitive harm.
  6. Improper disclosure of personal data could result in liability and harm our reputation
  7. We may experience outages, data loss and disruptions of our online services if we fail to maintain an adequate operations infrastructure.
  8. We are subject to government litigation and regulatory activity that affects how we design and market our products.
  9. Our business depends on our ability to attract and retain talented employees.
  10. Delays in product development schedules may adversely affect our revenue.
  11. We make significant investments in new products and services that may not be profitable.
  12. Adverse economic conditions may harm our business.
  13. We have claims and lawsuits against us that may result in adverse outcomes.
  14. We operate a global business that exposes us to additional risks.
  15. Catastrophic events or geo-political conditions may disrupt our business.
  16. Acquisitions, joint ventures and strategic alliances may have an adverse effect on our business.

FY12 Predictions and Roadmap Information

 Microsoft® expects fiscal 2012 operating expense guidance of 3% to 5% growth from 2011, or $28.0 billion to $28.6 billion.

  1. During Q4 FY11, Microsoft® unveiled a preview of the next version of Windows®, codenamed Windows® 8, featuring a new user interface and application experience.
  2. With Skype®, Microsoft® will increase the accessibility of real-time video and voice communications to both consumers and enterprises, thereby generating new business and revenue opportunities for Microsoft®.
  3. Twenty-five % of enterprise desktops have already deployed Windows® 7 and over 90% of enterprises have committed to a deployment plan.
  4. Expected release: New version of System Center®.
  5. Mango (Windows® Phone), will deliver deeper social experiences, multitasking, Office® 365 integration, and will feature Internet Explorer® 9 to optimize the browsing experience. During the quarter, we also signed the Nokia alliance, added several new OEM partners, launched on Verizon and Sprint, and saw the number of applications in the marketplace increase 60% sequentially.
  6. Microsoft® expects increased diversity of hardware and services designed to satisfy users’ growing demands for a unified, consistent experience across multiple devices. Microsoft® also expects businesses and developers to continue their transition to the cloud given the compelling economics and flexibility.
  7. PC growth will outpace consumer PC growth, with the business PC refresh cycle continuing throughout the fiscal year.
  8. Multi-year licensing revenue and enterprise services revenue will grow low double-digits for the first quarter and full fiscal year.
  9. Continued investment in Online Services.

Nov 2016