NOTE 21 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

In its operation of the business, management, including our chief operating decision maker, the company’s Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. The segment information in this note is reported on that basis.

During the first quarter of fiscal year 2014, we changed our organizational structure as part of our transformation to a devices and services company. As a result, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in fiscal year 2014, we reported our financial performance based on our new segments; D&C Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other. We have recast certain prior period amounts to conform to the way we internally managed and monitored segment performance during fiscal year 2014.

On April 25, 2014, we acquired substantially all of NDS. See Note 9 – Business Combinations for additional details. NDS has been included in our consolidated results of operations starting on the acquisition date. We report the financial performance of the acquired business in our new Phone Hardware segment. Prior to the acquisition of NDS, financial results associated with our joint strategic initiatives with Nokia were reflected in our D&C Licensing segment. The contractual relationship with Nokia related to those initiatives terminated in conjunction with the acquisition. With the creation of the new Phone Hardware segment, the D&C Hardware segment was renamed Computing and Gaming Hardware in the fourth quarter of fiscal year 2014.

Our reportable segments are described below.

 

Devices and Consumer

Our D&C segments develop, manufacture, market, and support products and services designed to entertain and connect people, increase personal productivity, help people simplify tasks and make more informed decisions online, and help advertisers connect with audiences. Our D&C segments are:

 

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D&C Licensing, comprising: Windows, including all OEM licensing (“Windows OEM”) and other non-volume licensing and academic volume licensing of the Windows operating system and related software; non-volume licensing of Microsoft Office, comprising the core Office product set, for consumers (“Office Consumer”); Windows Phone operating system, including related patent licensing; and certain other patent licensing revenue;

 

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Computing and Gaming Hardware, comprising: Xbox gaming and entertainment consoles and accessories, second-party and third-party video game royalties, and Xbox Live subscriptions (“Xbox Platform”); Surface devices and accessories; and Microsoft PC accessories;

 

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Phone Hardware, comprising: Lumia Smartphones and other non-Lumia phones, beginning with the acquisition of NDS; and

 

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D&C Other, comprising: Resale, including Windows Store, Xbox Live transactions, and Windows Phone Store; search advertising; display advertising; Office 365 Consumer, comprising Office 365 Home and Office 365 Personal; Studios, comprising first-party video games; our retail stores; and certain other consumer products and services not included in the categories above.

Commercial

Our Commercial segments develop, market, and support software and services designed to increase individual, team, and organizational productivity and efficiency, including simplifying everyday tasks through seamless operations across the user’s hardware and software. Our Commercial segments are:

 

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Commercial Licensing, comprising: server products, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); Windows Embedded; volume licensing of the Windows operating system, excluding academic (“Windows Commercial”); Microsoft Office for business, including Office, Exchange, SharePoint, Lync, and related CALs (“Office Commercial”); Microsoft Dynamics business solutions, excluding Dynamics CRM Online; and Skype; and

 

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Commercial Other, comprising: Enterprise Services, including Premier Support Services and Microsoft Consulting Services; Commercial Cloud, comprising Office 365 Commercial, other Microsoft Office online offerings, Dynamics CRM Online, and Microsoft Azure; and certain other commercial products and online services not included in the categories above.

Revenue and cost of revenue are generally directly attributed to our segments. Certain revenue contracts are allocated among the segments based on the relative value of the underlying products and services. Cost of revenue is directly charged to our hardware segments. For the remaining segments, cost of revenue is directly charged in most cases and allocated in certain cases, generally using a relative revenue methodology.

We do not allocate operating expenses to our segments. Rather, we allocate them to our two segment groups, Devices and Consumer and Commercial. Due to the integrated structure of our business, allocations of expenses are made in certain cases to incent cross-collaboration among our segment groups so that a segment group is not solely burdened by the cost of a mutually beneficial activity as we seek to deliver seamless experiences across devices, whether on-premises or in the cloud.

Operating expenses are attributed to our segment groups as follows:

 

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Sales and marketing expenses are primarily recorded directly to each segment group based on identified customer segment.

 

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Research and development expenses are primarily shared across the segment groups based on relative gross margin but are mapped directly in certain cases where the value of the expense only accrues to that segment group.

 

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General and administrative expenses are primarily allocated based on relative gross margin.

Certain corporate-level activity is not allocated to our segment groups, including costs of: legal, including expenses, settlements, and fines; information technology; human resources; finance; excise taxes; and integration and restructuring costs.

Segment revenue and gross margin were as follows during the periods presented:

 

(In millions)
Year Ended June 30,				2014				2013				2012
Revenue
Devices and Consumer		Licensing		$	18,803			$	19,021			$	19,495
		Hardware:
		Computing and Gaming Hardware			9,628				6,461				6,740
		Phone Hardware			1,985				0				0
		Total D&C Hardware			11,613				6,461				6,740
		Other			7,258				6,618				6,203
		Total Devices and Consumer			37,674				32,100				32,438
Commercial		Licensing			42,027				39,686				37,126
		Other			7,547				5,660				4,644
		Total Commercial			49,574				45,346				41,770
Corporate and Other					(415	)			403				(485	)
Total revenue				$	86,833			$	77,849			$	73,723

 

(In millions)
Year Ended June 30,				2014				2013				2012
Gross margin
Devices and Consumer		Licensing		$	17,216			$	17,044			$	17,240
		Hardware:
		Computing and Gaming Hardware			893				956				2,495
		Phone Hardware			54				0				0
		Total D&C Hardware			947				956				2,495
		Other			1,770				2,046				1,998
		Total Devices and Consumer			19,933				20,046				21,733
Commercial		Licensing			38,604				36,261				34,463
		Other			1,856				921				579
		Total Commercial			40,460				37,182				35,042
Corporate and Other					(494	)			372				(582	)
Total gross margin				$	59,899			$	57,600			$	56,193

Following is operating expenses by segment group. As discussed above, we do not allocate operating expenses below cost of revenue to our segments.

 

(In millions)
Year Ended June 30,		2014				2013				2012
Devices and Consumer		$	11,219			$	10,625			$	15,682
Commercial			16,993				16,050				15,064
Corporate and Other			3,928				4,161				3,684
Total operating expenses		$	32,140			$	30,836			$	34,430

 

Following is operating income (loss) by segment group.

 

(In millions)
Year Ended June 30,		2014				2013				2012
Devices and Consumer		$	8,714			$	9,421			$	6,051
Commercial			23,467				21,132				19,978
Corporate and Other			(4,422	)			(3,789	)			(4,266	)
Total operating income		$	27,759			$	26,764			$	21,763

Corporate and Other operating income includes adjustments to conform our internal accounting policies to U.S. GAAP and corporate-level activity not specifically attributed to a segment. Significant internal accounting policies that differ from U.S. GAAP relate to revenue recognition, income statement classification, and depreciation.

Corporate and Other activity was as follows:

 

(In millions)
Year Ended June 30,		2014				2013				2012
Corporate (a)		$	(3,888	)		$	(4,236	)		$	(3,671	)
Other (adjustments to U.S. GAAP):
Revenue reconciling amounts (b)			(415	)			403				(485	)
Cost of revenue reconciling amounts			(79	)			(31	)			(97	)
Operating expenses reconciling amounts			(40	)			75				(13	)
Total Corporate and Other		$	(4,422	)		$	(3,789	)		$	(4,266	)

 

(a)	Corporate is presented on the basis of our internal accounting policies and excludes the adjustments to U.S. GAAP that are presented separately in those line items.

(b)

Revenue reconciling amounts for fiscal year 2014 included a net $349 million of revenue deferrals related to sales of certain devices bundled with other products and services (“Bundled Offerings”). Revenue reconciling amounts for fiscal years 2012 and 2013 included the deferral and subsequent recognition, respectively, of $540 million of revenue related to the Windows Upgrade Offer.

No sales to an individual customer or country other than the United States accounted for more than 10% of fiscal year 2014, 2013, or 2012 revenue. Revenue, classified by the major geographic areas in which our customers are located, was as follows:

 

(In millions)
Year Ended June 30,		2014				2013				2012
United States (a)		$	43,474			$	41,344			$	38,846
Other countries			43,359				36,505				34,877
Total		$	86,833			$	77,849			$	73,723

 

(a)	Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

 

Revenue from external customers, classified by significant product and service offerings were as follows:

 

(In millions)
Year Ended June 30,		2014				2013				2012
Microsoft Office system		$	24,323			$	22,995			$	22,299
Windows PC operating system			16,856				17,529				17,320
Server products and tools			17,055				15,408				14,232
Xbox Platform			8,643				7,100				8,045
Consulting and product support services			4,767				4,372				3,976
Advertising			4,016				3,387				3,181
Phone			3,073				615				162
Surface			1,883				853				0
Other			6,217				5,590				4,508
Total		$	86,833			$	77,849			$	73,723

Our total Commercial Cloud revenue was $2.8 billion, $1.3 billion, and $0.7 billion in fiscal years 2014, 2013, and 2012, respectively. These amounts are included in their respective product categories in the table above.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is charged to the respective segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:

 

(In millions)
June 30,		2014				2013				2012
United States		$	17,653			$	16,615			$	14,081
Finland			9,840				12				8
Luxembourg			6,913				6,943				6,975
Other countries			5,713				4,159				3,827
Total		$	40,119			$	27,729			$	24,891