Demystifying Microsoft's new financial reporting structure

Demystifying Microsoft's new financial reporting structure

Summary: Microsoft officials shared a few more details about the new company's new financial reporting structure, reflective of its July reorg. The new structure is complex, to say the least.

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When Microsoft announced its new financial reporting structure reflective of its July company-wide reorg, there was considerable head scratching among those of us trying to decipher the details.

On September 26, Microsoft officials shared a few more tidbits about which product teams will be reporting into the five new groups which will be reporting earnings, starting with the first fiscal 2014 quarter, due to be announced October 24.

Up until now, Microsoft has reported revenues in a way that was aligned with how the company was organized. There were five groups: Microsoft Business Division (MBD), Windows client, Server & Tools (STB), Online Services (OSD), Entertainment and Devices. Here are the five new groups, as Microsoft officials outlined during the company's Financial Analyst Meeting last week:

5newsegments

At the highest level, Microsoft now has two uber-segments: Devices and Consumer (D&C) and Commercial. Included in D&C are three sub-segments:

  • D&C Licensing
  • D&C Hardware
  • D&C Other

Under Commercial, there's now:

  • Commercial Licensing
  • Commercial Other

D&C Licensing is where Windows (OEM and non-volume licensing sales); Consumer Office (Office preloaded on PCs and sold standalone at retail); Windows Phone, Android/Chrome OS-related patent licensing and unspecified "other" patent licensing sit.

D&C Hardware is where Xbox consoles, accessories, second- and third-party video games , Xbox Live subscriptions, Surfaces and PC accessories all reside now. If and when Microsoft closes its Nokia handset acquisition, the Windows Phones made by Nokia will likely be in this unit.

D&C "Other" includes Windows Store, Xbox Live and Windows Phone marketplace transactions; Microsoft Studios first-party games, search and display advertising and Office 365 Home Premium subscription revenues.

Commercial Licensing is whereWindows Server, SQL Server, Visual Studio, System Center and Windows Embedded -- the core STB products -- all sit. It's also where volume licensing of Windows; Office for Business (including Exchange, SharePoint and Lync); most of the Microsoft Dynamics products and Skype all sit.

The Commercial "Other" category is where Enterprise services (including product support), Microsoft Consulting, Office 365 (except for Home Premium); Dynamics CRM Online; and Windows Azure all live.

If those new groupings aren't confusing enough, here's the next wrinkle. Results for some products, like Windows, will be divided among multiple reporting units. Example:

windowsnew

Here's how the segment mapping looks when the current five segments are mapped across the five new units: 

segmentmapping

It's fairly apparent that it's going to be harder than ever, if not totally impossible, to determine revenues and losses from Bing & MSN, Windows Phone, Skype and other individual products, as they'll be lumped together with a number of totally different products and services under the new divisions.

Microsoft officials said the company will report its first quarter fiscal 2014 results (on October 24) two ways: Using the "old" five business units and using the five new ones to help with the transition to the new structure. 

Microsoft has made available the full slide deck with more details about the new reporting structure

 

Topics: Microsoft, Cloud, Windows, Microsoft Surface, Windows Phone

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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22 comments
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  • Perfect for hiding fraud.

    And misdirecting investors.
    jessepollard
    • Troll.

      Go back to your corner.
      ForeverCookie
      • Shill.

        Go back to your cubicle in Redmond.
        augenj
        • At least I have a cubicle.

          I'm a developer.

          What are you, Pot?
          ForeverCookie
          • At least I know what I'm talking about.

            My experience in computers of all types trumps yours. I've been a systems analyst, systems programmer, and yes a DEVELOPER for many years on many platforms including your precious Windows.
            augenj
          • And now?

            MS wants me to bail out on Visual Studio desktop applications for the primitive tools that exist to create touchy-feely apps? Not a chance. Good luck in your future career of writing code for a failed OS. I'll be long retired if Windows 8 or its iterations ever get off the ground.
            augenj
          • Trying to promote yourself?

            You just gave me 2 different names for a developer, while calling yourself a developer.

            At least I'm modest about myself.

            Oh, and a failed OS?

            90% of the PC market disagrees with you.

            I write for what I want, whether it's Windows, Android, or iOS.

            I've got a Mac somewhere on stand-bye, and an iPod when it's needed.

            I don't limit myself to a single platform.
            ForeverCookie
          • Nay, child.

            "You just gave me 2 different names for a developer, while calling yourself a developer"
            Systems programmer as in OPERATING SYSTEMS is not the same as DEVELOPER, aka, Application programmer. I've done them all and it's not bragging. It's a fact. You haven't.
            augenj
          • Good luck in the unemployment line.

            People won't hire those that can't/won't write for Windows 8, seeing it will be the most popular OS.
            William.Farrel
          • What????

            Are you saying that you have to code for Windows 8 to be hired to write code?

            Surely you can see further than that, right?

            As for the subject of the article: any time I see a term like "demystifying financial reporting structure" it signals a huge red flag. If you bring a Shaman, Voodoo Priest or witch Doctor to the meeting to read financial reporting you have already lost control of the ball.

            Why in the world would financial reporting require demystifying if there was no intention of hiding the real picture?
            InformationRetrieval
          • Stick to the subject, not the person

            You don't know ForeverCookie's amount of experience; consequently you have no way of knowing that you exceed it. Neither do you know where he sits.

            So having established yourself as willing to make facts up, am I am supposed to believe your opinion on Windows or reporting structures?

            Anyhow, the point of the article is to discus the new reporting structures, and yes, financial reporting is arranged sometimes to not disclose crucial information to competitors or to disguise bad results.

            The reality is grey at Microsoft; some good and profitable business, and some not so good.
            AndrewDover
    • You always did say that Apple and Google already do this

      so what you're really saying is that MS is late to the game, again.
      William.Farrel
      • Which game? Hiding losses? MS has been doing that for 20 years

        Just not as successfully. Now they can do it with ease.
        jessepollard
        • Losses?

          Have you seen their earnings report?

          They had a write-down on RT, but they paved out the damage with profits.
          ForeverCookie
          • They had a 10 year sequence of losses on Xbox

            covered by overcharging on Office and Windows.

            They had total phone failure on Kin. But no reports on how much they lost.

            They have had huge losses - all being hidden. It is one of the reasons their earnings have been flat for nearly 10 years.
            jessepollard
          • re: a 10 year sequence of losses on Xbox

            "covered by overcharging on Office and Windows."

            And XBox game sales, don't forget.

            In any case, isn't diversification neat?
            daftkey
          • Yeah, they wrote off the Kin.

            My guess is that the losses on that were similar to about a month's worth of stock the free soft drinks in the employee kitchens.

            Microsoft still has a printing press under Lake Washington that prints up *lots* of money every quarter. And, it's not just "Office and Windows" - take a look at what groups like Servers and Tools produce.
            Flydog57
        • So you're agreeing that MS hasn't been as successful as Apple and Google

          in hiding their loses, and now that they have this new financial reporting, they can now hide those loses as successfully as Apple or Google hide theirs.

          Isn't that what we both said in the first posts?
          William.Farrel
        • Must have been pretty good at it...

          ..they survived numerous recessions during those 20 years, including the melt-down of some pretty huge companies due to the exact same accounting tricks you accuse them of, all the while posting multi-billion dollar profits and declaring dividends year over year.

          Or.. maybe they just managed to remain profitable while spending money on R&D. You know, like all software companies do.
          daftkey
  • New reporting reflects new strategy.

    With the juggling of Microsoft's divisions and its newer strategy that focuses on "services", I can see where the new segmentation of their financial reporting makes sense.

    Consider the "Commercial Licensing" segment. All of the products that exist in this segment more or less feed sales of other products in this segment (for example, a Dynamics customer is also going to have investments in Windows Server, SQL Server and MS Office for Business. Many will also use Visual Studio, either for BI development or software customization, and SharePoint for hosting BI tools integrated with these products).

    While I agree that these new categories make it harder to determine the profitability of individual products (such as Skype, MSN, Bing, etc), I also think that looking at each product like it lives on an island does nobody any favours anyway. Many of these products, again, drive profitability of the company as a whole, even of individual products have low or negative profitability. For external investors, it is far better to look at the health of the company's overall strategic direction as a whole, which is precisely what these new categories allow us to do.

    You know that internally, the profitability of products are tracked at a very detailed level (far more detailed than GAAP or IFRS would allow). This is really where individual product profitability is actually relevant.

    For those of us who like to put on the pom-poms and cheer market share numbers, sure, this makes Microsoft's external filings a poor tool for measurement, but for most people, using financials to draw market share conclusions was always a poor idea anyway. We have far better tools available for this purpose.

    For the main consumers of these financial reports (analysts, shareholders, banks) - this new structure actually provides a much better picture of Microsoft's different strategies and how well they are executing each one.
    daftkey