Demystifying Microsoft's new financial reporting structure

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:

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:

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

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.