NOTE 18 — SEGMENT INFORMATION

In its operation of the business, management, including our chief operating decision maker, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with U.S. GAAP.

In June 2015, we announced a change in organizational structure as part of our transformation in the mobile-first, cloud-first world. During the first quarter of fiscal year 2016, the Company’s chief operating decision maker requested changes in the information that he regularly reviews for purposes of allocating resources and assessing performance. As a result, beginning in fiscal year 2016, we report our financial performance based on our new segments, Productivity and Business Processes, Intelligent Cloud, and More Personal Computing, and analyze operating income as the measure of segment profitability. We have recast certain prior period amounts to conform to the way we internally manage and monitor segment performance.

 

Our reportable segments are described below.

Productivity and Business Processes

Our Productivity and Business Processes segment consists of products and cloud services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:

 

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Office Commercial, including volume licensing and subscriptions to Office 365 Commercial for products and cloud services such as Microsoft Office, Exchange, SharePoint, and Skype for Business, and related Client Access Licenses (“CALs”).

 

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Office Consumer, including Office sold through retail or through an Office 365 Consumer subscription, and Office Consumer Services, including Outlook.com, OneDrive, and consumer Skype services.

 

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Microsoft Dynamics business solutions, including Dynamics ERP products, Dynamics CRM on-premises, and Dynamics CRM Online (“Microsoft Dynamics”).

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business. This segment primarily comprises:

 

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Server products and cloud services, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and related CALs, as well as Microsoft Azure.

 

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Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

More Personal Computing

Our More Personal Computing segment consists of products and services geared towards harmonizing the interests of end users, developers, and information technology professionals across screens of all sizes. This segment primarily comprises:

 

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Windows, including Windows original equipment manufacturer licensing (“Windows OEM”) and other non-volume licensing of the Windows operating system, volume licensing of the Windows operating system, patent licensing, Windows Embedded, MSN display advertising, and Windows Phone licensing.

 

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Devices, including phones, Surface, and Microsoft PC accessories.

 

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Gaming, including Xbox hardware; Xbox Live, comprising transactions, subscriptions, and advertising; video games; and third-party video game royalties.

 

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Search advertising.

Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue on certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit, and are generally allocated based on relative gross margin.

In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include costs of: legal, including settlements and fines; information technology; human resources; finance; excise taxes; field selling; shared facilities services; and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments, including impairment, integration, and restructuring expenses.

 

Segment revenue and operating income (loss) were as follows during the periods presented:

 

(In millions)		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Revenue
Productivity and Business Processes		$	6,522			$	6,457			$	19,518			$	19,769
Intelligent Cloud			6,096				5,903				18,331				17,419
More Personal Computing			9,458				9,369				31,563				33,917
Corporate and Other			(1,545	)			0				(4,706	)			295
Total revenue		$	20,531			$	21,729			$	64,706			$	71,400

 

(In millions)		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Operating income (loss)
Productivity and Business Processes		$	2,994			$	3,204			$	9,461			$	10,192
Intelligent Cloud			2,188				2,533				7,168				7,238
More Personal Computing			1,645				1,049				5,178				4,063
Corporate and Other			(1,544	)			(192	)			(4,705	)			(1,279	)
Total operating income		$	5,283			$	6,594			$	17,102			$	20,214

Corporate and Other operating income (loss) includes adjustments to conform our internal accounting policies to U.S. GAAP, and impairment, integration, and restructuring expenses. Significant internal accounting policies that differ from U.S. GAAP relate to revenue recognition.

Corporate and Other operating income (loss) activity was as follows during the periods presented:

 

(In millions)		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Revenue reconciling amounts and other (a)		$	(1,544	)		$	(2	)		$	(4,705	)		$	294
Impairment, integration, and restructuring expenses			0				(190	)			0				(1,573	)
Total Corporate and Other		$	(1,544	)		$	(192	)		$	(4,705	)		$	(1,279	)

 

(a)	Revenue reconciling amounts and other for the three months ended March 31, 2016 primarily consisted of a net $1.6 billion of revenue deferrals related to sales of Windows 10.

 

Revenue reconciling amounts and other for the nine months ended March 31, 2016 primarily consisted of a net $4.6 billion of revenue deferrals related to sales of Windows 10. Revenue reconciling amounts and other for the nine months ended March 31, 2015 included the net recognition of $296 million of previously deferred revenue related to bundled products and services.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment, and 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.