Inside Microsoft's Israel R&D Center: Almost $1B in annual income and an average monthly salary of $18k

Income of 3.5 billion shekels (approximately $950 million) from the parent company, salaries of 2.1 billion shekels ($570 million) a year, and approximately 2,700 employees — these are just some of the figures Calcalist can reveal regarding Microsoft's R&D center in Israel.

Microsoft runs one of its most strategic development centers out of Israel, and it is one of the largest and most intriguing in the country. More than 370 development centers of multinational companies, such as Intel, Amazon, Google, Philips, IBM, and other technology giants—mostly American—operate in Israel. The information usually revealed about these centers mainly concerns the technology they develop, the working conditions of the employees, etc. Little is known about the business of these companies whose development centers make up the lion's share of high-tech employers in Israel but are not obligated to disclose their numbers.

Microsoft Herzliya

Calcalist obtained reports on the activities of Microsoft's development center in Israel, conducted by the accounting firms EY and Deloitte. According to the reports, the Israel R&D center registered income of approximately NIS 3.5 billion in 2023—a commission from the parent company for the center's activities in Israel. Microsoft Israel R&D's income in 2021 was NIS 2.87 billion ($780 million) and NIS 2.2 billion shekels ($600 million) in 2022.

The company's income is calculated using the cost-plus percentage beyond cost (cost-plus) method. Currently, Microsoft pays its Israel R&D headquarters 6% above the cost. A significant part of the improvement in the center's income in recent years is due to the increase in the commission rate.

In recent years, the development center of Microsoft Israel has been managed by Michal Braverman-Blumenstyk and, before her, by Assaf Rappaport, currently CEO and one of the founders of the cyber unicorn Wiz. The center is responsible for a series of the company's strategic products and a large part of its activities in the cyber field, in which the company made several acquisitions in Israel.

Salaries are the main expense

Ernst & Young's report was made as part of an inspection process carried out at Microsoft's request to examine the distribution of NIS 1.5 billion to the parent company through a stock buyback by the Israeli R&D center. The inspection was carried out because the local company does not meet the profit test for the purpose of the distribution. The inspection revealed that although the company does not currently have the full balance of funds required to purchase the stocks, thanks to the support of the global company and the nature of its activities, it will not have any problem meeting this financial obligation.

According to the reports obtained by Calcalist, the center spent NIS 2.1 billion ($570 million) on salaries in 2023, and the center's total expenses were about NIS 3.1 billion ($840 million). This means that the average monthly salary cost at the center was about NIS 66,100 ($18,000) in 2023. This is a jump of more than 20% compared to the years 2022 and 2021, when the average monthly wage cost was NIS 53,800 ($14,600) and NIS 57,600 ($15,600), respectively.

In the corresponding period in 2022, the cost of the company's salary payments in Israel amounted to NIS 1.74 billion ($470 million), and the total expenses amounted to NIS 2.5 billion ($680 million). In 2021, the salary cost in the company was about NIS 1.4 billion ($380 million), and the total expenses were NIS 2 billion ($540 million). The reports refer to the company's fiscal year 2023, the period between July 1, 2022, and June 30, 2023.

The significant increase in salary expenses is due to the increase in personnel in the center, making up 70% of all expenses. According to the reports in 2023, the company employed 2,683 workers in R&D and another 41 in other fields, for a total of 2,724 workers. In 2022, the company employed 2,653 workers in R&D and another 54 in other fields, which together constitute 2,707 workers. In 2021, the center employed 2,119 workers in R&D and another 43 workers in other fields - 2,162 workers in total.

The company reports that it has paid, as part of various tax arrangements, an addition of approximately NIS 260 million to Israeli income tax, in addition to the payments it made between 2013-2020 and an amount of approximately NIS 60 million that it paid in respect of retained profits.

The effects of the war are still unknown

At the end of the report, the company refers to two events that happened after the end of FY 2023. One is the outbreak of the war in Israel on October 7. The company writes that it does not know if the ongoing war will have any effects on the company in Israel. The company also notes that following the purchase of Nuance's assets by Microsoft, the company in Israel absorbed the company's employees in Israel, which also included the employees of Phonetic Systems.

The report also includes full disclosure of the data of some of the purchases made by the company in Israel. According to the report, the global company transferred approximately $156 million to the company in Israel for the purchase of Aurato in 2014. In addition, one of Microsoft's most famous and successful acquisitions in Israel was that of Assaf Rappaport's company Adallom, who later managed the development center and is currently the head of Wiz. According to the report, Microsoft Global transferred approximately $260 million to the company in Israel for the purchase of the Israeli company, and also transferred $41 million in 2015 for the purchase of Equivio. Microsoft also purchased Secure Islands in the same year for $45.4 million. Another purchase the company made was that of Hexadite in 2017 for $75 million. In July 2017, the company acquired Cloudyn for approximately $50 million.

Between 2018 and 2021, Microsoft's parent company in Israel paid it an amount of approximately NIS 1.2 billion ($330 million) for the intellectual property of all the companies it acquired during this period. This amount includes about NIS 191 million ($52 million) for the personnel of all these companies.

In the report, it was also revealed that the parent company made a number of purchases here that it did not disclose, most of which were made for the purpose of purchasing manpower and for which the company paid a total of NIS 59 million ($16 million). The purchases were made between 2018 and 2021.

Microsoft's development center in Israel was established in 1991 and was the company's first center outside the U.S. Since then, the center has grown significantly, mainly as a result of a series of mergers and acquisitions at costs of hundreds of millions of dollars. The center is today considered one of the company's three strategic centers in the world and is responsible for about 40 different products and activities.

A significant part of the growth in recent years is related to the fact that the company in Israel has become Microsoft's cyber center, mainly as a result of the acquisitions of companies previously mentioned. The sales generated by the center for the parent company in the cyber field are estimated at $5-7 billion per year. The move of the center and the company in general to a new headquarters in Herzliya allowed the company to concentrate most of its manpower in a number of centers. Besides Herzliya, the company has centers in Haifa and Tel Aviv. The company even announced in 2021 its intention to expand beyond these cities and open significant centers in Nazareth, Haifa, and Beer Sheva.