Microsoft Quarterly Revenue Tops $10 Billion

Redmond, Wash., Jan. 22, 2004 — Microsoft Corp. today announced record revenue of $10.15 billion for the quarter ended Dec. 31, 2003, a 19% increase over $8.54 billion in the prior year. Operating income for the second quarter was $1.48 billion, compared to $2.23 billion in the prior year. Net income and diluted earnings per share for the second quarter were $1.55 billion and $0.14 per share. These results include stock based compensation expense of $2.17 billion (after-tax) or $0.20 per share, of which $1.48 billion (after-tax) or $0.14 per share related to the completion of the employee Stock Option Transfer Program. For the previous year, net income and earnings per share for the second quarter were $1.87 billion and $0.17 per share, including stock based compensation expense of $709 million (after-tax) or $0.07 per share, a $282 million (after-tax) or $0.03 per share charge for investment impairments, a $126 million or $0.01 per share tax benefit from the reversal of previously accrued taxes, and $141 million (after-tax) or $0.01 per share legal charge related to the state antitrust and unfair competition class action lawsuits.

“Consumer and corporate demand for PCs continued to exceed our expectations and resulted in solid double-digit revenue growth for Windows®
XP and Office products,” said John Connors, chief financial officer at Microsoft. “In the second quarter, the overall corporate IT market also began to show signs of a recovery, with increased demand for both desktop and server products. Going forward, we will continue to focus on driving broader customer adoption of our latest enterprise products, including Office 2003, Windows Server (TM) 2003, Exchange Server 2003, and Small Business Server 2003.”

Information Worker revenue grew 27% over the prior year, as customers took advantage of the compelling value in the new Office System collaboration and productivity tools. Strong adoption of Office 2003 by consumers and small businesses drove sales in the retail and system builder channels to surpass expectations. Customers acquiring Office during the quarter included Eli Lilly and Company, Safeco Corporation, and Ticketmaster.

MSN®
once again reported stronger than expected revenue growth of 19% over last year. “As MSN continues to invest in its growing businesses, we remain focused on achieving long term profitability,” said Bruce Jaffe, chief financial officer of MSN. “A key factor in attaining that long-term goal will be the success of MSN’s advertising business which achieved record revenue with 47% growth year over year, driven by strength in both traditional online and search-based advertising.” This month, MSN also launched MSN Premium and the new MSN.com, which provides additional services for broadband customers as well as new opportunities for advertisers. MSN Premium is Microsoft’s most comprehensive web service ever offered with advanced communication capabilities, security and protection features, and rich information services and productivity applications.

Home and Entertainment had a solid quarter driven by sales of Xbox®
games and consoles. With over 400 games available, including 70 Live-enabled games, Xbox grew its U.S. cumulative game attach rate to 6.4, according to NPD Data. Since the launch of Xbox in 2001, Microsoft has sold over 13.7 million Xbox consoles worldwide and is on track to have sold 14.5 to 16.0 million consoles by the end of this fiscal year. In addition, Xbox Live (TM) momentum continued with subscribers growing to nearly 750,000, keeping the business on target to have one million subscribers by the end of the fiscal year.

Business Outlook

Management offers the following guidance for the quarter ending March 31, 2004, which includes stock based compensation expenses in accordance with SFAS 123:

  • Revenue is expected to be in the range of $8.6 billion and $8.7 billion.

  • Operating income is expected to be in the range of $3.0 billion and $3.1 billion, including stock based compensation expense of approximately $750 million.

  • Diluted earnings per share are expected to be in the range of $0.23 and $0.24, including stock based compensation expense of approximately $0.05.

Management offers the following guidance for the full fiscal year ending June 30, 2004, which includes stock based compensation expenses in accordance with SFAS 123:

  • Revenue is expected to be in the range of $35.6 billion and $35.9 billion.

  • Operating income is expected to be in the range of $10.3 billion and $10.6 billion, including stock based compensation expense of approximately $5.7 billion.

  • Diluted earnings per share are expected to be in the range of $0.82 and $0.83, including stock based compensation expense of approximately $0.35. The stock based compensation expense includes $0.14 related to the completion of the Stock Option Transfer Program in the December quarter.

Webcast Details

Microsoft will hold an audio webcast at 2:30 p.m. PDT (5:30 p.m. EDT) today with John Connors and Scott Di Valerio to discuss details regarding the company’s performance for the quarter and other forward-looking information. The session may be accessed at http://www.microsoft.com/msft . The webcast will be available for replay through the close of business on January 22, 2005.

Forward-Looking Statements

Statements in this release that are “forward-looking statements” are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as: entry into markets with vigorous competition, market acceptance of new products and services, continued acceptance of existing products and services, changes in licensing programs, product price discounts, delays in product development and related product release schedules, and reliance on sole source suppliers for key components of Xbox that could result in component shortages and delays in product delivery, any of which may cause revenues and income to fall short of anticipated levels; obsolete inventory or product returns by distributors, resellers and retailers; warranty and other claims on hardware products such as Xbox; changes in the rate of PC shipments; technological shifts; the support of third party software developers for new or existing platforms; the availability of competitive products or services such as the Linux operating system at prices below our prices or for no charge; the ability to have access to MSN service distribution channels that are controlled by third parties; the risk of unanticipated increased costs for network services; the continued ability to protect the company’s intellectual property rights; the ability to obtain on acceptable terms the right to incorporate in the company’s products and services technology patented by others; changes in product and service mix; maturing product life cycles; product sale terms and conditions; the risk that actual or perceived security vulnerabilities in our products could adversely affect our revenues; the company’s ability to efficiently integrate acquired businesses such as Navision a/s; implementation of operating cost structures that align with revenue growth; the financial condition of our customers and vendors; variations in equity compensation expenses under FAS 123, which will fluctuate based on factors such as the actual number of stock awards issued and the market value of the awards on the dates of grant; unavailability of insurance; uninsured losses; adverse results in litigation; the effects of terrorist activity and armed conflict such as disruptions in general economic activity and changes in our operations and security arrangements; the level of corporate information technology spending and changes in general economic conditions that affect demand for computer hardware or software; currency fluctuations; trade sanctions or changes to U.S. tax law resulting from the World Trade Organization decision with respect to the extraterritorial income provisions of U.S. tax law; and financial market volatility or other changes affecting the value of our investments that may result in a reduction in carrying value and recognition of losses including impairment charges.

For further information regarding risks and uncertainties associated with Microsoft’s business, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Issues and Uncertainties” sections of Microsoft’s SEC filings, including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q, copies of which may be obtained by contacting Microsoft’s investor relations department at (800) 285-7772 or at Microsoft’s investor relations website at http://www.microsoft.com/msft .

All information in this release is as of January 22, 2004. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company’s expectations.

Founded in 1975, Microsoft (Nasdaq “MSFT”) is the worldwide leader in software, services and Internet technologies for personal and business computing. The company offers a wide range of products and services designed to empower people through great software — any time, any place and on any device.

Microsoft, Windows, Windows Server, MSN, Xbox, and Xbox Live are either registered trademarks or trademarks of Microsoft Corp. in the United States and/or other countries. The names of actual companies and products mentioned herein may be the trademarks of their respective owners.

For more information, financial analysts only:

Curt Anderson, senior director, Investor Relations (425) 706-3703

For more information, press only:

Rapid Response Team, Waggener Edstrom, (503) 443-7070, rrt@wagged.com

Note to editors: If you are interested in viewing additional information on Microsoft, please visit the Microsoft Web page at http://www.microsoft.com/presspass/ on Microsoft’s corporate information pages. Shareholder and financial information, as well as today’s 2:30 p.m. PDT conference call with investors and analysts, is available at http://www.microsoft.com/msft .