Microsoft Announces Fiscal Third Quarter Results

April 18, 2002 Microsoft Corp. today announced revenue of $7.25 billion for the quarter ended March 31, 2002, a 13 percent increase over the $6.40 billion reported in the prior year. Operating income totaled $3.30 billion compared to $3.00 billion in the prior year. Net income for the quarter was $2.74 billion, which includes an $847 million after-tax gain on the sale of Expedia and an $806 million after-tax charge related to investment impairments. Diluted earnings per share for the March 2002 quarter were $0.49, including a $0.15 gain on the sale of Expedia and $0.14 investment impairment charge as noted above.

We delivered another quarter of solid revenue growth and operating results that exceeded our expectations.
Desktop platform sales have been excellent on the strength of Windows®
XP both in the enterprise and in the home.
We took another big bite out of costs this quarter, with single-digit operating expense growth driving costs down and efficiency up throughout the entire organization,”
said John Connors, chief financial officer at Microsoft.
“While we look forward to slightly improved PC growth rates for the next quarter, our expectations for enterprise IT spending levels continue to be quite modest.”

Robust sales of the Windows XP operating system drove strong desktop platforms revenue growth of 11 percent. The business version of Windows accounted for 47 percent of all operating systems sold this quarter, up from 35 percent in the prior year.
“This quarter Windows XP shipped on nearly 60 percent of all new PCs, which represents a faster penetration than any of our previous operating systems. Windows XP continues to drive excitement for the personal computer during a challenging time for the industry as a whole,”
said Jim Allchin, group vice president of the Platforms Division at Microsoft.
“Looking ahead, we are incredibly enthusiastic about the opportunity to deliver new digital experiences and innovative technologies around the personal computer.”

On Feb. 13, 2002, Microsoft launched Visual Studio®
.NET and the .NET Framework, the culmination of more than four years of work to create a new software development platform.

In less than two months since the launch, more than 1 million units of Visual Studio .NET and the .NET Framework have shipped to developers worldwide.
“We are seeing tremendous momentum with customers and industry partners, who are using the .NET Platform to take advantage of new opportunities that result from developing and consuming Web services,”
said Eric Rudder, senior vice president of the Developer and Platform Evangelism Group at Microsoft.
“Companies like Compaq, Deutsche Telekom, Ingram Micro, LOreal, Merrill Lynch and Xerox are seeing real and significant business value, productivity gains, and return on investment through .NET today.”

Following a record-breaking launch in North America in November 2001, Xbox™
continued its worldwide rollout during the quarter with launches in Japan, Europe and Australia. Also during the quarter,
“Halo: Combat Evolved”
for Xbox, the enormously popular action-adventure game, achieved the distinction of reaching 1 million unit sales faster than any next-generation console game.

Microsoft also announced that effective April 26, 2002, prices for Xbox in Europe and Australia will be reduced to 299/199 and A$399, respectively.
“The new prices in Europe and Australia make Xbox more accessible to a broader set of gamers, consistent with our long-term strategy to build an ecosystem around Xbox where our retail partners, third-party game publishers and gamers all thrive,”
said Robbie Bach, chief Xbox officer.
“With a built-in hard drive and Ethernet port, Xbox is the most powerful video game system ever developed and now an even better value.”

Business Outlook

Management offers the following guidance for the quarter ending June 30, 2002:

  • Revenue is expected to be in the range of $7.0 and $7.1 billion.

  • Operating income is expected to be in the range of $2.9 and $3.0 billion.

  • Diluted earnings per share is expected to be $0.41 or $0.42.

Management offers the following guidance for the full fiscal year ending June 30, 2003:

  • Revenue is expected to be in the range of $31.5 billion and $32.4 billion.

  • Operating income is expected to be in the range of $13.3 and $13.6 billion.

  • Diluted earnings per share is expected to be in the range of $1.89 to $1.92.

Webcast Details

Microsoft will hold an audio webcast at 2:30 p.m. PDT (5:30 p.m. EDT) today with John Connors to discuss additional details regarding the companys performance for the quarter and other forward-looking information. The session may be accessed at . The webcast will be available for replay through the close of business on Friday, April 26, 2002.

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; higher relative marketing expenses associated with new product releases; changes in the rate of PC shipments; technological shifts; customer demand for our product and services; 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; changes in product and service mix; product life cycles; product sale terms and conditions; the companys ability to efficiently integrate acquired businesses; implementation of operating cost structures that align with revenue growth; the financial condition of our customers and vendors; 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; 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.

For further information regarding risks and uncertainties associated with Microsofts business, please refer to the
“Managements Discussion and Analysis of Results of Operations and Financial Condition”
“Risk Factors”
sections of Microsofts 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 Microsofts investor relations department at (800) 285-7772 or Microsofts investor relations website at .

All information in this release is as of April 18, 2002. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the companys expectations.

Founded in 1975, Microsoft (Nasdaq
) 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, Visual Studio and Xbox 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:

Krish Srinivasan, senior director, Investor Relations (425) 706-3703

For more information, press only:

Rachel Wayne, Waggener Edstrom, (503) 443-7000, [email protected]

Katy Fonner, Waggener Edstrom, (503) 443-7000, [email protected]

Caroline Boren, Waggener Edstrom, (425) 638-7000, [email protected]

Note to editors:
If you are interested in viewing additional information on Microsoft, please visit the Microsoft Web page at
on Microsofts corporate information pages. Shareholder and financial information as well as todays 2:30 p.m. PDT conference call with investors and analysts is available at .

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