Microsoft Announces Record First Quarter Revenue

Redmond, Wash., Oct. 17, 2002 — Microsoft Corp. today announced revenue of $7.75 billion for the quarter ended Sept. 30, 2002, a 26 percent increase over revenue of $6.13 billion for the same quarter last year. Operating income for the first quarter was $4.05 billion, compared to $2.90 billion in the same period last year. Net income and diluted earnings per share for the first quarter of fiscal year 2003 were $2.73 billion and $0.50, which included an after-tax charge for investment impairments of $291 million or $0.05. For the same period of the previous year, net income and diluted earnings per share were $1.28 billion and $0.23, which included an after-tax charge for investment impairments of $1.22 billion.

“Results for the first quarter were exceptionally strong, exceeding our expectations. During the quarter, we saw broader customer adoption of our licensing programs than we anticipated, as customers recognized the value of entering into long-term licensing agreements for our products. This strength in licensing led to solid growth for Windows® XP, Office XP and .NET Enterprise Servers,”
said John Connors, chief financial officer at Microsoft.
“Consistent with our view at the outset of this year, the global economic outlook continues to be uncertain, however we remain committed to making the investments necessary to drive long-term product innovation and customer value across our businesses.”

Robust sales of the Windows XP operating system drove Client revenue growth of 33 percent, with the business version of Windows accounting for 63 percent of all operating systems sales. Since its launch on Oct. 25, 2001, over 67 million copies of Windows XP have been sold by computer manufacturers on new personal computers and by retailers. During the quarter Microsoft demonstrated its commitment to making Windows XP the platform for innovation with the roll-out of Service Pack 1, containing important security enhancements. Also announced was the new Windows Media (TM) 9 Series, which will power the next wave of digital media experiences.

Information Worker turned in healthy revenue growth of 26 percent, reflecting customer adoption of Microsoft Office XP through multi-year licensing programs. Customers acquiring Office this quarter included ChevronTexaco, Lockheed Martin, MetLife, Newell Company (Rubbermaid) and the US Department of the Army, Program Executive Office, Aviation.

Revenues from Server Platforms grew 14 percent in the first quarter, driven by superior performances across a breadth of server products including the Windows 2000 Server and Microsoft® SQL Server (TM) 2000 family of products. As in recent quarters, customers purchased an increasing number of servers through multi-year licensing programs. Customers purchasing Microsoft servers this quarter included American Family Life Assurance Company (AFLAC), Bayer Corporation, ChevronTexaco Information Technology Company and Unisys Corporation. Windows 2000 Server revenue growth was fueled by the combination of strong volume licensing sales and continued market share gains by Intel®
-based server hardware over proprietary Unix products. Further, early excitement for the upcoming launch of Windows .NET Server 2003 continued to build, as over 200,000 customers signed up for the product through the Customer Preview Program in the first 60 days of the program’s availability. SQL Server 2000 continued to gain market share, driven in part by increasing demand for SQL Server Enterprise Edition. The enterprise edition experienced 51 percent revenue growth during the quarter, reflecting acceptance of SQL Server for use in the most demanding enterprise environments.

For the quarter, MSN®
saw significant revenue growth of 23 percent excluding Expedia in the prior period, driven by strong advertising sales and increased end-user subscriptions. To kick off the upcoming holiday season, MSN 8 launches on Oct. 24, 2002, and will offer the best online experience for consumers to date, including the most compelling communication tools and advanced parental controls. November brings the highly anticipated U.S. launch of Xbox Live, which will allow gamers to take full advantage of the built-in power of the Xbox, while demonstrating the ground-breaking advances Microsoft has made in interactive gaming. Over the next few months, a variety of innovative computing devices, such as Tablet PC, Windows XP Media Center Edition and the Windows Powered Smartphone 2002, will be introduced in conjunction with OEM partners to further broaden retail offerings.

Business Outlook

Management offers the following guidance for the quarter ending Dec. 31, 2002:

  • Revenue is expected to be in the range of $8.5 billion and $8.6 billion.

  • Operating income is expected to be in the range of $3.2 billion and $3.3 billion.

  • Diluted earnings per share is expected to be either $0.45 or $0.46.

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

  • Revenue is expected to be in the range of $32.2 billion and $32.6 billion.

  • Operating income is expected to be in the range of $14.1 billion and $14.4 billion.

  • Diluted earnings per share is expected to be in the range of $1.89 and $1.95.

Webcast Details

Microsoft will hold an audio webcast at 2:30 pm PDT (5:30 p.m. EDT) today with John Connors to discuss details regarding the company’s 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, Oct. 25, 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; 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; the affects of the Consent Decree in United States v. Microsoft on the Windows operating system and server business, including those associated with protocol and other disclosures required by the Decree and the ability of PC manufacturers to hide end user access to certain new Windows features; the ability to have access to MSN service distribution channels controlled by third parties; the risk of unanticipated increased costs for network services; the continued ability to obtain or protect intellectual property rights; changes in product and service mix; maturing product life cycles; product sale terms and conditions; 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; 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; disruptions in hardware product assembly and distribution that may arise from shipping interruptions or slowdowns at west coast US ports; 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, such as the AT & T securities held by Microsoft, 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 Results of Operations and Financial Condition” and “Risk Factors” 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 Microsoft’s investor relations website at .

All information in this release is as of Oct. 17, 2002. 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 Media, MSN 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.

Intel is a registered trademark of Intel Corporation in the United States and/or other countries.

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]

Megan Numrich, 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 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 .

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