Microsoft Reports Solid Second Quarter Financial Results on Record Quarterly Revenue

Redmond, Wash., Jan. 16, 2003 — Microsoft Corp. today announced revenue of $8.54 billion for the quarter ended Dec. 31, 2002, a 10 percent increase over revenue of $7.74 billion for the same period in the prior year. Operating income for the second quarter was $3.26 billion, including an additional $210 million charge reflecting the company’s estimate of costs related to resolving pending state antitrust and unfair competition class action lawsuits. This compares to operating income of $2.84 billion reported in the second quarter of last year, which included a $660 million charge related to the company’s estimate of the class action lawsuit costs.

Net income for the second quarter was $2.55 billion, including a $282 million after-tax charge ($421 million pre-tax) for investment impairments and a $126 million one-time tax benefit relating to a favorable tax court ruling, compared to net income of $2.28 billion in the prior year. Diluted earnings per share for the second quarter were $0.47, including a $0.03 charge related to the company’s estimate of the class action lawsuit costs, a $0.05 charge for investment impairments, and a one-time tax benefit of $0.02 as noted above, compared to earnings per share of $0.41 in the prior year, which included an $0.08 charge related to the company’s estimate of the class action lawsuit costs.

“The company delivered solid results in every business despite a challenging global economic environment. During the quarter we also launched a broad range of products and services, including MSN® 8, Tablet PC, Windows®
XP Media Center Edition, Xbox Live (TM) and Windows Powered Smartphone,” said John Connors, chief financial officer at Microsoft. “While we are very optimistic about the future of the technology sector, we do not expect to see a significant upturn in global IT spending in the short term.”

Microsoft also announced today that its Board of Directors approved an annual dividend and a two-for-one common stock split. “Declaring a dividend demonstrates the board’s confidence in the company’s long-term growth opportunities and financial strength. We are especially pleased to be able to return profits to our shareholders, while maintaining our significant research and development efforts and satisfying our long-term capital requirements,” Connors said.

Revenue from Server Platforms grew 12 percent in the second quarter, driven by strong performance across a breadth of server products including Windows 2000 Server and Windows 2000 Advanced Server. Customers acquiring Microsoft server software this quarter include the Coca-Cola Company, Ernst & Young LLP and Siemens. Despite the overall weakness in IT spending, Microsoft SQL Server (TM) 2000 posted strong growth of over 40 percent, driven by strong demand for SQL Server Enterprise Edition among companies deploying mission-critical applications.

Now available in all markets, Xbox (TM) turned in a strong performance for the holiday season, selling more than 8 million units since the product launched on Nov. 15, 2001. In November 2002, Xbox Live launched in North America, and in less than 60 days, more than 250,000 Xbox Live starter kits were sold, exceeding internal expectations. Three of the four best-selling Xbox titles are all Live-enabled, including “MechAssault (TM) ” from Microsoft Game Studios, Tom Clancy’s “Ghost Recon” from Ubi Soft, and “Unreal Championship” from Infogrames. According to NPD Data, more than 80 percent of customers who purchased the Xbox Live Starter Kit also purchased one or more of these games.

MSN experienced strong growth this quarter with an increase of over 40 percent in online advertising compared to a year ago, reflecting advertising alliances with customers such as Volvo and Lexus. Designed to give consumers advanced communication options, improved browsing and online safety features, MSN 8 earned the prestigious Good Housekeeping Seal, marking the first Internet software product ever backed by the seal.

Business Outlook

Management offers the following guidance for the quarter ending March 31, 2003:

  • Revenue is expected to be in the range of $7.7 billion and $7.8 billion.

  • Operating income is expected to be in the range of $3.4 billion and $3.5 billion.

  • Diluted earnings per share is expected to be either $0.47 or $0.48.

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

  • Revenue is expected to be in the range of $31.9 billion and $32.1 billion.

  • Operating income is expected to be in the range of $14.1 billion and $14.3 billion.

  • Diluted earnings per share is expected to be in the range of $1.90 and $1.93.

Webcast Details

Microsoft will hold an audio webcast at 2:30 pm PST (5:30 p.m. EST) 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, Jan. 24, 2003.

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 controlled by third parties; the risk of unanticipated increased costs for network services; the continued ability to protect the company’s 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; continued softness in corporate information technology spending or other 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 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 at Microsoft’s investor relations website at .

All information in this release is as of January 16, 2003. 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.

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. PST conference call with investors and analysts is available at .

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