Microsoft Reports Fourth Quarter Earnings

Redmond, Wash., July 17, 2003 — Microsoft Corp. today announced revenue of $8.07 billion for the quarter ended June 30, 2003, an 11 percent increase over revenue of $7.25 billion for the same period in the prior year. Operating income for the fourth quarter came in at $2.19 billion, which included charges of $796 million primarily related to the settlement of the AOL Time Warner lawsuit. This is compared to operating income of $2.87 billion reported in the prior year period. Net income for the quarter was $1.92 billion, including $533 million in after-tax settlement charges, compared to $1.53 billion reported in the previous year, which included an after-tax charge for investment impairments of $806 million. Diluted earnings per share for the June 2003 quarter were $0.18, including an after-tax charge of $0.05 associated with the legal settlements. The prior year’s diluted earnings per share were $0.14, including an after-tax investment impairment charge of $0.07.

“In fiscal year 2003, we reported double digit revenue growth in each of our businesses. In the fourth quarter, sales came in better than expected reflecting solid corporate and consumer demand for our products,” said John Connors, chief financial officer at Microsoft. “Going into the new year, we will continue to focus on providing better customer value, growing opportunities with small and medium businesses, increasing our enterprise penetration and improving performance in our emerging businesses.”

The company also announced revenue of $32.19 billion for the fiscal year ended June 30, 2003, a 13 percent increase over the $28.37 billion reported last year. Operating income was $13.22 billion, compared to $11.91 billion in the prior fiscal year. Net income for fiscal year 2003 was $9.99 billion and diluted earnings per share were $0.92, which included after-tax charges for investment impairments of $0.07, charges related to legal settlements of $0.06, and a one-time tax benefit of $0.01. For the previous year, net income and diluted earnings per share were $7.83 billion and $0.70, which included after-tax charges for investment impairments of $0.26, charges related to legal settlements of $0.04, and a gain on the sale of Expedia of $0.08.

Server Platforms had strong revenue growth of 17 percent compared to the fourth quarter of last year, fueled by 24 percent growth in Windows Server (TM) revenue and 34 percent growth in Microsoft®
SQL Server (TM) revenue. In addition, the company reported increasing demand for enterprise editions of its core server products, as customers continue to turn to Microsoft for their mission critical workloads. In the fourth quarter, Microsoft launched the Windows Server 2003 family of products, which is already seeing strong customer adoption. Customers acquiring Microsoft server software this quarter include Cendant Corporation, VeriSign, Inc., and the United States Army.

turned in record revenue this quarter, with 25 percent growth over the comparable quarter in the previous year, driven by 48 percent growth in advertising revenue. “In the past year, we have made significant progress with both our performance based advertising and our brand advertising on the MSN network. With customers like Nestle, Visa, and Kraft, MSN is proving that it is a premier Internet location for advertisers,” said Yusuf Mehdi, corporate vice president of MSN. “Going forward, the MSN business will continue to focus on providing the best Internet experiences for consumers and advertisers, while maintaining our path toward profitability.”

Home and Entertainment posted stronger than expected results in the fourth quarter, with 8 percent revenue growth over the prior year on higher than forecasted Xbox® console sales. Since the launch of Xbox in 2001, Microsoft has sold over 9.4 million Xbox consoles worldwide, and by the end of the next fiscal year, Microsoft expects to have sold 14.5 to 16.0 million consoles. In addition, Xbox Live (TM) continued to gain momentum with over 500,000 subscribers worldwide participating in more than 1 million game sessions every week. There will be over 400 Xbox titles available for the 2003 holiday season, and there are several highly anticipated games coming out this fiscal year, including Halo®

Business Outlook

As noted with the new compensation plan announced on July 8, 2003, Microsoft will include equity compensation expense in financial statements beginning the first quarter of fiscal year 2004. Going forward, comparable period financial statements will reflect equity compensation expenses and will be consistent to the amounts reflected in FAS 123 disclosures provided in prior quarters.

Management offers the following guidance for the quarter ending September 30, 2003:

  • Revenue is expected to be in the range of $7.9 billion and $8.1 billion.

  • Operating income is expected to be in the range of $3.0 billion and $3.1 billion, including equity compensation expense of approximately $980 million.

  • Diluted earnings per share are expected to be around $0.23, including after-tax equity compensation expense of approximately $0.06.

Management offers the following guidance for the full fiscal year ending June 30, 2004:

  • Revenue is expected to be in the range of $34.2 billion and $34.9 billion.

  • Operating income is expected to be in the range of $11.3 billion and $11.6 billion, including equity compensation expense of approximately $3.9 billion.

  • Diluted earnings per share are expected to be between $0.85 and $0.87, including after-tax equity compensation expense of approximately $0.24.

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 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 July 17, 2004.

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; 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 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 effects of travel restrictions and quarantines associated with major health problems, such as the Severe Acute Respiratory Syndrome, on general economic activity; 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 July 17, 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
) 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 Server, MSN, Xbox, Xbox Live and Halo 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.

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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