Microsoft Reports First Quarter Earnings

Redmond, Wash., Oct. 23, 2003 — Microsoft Corp. today announced revenue of $8.22 billion for the quarter ended Sept. 30, 2003, a six percent increase over $7.75 billion in the prior year. Operating income for the first quarter was $3.15 billion, compared to $3.03 billion reported in the prior year. Net income and diluted earnings per share for the first quarter of fiscal year 2004 were $2.61 billion and $0.24, which included equity compensation expense of approximately $680 million (after-tax) or $0.06 per share. For the previous year, net income and diluted earnings per share were $2.04 billion and $0.19, which included a charge for investment impairments of $291 million (after-tax) or $0.03 per share and equity compensation expense of approximately $702 million (after-tax) or $0.06 per share. Prior year operating income, net income, and earnings per share have been retroactively adjusted to reflect the adoption of fair value expense accounting for equity based compensation under SFAS 123.

“While corporate IT spending was slow to improve this quarter, we saw strength across all of our consumer businesses, driving higher than expected revenue for the company,” said John Connors, chief financial officer at Microsoft. “Delivering value to our customers with innovative software like the new Office System, Exchange Server 2003, and Small Business Server and executing on our plan to better help protect customers from a growing number of security attacks are our top priorities for the rest of the year.”

Robust consumer demand for PCs during the back to school shopping season fueled better than expected Client revenue during the quarter. In addition, MSN® had another strong quarter with over 50% advertising revenue growth, and Home and Entertainment revenue grew by 20%, driven by the successful launch of the Xbox® holiday offering. Mobile and Embedded Devices also demonstrated momentum this quarter with revenue growing to $53 million on strong results from our Windows Mobile (TM) , MapPoint® , and Windows®
Embedded products. Additionally, this week AT & T Wireless announced the availability of the Motorola MPx200, the first Windows Mobile-based Smartphone in North America.

Server and Tools grew a solid 15% over last year to $1.87 billion this quarter. Windows Server (TM) , Microsoft®
SQL Server (TM) and Microsoft Exchange all experienced double digit revenue growth, driven by a growing number of customers acquiring high-end enterprise editions. Windows Server 2003 has sold over two times as many licenses as Windows 2000 Server over the same period of time since launch. In addition, with over 120 million seats sold worldwide, Exchange continues to be a leading messaging solution for companies.

This week, Microsoft launched the new Office System, with a pioneering new version of Outlook®
, built-in XML capabilities and several new applications including Microsoft Office InfoPath (TM) , Microsoft Office OneNote (TM) , and Microsoft Office Live Communications Server. “The new Microsoft Office System presents a clear opportunity for both small and large organizations to increase employee productivity and the value of business information. In addition, by introducing new editions of Office such as the Microsoft Office Small Business Edition 2003 and Microsoft Office Student & Teacher Edition 2003, we are answering customers’ requests for products customized specifically for their needs,” said Jeff Raikes, group vice president, Productivity and Business Services. Customers acquiring Office during the quarter included Accenture, Ace Hardware Corp., and Gold Kist, Inc.

Business Outlook

Management offers the following guidance for the quarter ending December 31, 2003, which includes equity compensation expenses in accordance with SFAS 123:

  • Revenue is expected to be in the range of $9.7 billion and $9.8 billion.

  • Operating income is expected to be in the range of $3.2 billion and $3.3 billion, including equity compensation expense of approximately $1.0 billion.

  • Diluted earnings per share are expected to be in the range of $0.23 and $0.24, including equity compensation expense of approximately $0.06.

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

  • Revenue is expected to be in the range of $34.8 billion and $35.3 billion.

  • Operating income is expected to be in the range of $11.4 billion and $11.7 billion, including equity compensation expense of approximately $4.0 billion.

  • Diluted earnings per share are expected to be in the range of $0.86 and $0.88, including equity compensation expense of approximately $0.24.

The equity compensation estimates for the December quarter and the full fiscal year do not include any potential equity compensation expense impact from our stock option transfer program.

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 . The webcast will be available for replay through the close of business on October 23, 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 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; 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 “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 .

All information in this release is as of October 23, 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, MSN, Xbox, Windows Mobile, MapPoint, Windows, Windows Server, Outlook, InfoPath and OneNote 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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