Microsoft Reports Strong Fourth Quarter Earnings

Redmond, Wash., July 22, 2004 — Microsoft Corp. today announced revenue of $9.29 billion for the quarter ended June 30, 2004, a 15% increase over revenue of $8.07 billion for the same period in the prior year. Operating income for the fourth quarter was $3.13 billion, which included stock-based compensation expense of $739 million (pre-tax). This compares to operating income of $1.54 billion for the fourth quarter of the prior fiscal year, which included stock-based compensation expense of $665 million (pre-tax) and charges of $796 million (pre-tax) primarily related to the settlement of the Time Warner lawsuit. Net income for the fourth quarter was $2.69 billion including a $208 million tax benefit from the reversal of previously accrued taxes. This compares to net income of $1.48 billion reported in the same quarter of the previous fiscal year. Diluted earnings per share for the quarter were $0.25 which included after-tax charges of $0.05 in stock-based compensation expense and a $0.02 tax benefit from the reversal of previously accrued taxes. This compares to diluted earnings per share of $0.14 in the fourth quarter of the previous fiscal year which included after-tax charges of $0.04 in stock-based compensation expense and $0.05 primarily related to settlement of the Time Warner lawsuit.

The company also announced revenue of $36.84 billion for the fiscal year ended June 30, 2004, a 14% increase over the $32.19 billion reported last year. Net income for fiscal year 2004 was $8.17 billion and diluted earnings per share were $0.75, which included after-tax charges for stock-based compensation expense of $0.35, charges of $0.17 related to the Sun Microsystems settlement and a fine imposed by the European Commission, and a tax benefit of $0.02. For the previous fiscal year, net income and diluted earnings per share were $7.53 billion and $0.69, which included after-tax charges of $0.23 for stock-based compensation expense, charges for investment impairments of $0.07, charges related to legal settlements of $0.06 and a tax benefit of $0.01.

“We had a great quarter with 15% revenue growth as all of our businesses met or exceeded our expectations and our progress on cost efficacy delivered higher operating margins overall,” said John Connors, chief financial officer at Microsoft. “Fiscal 2004 was a banner year – revenue grew 14% on strong performances from each of our seven businesses, our emerging business operating margins improved, and we resolved a significant portion of our legal exposure. Entering into the new fiscal year, we announced our intention to provide up to $75 billion in value to shareholders over the next four years and we’re confident that we’ll continue to grow through innovation and delivering value to our customers.”

Server and Tools grew 20% compared to the prior fourth quarter. The record-level of revenue was driven by broad platform strength, including 20% growth in new Windows Server(tm) license units and increasing demand for enterprise editions of the company’s core server products. Microsoft SQL Server(tm) and Microsoft(r) Exchange enjoyed revenue growth rates of over 20%. “Fueled by strong demand for Windows Server 2003, we saw broad strength across our server products, including Small Business Server, Microsoft SQL Server and Exchange,” said Kevin Johnson, Group Vice President Worldwide Sales Marketing and Services.

Information Worker revenue grew 23% compared to the previous fourth quarter as momentum for the Microsoft Office System of products continued across all customer segments due to strength in volume licensing and OEM sales. Customers acquiring Microsoft Office during the quarter included JDS Uniphase Corporation, The World Bank and Xerox Corporation.

MSN(r) posted its first-ever profitable year, moving from a $567 million loss in fiscal year 2003 to a $121 million operating profit in fiscal year 2004, a turnaround of almost $690 million which underscores the strength of the company’s focus on its best of breed advertising platform and improved operational efficiency. “We are very proud of our hard work and the progress we’ve made in MSN. We’ve been able to drive our business to profitability while continuing to invest in making the MSN customer experience the best on the Web,” said David Cole, senior vice-president of MSN and personal services division.

Earlier this week, the company announced that its board of directors approved an $0.08 per share quarterly dividend, plans to buy back up to $30 billion of the company’s stock over the next four years, and a special one-time dividend of $3.00 per share. The payment of the special dividend is subject to shareholder approval of stock plan amendments that will allow certain adjustments to employee stock-based compensation awards to offset the impact of the special one-time dividend.

Business Outlook

Management offers the following guidance for the quarter ending September 30, 2004:

  • Revenue is expected to be in the range of $8.9 billion and $9.0 billion.

  • Operating income is expected to be in the range of $3.7 billion and $3.8 billion, including stock-based compensation expense of approximately $750 million.

  • Diluted earnings per share are expected to be $0.25, including after-tax stock-based compensation expense of approximately $0.05.

Management offers the following guidance for the full fiscal year ending June 30, 2005:

  • Revenue is expected to be in the range of $38.4 billion and $38.8 billion.

  • Operating income is expected to be in the range of $16.1 billion and $16.5 billion, including stock-based compensation expense of approximately $2.5 billion.

  • Diluted earnings per share are expected to be between $1.05 and $1.08, including after-tax stock-based compensation expense of approximately $0.16.

Webcast Details

Microsoft will hold an audio webcast at 2:30 p.m. PDT (5:30 p.m. EDT) today with John Connors, chief financial officer, and Scott Di Valerio, corporate controller, to discuss details regarding the company’s performance for the quarter and other forward-looking information. The session may be accessed at http://www.microsoft.com/msft . The webcast will be available for replay through the close of business on July 22, 2005.

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 that are 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; implementation of operating cost structures that align with revenue growth; the financial condition of our customers and vendors; variations in stock-based 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 level of corporate information technology spending and changes in general economic conditions that affect demand for computer hardware or software; currency fluctuations; 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 Financial Condition and Results of Operations” 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 http://www.microsoft.com/msft .

All information in this release is as of July 22, 2004. 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 solutions that help people and businesses realize their full potential.

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Microsoft, MSN, SharePoint, Windows, and Windows Server 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 and investors only:

Curt Anderson, senior director, Investor Relations (425) 706-3703

For more information, press only:

Rapid Response Team, Waggener Edstrom, (503) 443-7070, rrt@wagged.com

Note to editors: If you are interested in viewing additional information on Microsoft, please visit the Microsoft Web page at http://www.microsoft.com/presspass/ on Microsoft’s corporate information pages. Web links, telephone numbers and titles were correct at time of publication, but may since have changed. Shareholder and financial information, as well as today’s 2:30 p.m. PDT conference call with investors and analysts is available at http://www.microsoft.com/msft/ .

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