Microsoft Reports Record First Quarter Earnings

REDMOND, Wash., Oct. 21, 2004 — Microsoft Corp. today announced revenue of $9.19 billion for the quarter ended September 30, 2004, a 12% increase over revenue of $8.22 billion for the same period in the prior year. Operating income for the first quarter was $4.05 billion and net income was $2.90 billion. Diluted earnings per share exceeded Microsoft’s guidance by $0.02 and were $0.27 including stock-based compensation expense.

“We’ve had a strong beginning to what we expect will be a very good year with continued growth in both our commercial and consumer businesses,” said John Connors, chief financial officer at Microsoft. “This quarter we had a very healthy commercial server and desktop business driving double digit revenue growth, and we expect to continue the trend of growing revenue faster than expenses as we work to make each of our businesses more efficient and profitable.”

Demand for Microsoft’s core platform products from business customers and growth in shipments of PCs and servers drove strong results in the Client, Information Worker and Server and Tools groups. In particular, Server and Tools revenue grew 19% driven by broad platform strength led by Windows Server (TM) , SQL Server (TM) and Exchange Server. “In addition to the success of our flagship server products, we continue to be very pleased with the customer momentum for our management products. The recent release of Microsoft®
Operations Manager 2005 and the upcoming release of Microsoft System Center 2005 are creating excitement in the market, as evidenced by the greater than 20% revenue growth this quarter in our management server business. This is another example of integrated innovation across the entire Windows Server System (TM) adding business value for our customers,” said Eric Rudder, senior vice president, Server and Tools group.

Microsoft’s consumer-focused businesses also performed well. MSN® again achieved segment profitability while growing revenues by 10% over the first quarter of the prior year on continued strength in its Internet advertising business. Home and Entertainment revenue grew 9% driven by increased sales of Xbox® consoles and games while its operating loss narrowed by more than 47% compared to the prior first quarter as a result of higher than expected sales of Xbox games. Set to launch on November 9th, Halo 2 is one of the most anticipated video games on any platform and has achieved record-breaking video game pre-orders of 1.5 million. “Xbox continues to be the only platform to show year-over-year growth and has now outsold Sony PlayStation 2 for two months in a row in the United States,” said Robbie Bach, senior vice president, Home and Entertainment group. “With a robust portfolio of games and cornerstone titles like Halo®
2 and Fable — which was the top selling video game across all platforms in September — our holiday lineup is the strongest in Xbox history. Moreover, with 150 Xbox Live titles available this holiday, we expect the market momentum around the Xbox business to continue to accelerate.”

Business Outlook

Management offers the following guidance for the quarter ending December 31, 2004:

  • Revenue is expected to be in the range of $10.3 billion and $10.5 billion.

  • Operating income is expected to be in the range of $4.2 billion and $4.3 billion, including stock-based compensation expense.

  • Diluted earnings per share are expected to be $0.28, including stock-based compensation expense.

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

  • Revenue is expected to be in the range of $38.9 billion and $39.2 billion.

  • Operating income is expected to be in the range of $16.4 billion and $16.7 billion, including stock-based compensation expense.

  • Diluted earnings per share are expected to be in the range of $1.07 and $1.09, including stock-based compensation expense.

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 . The webcast will be available for replay through the close of business on October 21, 2005.

Founded in 1975, Microsoft (Nasdaq “MSFT”) is the worldwide leader in software, services and solutions that help people and businesses realize their full potential.


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, sales channel disruption such as the bankruptcy of a major distributor, 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; adverse effects on our business that might result if an unauthorized disclosure of a significant portion of our source code were to occur; 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; unavailability of insurance; uninsured losses; adverse results in litigation; unanticipated tax liabilities; 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 a major earthquake, cyber-attack or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems; the level of corporate information technology spending and changes in general economic conditions that affect demand for computer hardware or software; currency fluctuations; 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 .

All information in this release is as of October 21, 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.

Microsoft, Halo, MSN, Windows, Windows Server, Windows Server System, 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.

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. 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 .

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