Microsoft Reports Strong Revenue Growth

REDMOND, Wash. — July 21, 2005 — Microsoft Corp. today announced revenue of $10.16 billion for the quarter ended June 30, 2005, a 9% increase over the results in the same period of the prior year. Operating income for the fourth quarter was $2.99 billion, compared to $3.13 billion in the prior year. Operating income for the fourth quarter includes $756 million related to legal charges for antitrust-related claims.

Net income and diluted earnings per share for the fourth quarter were $3.70 billion and $0.34 per share, which included $0.05 of legal charges and $0.09 of tax benefits. For the previous year, net income and diluted earnings per share for the fourth quarter were $2.69 billion and $0.25 per share, which included a $0.02 tax benefit.

Operating income, net income, and earnings per share amounts for the quarter and for the full year include stock-based compensation expense.

The company also announced record revenue of $39.79 billion for the fiscal year ended June 30, 2005, an 8% increase over the $36.84 billion reported last year. Net income for fiscal year 2005 was $12.25 billion and diluted earnings per share were $1.12, which included legal charges of $0.13 and tax benefits of $0.09. For the previous fiscal year, net income and diluted earnings per share were $8.17 billion and $0.75, which included legal charges of $0.17 and a tax benefit of $0.02.

“We closed out a record fiscal year with strong revenue growth in the fourth quarter driven by healthy, broad-based demand across all customer segments and channels,” said Chris Liddell, chief financial officer at Microsoft. “While continuing to invest in the business, we also returned $44 billion to investors through share repurchases and dividends during the fiscal year. These results provide solid momentum heading into fiscal 2006, which is shaping up to be a strong year for growth and investment. We expect double digit revenue growth next year, kicking off the strongest multi-year product pipeline in the company’s history.”

Revenue and operating income growth for the quarter were driven by continued strength in the Server and Tools business. Rapid customer adoption of Microsoft® SQL Server™ product resulted in double digit revenue growth of 16% over the same quarter of the prior year. This marks the third consecutive year that the Server and Tools business has delivered double digit revenue growth and improved profitability.

Strong results across all aspects of the Xbox® business resulted in 22% revenue growth for the Home and Entertainment division, providing a great finish to an excellent year. In fiscal 2005 Home and Entertainment shipped a record number of Xbox consoles and software, doubled the number of Xbox Live® members, and unveiled the Xbox 360™ future-generation video game and entertainment system.

Business Outlook

Management offers the following guidance for the full fiscal year ending June 30, 2006:

  • Revenue is expected to be in the range of $43.7 billion and $44.5 billion.

  • Operating income is expected to be in the range of $18.3 billion and $18.8 billion.

  • Diluted earnings per share are expected to be in the range of $1.27 and $1.32.

Management offers the following guidance for the quarter ending September 30, 2005:

  • 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 $4.3 billion and $4.5 billion.

  • Diluted earnings per share are expected to be in the range of $0.29 to $0.31.

All figures include stock-based compensation expense and assume an effective tax rate of 32%.

Webcast Details

Microsoft will hold an audio webcast at 2:30 p.m. PT (5:30 p.m. ET) today with Chris Liddell, chief financial officer, and Scott Di Valerio, corporate vice president and chief accounting officer, 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 21, 2006.

About Microsoft

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; an increase in business investment that isn’t accompanied by an offsetting increase in revenue; 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 distribution channels for MSN 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 legal disputes resulting in liabilities that exceed existing reserves; 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.

All information in this release is as of July 21, 2005. 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, Xbox, Xbox Live and Xbox 360 are either registered trademarks or trademarks of Microsoft Corp, in the United States and/or other countries.

The names of actual companies or products mentioned herein may be the trademarks of their respective owners.

For more information, financial analysts and investors only:

Colleen Healy, 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. PT conference call with investors and analysts is available at http://www.microsoft.com/msft.

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