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Eric Frost
10-23-2003, 11:12 PM
Strong Demand for Consumer and Server Products Drives Revenue

REDMOND, Wash., Oct. 23 /PRNewswire-FirstCall/ -- Microsoft Corp.
(Nasdaq: MSFT) 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.
(Logo: http://www.newscom.com/cgi-bin/prnh/20000822/MSFTLOGO )
"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(R) 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(R) 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(R), and Windows(R)
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(R) 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(R), 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 http://www.microsoft.com/msft. 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
http://www.microsoft.com/msft.
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 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.



Microsoft Corporation
Income Statements
(In millions, except earnings per share)

Three Months Ended
September 30
2002 (1) 2003
Revenue $7,746 $8,215
Operating expenses:
Cost of revenue 1,344 1,480
Research and development 1,707 1,611
Sales and marketing 1,415 1,505
General and administrative 252 471
Total operating expenses 4,718 5,067
Operating income 3,028 3,148
Losses on equity investees and other (22) (10)
Investment income 41 763
Income before income taxes 3,047 3,901
Provision for income taxes 1,006 1,287
Net income $2,041 $2,614

Earnings per share:
Basic $ 0.19 $ 0.24
Diluted $ 0.19 $ 0.24

Weighted average shares outstanding:
Basic 10,739 10,811
Diluted 10,933 10,885


(1) The three months ended September 30, 2002 results have been restated
to reflect a two-for-one stock split in February 2003 and for the
retroactive adoption of SFAS 123, Accounting for Stock Based
Compensation.


Microsoft Corporation
Balance Sheets
(In millions)

June 30, 2003 (1) Sept. 30, 2003
Assets
Current assets:
Cash and equivalents $ 6,438 $ 5,768
Short-term investments 42,610 45,854
Total cash and short-term investments 49,048 51,622
Accounts receivable, net 5,196 4,533
Inventories 640 1,099
Deferred income taxes 2,506 2,206
Other 1,583 1,450
Total current assets 58,973 60,910
Property and equipment, net 2,223 2,193
Equity and other investments 13,692 13,962
Goodwill 3,128 3,128
Intangible assets, net 384 378
Deferred income taxes 2,161 2,507
Other long-term assets 1,171 1,203
Total assets $81,732 $84,281

Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,573 $ 1,341
Accrued compensation 1,416 869
Income taxes 2,044 2,600
Short-term unearned revenue 7,225 6,620
Other 1,716 3,668
Total current liabilities 13,974 15,098
Long-term unearned revenue 1,790 1,627
Other long-term liabilities 1,056 876
Stockholders' equity:
Common stock and paid-in capital -
shares authorized 24,000; Shares
issued and outstanding 10,771 and
10,805 49,234 51,298
Retained earnings, including accumulated
other comprehensive income of $1,840
and $1,719 15,678 15,382
Total stockholders' equity 64,912 66,680
Total liabilities and stockholders'
equity $81,732 $84,281

(1) June 30, 2003 balance sheet has been restated for the retroactive
adoption of SFAS 123.


Microsoft Corporation
Cash Flows Statements
(In millions)

Three Months Ended
Sept. 30
2002 2003
Operations
Net income $2,041 $2,614
Depreciation, amortization, and other non-cash
items 273 328
Stock based compensation 1,048 1,015
Net recognized (gains)/losses on investments 475 (279)
Stock option income tax benefits 365 489
Deferred income taxes (939) 6
Unearned revenue 4,093 2,214
Recognition of unearned revenue (2,743) (2,983)
Accounts receivable 751 676
Other current assets (37) (314)
Other long-term assets 28 (14)
Other current liabilities 797 (276)
Other long-term liabilities 20 (52)
Net cash from operations $6,172 $3,424
Financing
Common stock issued 539 695
Common stock repurchased (3,497) (1,045)
Net cash used for financing ($2,958) ($350)
Investing
Additions to property and equipment (160) (167)
Acquisition of companies, net of cash acquired (870) (4)
Purchases of investments (26,685) (24,598)
Maturities of investments 3,230 2,650
Sales of investments 23,588 18,371
Net cash used for investing ($897) ($3,748)
Net change in cash and equivalents 2,317 (674)
Effect of exchange rates on cash and equivalents 5 4
Cash and equivalents, beginning of year 3,016 6,438
Cash and equivalents, end of year $5,338 $5,768


Microsoft Corporation
Segment Revenue
(In millions)

Three Months Ended
Sept. 30
2002 2003
Segments
Client $2,807 $2,809
Server and Tools 1,625 1,866
Information Worker 2,268 2,287
Microsoft Business Solutions 106 128
MSN 427 491
Mobile and Embedded Devices 28 53
Home and Entertainment 485 581
Total revenue $7,746 $8,215