Microsoft Reports Record Revenue

Microsoft Reports Record Revenue

Quarter marks the successful launches of Xbox 360 and SQL Server 2005

REDMOND, Wash., Jan. 26 /PRNewswire-FirstCall/ -- Microsoft Corp. (NASDAQ:MSFT) today announced revenue of $11.84 billion for the quarter ended December 31, 2005, a 9% increase over the same period of the prior year, marking the highest quarterly revenue in the company's history. Net income for the quarter was $3.65 billion, which grew 5% from $3.46 billion for the same quarter of the previous year. Diluted earnings per share for the quarter were $0.34. Net results included $108 million, or $0.01 per share, in tax benefits.

(Logo: http://www.newscom.com/cgi-bin/prnh/20000822/MSFTLOGO )

Operating income for the quarter was $4.66 billion, a 2% decline from the same period in the prior year reflecting in part the impact of significant sales, marketing and product development expenses associated with major product launches.

"The growth in our core businesses was healthy during the quarter driven by strength in Server and Tools and the success of our Windows(R) Client products in a robust PC market," said Chris Liddell, chief financial officer of Microsoft. "The quarter also marked the beginning of an important product cycle for Microsoft with the launches of Xbox 360(TM), SQL Server(TM) 2005, Visual Studio(R) 2005 and Microsoft Dynamics(TM) CRM 3.0, all of which were extremely successful and well received by our customers."

Server and Tools revenue grew 14% over the prior year on strength across the product line. The growth of SQL Server was robust with over 20% year over year revenue growth.

"Demand for our desktop and server products from enterprise customers was particularly strong this quarter with significant sales and customer momentum from our recently launched server products," said Kevin Turner, chief operating officer at Microsoft. "We recently conducted our annual customersatisfaction survey and remain committed to driving satisfaction improvements. Our customers are responding very favorably to the value, quality, and improved security of our new product releases."

During the quarter, Microsoft returned over $8.5 billion to shareholders in the form of dividends and share repurchases.

Business Outlook

Microsoft management offers the following guidance for the quarter ending March 31, 2006:

-- Revenue is expected to be in the range of $10.9 billion to $11.2
billion.
-- Operating income is expected to be in the range of $4.5 billion to $4.6
billion.
-- Diluted earnings per share are expected to be $0.32 or $0.33.

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

-- Revenue is expected to be in the range of $44.0 billion to $44.5
billion.
-- Operating income is expected to be in the range of $17.9 billion to
$18.3 billion, including $361 million for the first-quarter settlement
charge.
-- Diluted earnings per share are expected to be in the range of $1.28 to
$1.31. Before the first-quarter legal settlement of $0.02 and the
second quarter tax benefit of $0.01, diluted earnings per share are
expected to be in the range of $1.29 to $1.32.

Webcast Details and 10-Q filing

Microsoft will hold an audio webcast at 2:30 p.m. PST (5:30 p.m. EST) 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 certain 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 Jan 26, 2007.

About Microsoft

Founded in 1975, Microsoft 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:

-- challenges to our core business model;
-- intense competition in all our markets;
-- our continued ability to protect the company's intellectual property
rights;
-- claims that we have infringed the intellectual property rights of
others;
-- the possibility of unauthorized disclosure of significant portions of
our source code;
-- actual or perceived security vulnerabilities in our products that could
reduce revenue or lead to liability;
-- government litigation and regulation affecting how we design and market
our products;
-- our ability to attract and retain talented employees;
-- delays in product development and related product release schedules;
-- significant business investments that may not produce offsetting
increases in revenue;
-- the level of corporate spending and changes in general economic
conditions that affect demand for computer hardware or software;
-- adverse results in legal disputes;
-- unanticipated tax liabilities;
-- key component shortages and delays in Xbox(R) product delivery;
-- impairment of goodwill or amortizable intangible assets causing a
charge to earnings;
-- changes in accounting that may affect our reported earnings and
operating income;
-- exposure to increased economic and regulatory uncertainties from
operating a global business;
-- general economic and geo-political conditions;
-- natural disaster, cyber-attack or other catastrophic event disrupting
our business;
-- acquisitions and joint ventures that adversely affect the business;
-- limitations on the availability of insurance and resulting uninsured
losses;
-- sales channel disruption such as the bankruptcy of a major distributor;
-- implementation of operating cost structures that align with revenue
growth;
-- continued access to third party distribution channels for MSN(R); and
-- foreign currency, interest rate, fixed income, equity and commodity
price risks.

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 "Risk Factors" 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 January 26, 2006. 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, Windows, Xbox 360, Visual Studio, Microsoft Dynamics, Xbox and MSN 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.

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

Three Months Ended Six Months Ended
December 31, December 31,
2005 2004 (1) 2005 2004 (1)

Revenue $11,837 $10,818 $21,578 $20,007
Operating expenses:
Cost of revenue 2,239 1,875 3,492 3,280
Research and development 1,591 1,421 3,106 2,951
Sales and marketing 2,689 2,122 4,634 3,786
General and administrative 661 651 1,643 1,747
Total operating expenses 7,180 6,069 12,875 11,764
Operating income 4,657 4,749 8,703 8,243
Investment income and other 480 420 986 699
Income before income taxes 5,137 5,169 9,689 8,942
Provision for income taxes 1,484 1,706 2,895 2,951
Net income $ 3,653 $ 3,463 $ 6,794 $ 5,991

Earnings per share:
Basic $ 0.35 $ 0.32 $ 0.64 $ 0.55
Diluted $ 0.34 $ 0.32 $ 0.63 $ 0.55

Weighted average shares outstanding:
Basic 10,560 10,877 10,628 10,875
Diluted 10,638 10,956 10,708 10,936

Cash dividends declared per common
share $ 0.09 $ 0.08 $ 0.17 $ 3.24

(1) Certain prior year amounts have been reclassified to conform to the
current year presentation.

Microsoft Corporation
Balance Sheets
(In millions)

December 31, 2005 June 30, 2005
(Unaudited) (Audited)

Assets
Current assets:
Cash and equivalents $ 4,083 $ 4,851
Short-term investments 30,618 32,900
Total cash and short-term investments 34,701 37,751
Accounts receivable, net of allowance for
doubtful accounts of $208 and $171 7,758 7,180
Inventories, net 1,003 491
Deferred income taxes 1,487 1,701
Other 1,745 1,614
Total current assets 46,694 48,737
Property and equipment, net 2,452 2,346
Equity and other investments 9,095 11,004
Goodwill 3,553 3,309
Intangible assets, net 466 499
Deferred income taxes 3,713 3,621
Other long-term assets 1,284 1,299
Total assets $67,257 $70,815

Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,477 $ 2,086
Accrued compensation 1,249 1,662
Income taxes 2,787 2,020
Short-term unearned revenue 7,118 7,502
Other 3,116 3,607
Total current liabilities 16,747 16,877
Long-term unearned revenue 1,720 1,665
Other long-term liabilities 4,582 4,158
Commitments and contingencies
Stockholders' equity:
Common stock and paid-in capital - shares
authorized 24,000; outstanding
10,384 and 10,710 60,140 60,413
Retained deficit, including accumulated other
comprehensive income of $1,210 and $1,426 (15,932) (12,298)
Total stockholders' equity 44,208 48,115
Total liabilities and stockholders' equity $67,257 $70,815

Microsoft Corporation
Cash Flows Statements
(In millions) (Unaudited)

Three Months Ended Six Months Ended
December 31, December 31,
2005 2004 (1) 2005 2004 (1)

Operations
Net income $3,653 $3,463 $6,794 $5,991
Depreciation, amortization, and
other noncash items 231 108 465 291
Stock-based compensation 514 551 978 1,296
Net recognized (gains) / losses on
investments (75) 74 (205) 239
Stock option income tax benefits 0 99 0 227
Excess tax benefits from stock-based
payment arrangements (13) 0 (44) 0
Deferred income taxes 170 68 42 361
Unearned revenue 3,670 3,354 6,702 5,953
Recognition of unearned revenue (3,622) (3,166) (7,041) (6,228)
Accounts receivable (2,012) (1,398) (604) (537)
Other current assets (354) 373 (694) 171
Other long-term assets (10) 7 (8) 25
Other current liabilities (89) (175) (298) (520)
Other long-term liabilities 168 261 473 357
Net cash from operations 2,231 3,619 6,560 7,626
Financing
Common stock issued 466 795 1,467 1,282
Common stock repurchased (7,435) (969) (10,551) (1,324)
Common stock cash dividends (846) (33,498) (1,703) (34,368)
Excess tax benefits from stock-based
payment arrangements 13 0 44 0
Net cash used for financing (7,802) (33,672) (10,743) (34,410)
Investing
Additions to property and equipment (318) (176) (531) (349)
Acquisition of companies, net of
cash acquired (63) (1) (250) (1)
Purchases of investments (16,151) (16,063) (35,561) (45,713)
Maturities of investments 743 19,536 1,692 26,737
Sales of investments 22,481 20,799 38,081 35,307
Net cash from investing 6,692 24,095 3,431 15,981
Net change in cash and equivalents 1,121 (5,958) (752) (10,803)
Effect of exchange rates on cash
and equivalents (12) 54 (16) 57
Cash and equivalents, beginning of
period 2,974 9,462 4,851 14,304
Cash and equivalents, end of period $4,083 $3,558 $4,083 $3,558

(1) Certain prior year amounts have been reclassified to conform to the
current year presentation.

Microsoft Corporation
Segment Revenue and Operating Income / (Loss)
(In millions) (Unaudited)

Three Months Ended Six Months Ended
Revenue December 31, December 31,
2005 2004 2005 2004
Segments
Client $ 3,459 $ 3,193 $ 6,646 $ 6,173
Server and Tools 2,907 2,542 5,438 4,783
Information Worker 2,979 2,825 5,677 5,420
Microsoft Business Solutions 242 207 423 363
MSN 593 606 1,157 1,165
Mobile and Embedded Devices 101 72 175 121
Home and Entertainment 1,556 1,373 2,062 1,982
Total revenue $11,837 $10,818 $21,578 $20,007

Three Months Ended Six Months Ended
Operating Income / (Loss) December 31, December 31,
2005 2004 2005 2004
Segments
Client $ 2,638 $ 2,528 $ 5,210 $ 4,929
Server and Tools 1,099 947 2,006 1,655
Information Worker 2,101 2,065 4,047 3,986
Microsoft Business Solutions 10 (17) (2) (48)
MSN 58 130 140 209
Mobile and Embedded Devices 20 (12) 17 (41)
Home and Entertainment (293) 55 (449) (104)
Other (976) (947) (2,266) (2,343)
Total operating income $ 4,657 $ 4,749 $ 8,703 $8,243

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Source: Microsoft Corporation

CONTACT: financial analysts and investors only: Colleen Healy, senior
director, Investor Relations, of Microsoft, +1-425-706-3703; or press only:
Rapid Response Team, Waggener Edstrom Worldwide, +1-503-443-7070 or
rrt@WaggenerEdstrom.com, for Microsoft

Web site: http://www.microsoft.com/msft

NOTE TO EDITORS: If you are interested in viewing additional information on Microsoft, please visit the Microsoft(R) 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. PST conference call with investors and analysts, is available at http://www.microsoft.com/msft.

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