Microsoft Reports Record First-Quarter Revenue of $18.53 Billion

Robust enterprise sales and improving consumer demand drive broad-based growth.

REDMOND, Wash. — October 24, 2013 — Microsoft Corp. today announced revenue of $18.53 billion for the quarter ended September 30, 2013. Gross margin, operating income, net income, and diluted earnings per share for the quarter were $13.42 billion, $6.33 billion, $5.24 billion, and $0.62 per share.

These financial results reflect the deferral of $113 million of revenue primarily related to Windows 8.1 Pre-sales. All growth comparisons in the press release relate to the corresponding period in the last fiscal year, unless otherwise noted.

The following table reconciles these financial results reported in accordance with generally accepted accounting principles (GAAP) to non-GAAP financial results. We have provided this non-GAAP financial information to aid investors in better understanding the company’s performance.

Three Months Ended September 30, Percentage Change (In millions, except per share amounts and percentages) Revenue Operating income Diluted EPS Revenue Operating income Diluted EPS 2012 As reported (GAAP) $16,008 $5,308 $0.53 Revenue deferred for Windows Upgrade Offer, Windows 8 Pre-sales, and Office Offer $1,356 $1,356 $0.13 2012 As adjusted (non-GAAP) $17,364 $6,664 $0.65 2013 As reported (GAAP) $18,529 $6,334 $0.62 16% 19% 17% Revenue deferred primarily related to Windows 8.1 Pre-sales $113 $113 $0.01 2013 As adjusted (non-GAAP) $18,642 $6,447 $0.63 7% (3)% (3)%

“Our devices and services transformation is progressing and we are launching a wide range of compelling products and experiences this fall for both business and consumers,” said Steve Ballmer, chief executive officer at Microsoft. “Our new commercial services will help us continue to outgrow the enterprise market, and we are seeing lots of consumer excitement for Xbox One, Surface 2 and Surface Pro 2, and the full spectrum of Windows 8.1 and Windows Phone devices.”

“We saw strong focus across our teams, generating record first-quarter revenue even as we navigate a fundamental business transition. Our enterprise renewals were very healthy and our devices and consumer business continued to improve,” said Amy Hood, chief financial officer at Microsoft. “We are making strategic investments in areas like technological innovation, supply chain management, and global cloud operations to build for the future and create long-term shareholder value.”

Devices and Consumer revenue grew 4% to $7.46 billion.

· Windows OEM revenue declined 7%; Windows Pro revenue grew for the second consecutive quarter.

· Surface revenue grew to $400 million with sequential growth in revenue and units sold over the prior quarter.

· Search advertising revenue grew 47% driven by an increase in revenue per search and volume.

Commercial revenue grew 10% to $11.20 billion.

· SQL Server revenue grew double-digits, with SQL Server Premium revenue growing more than 30%.

· Lync, SharePoint, and Exchange, our productivity server offerings, collectively grew double-digits.

· Commercial cloud revenue grew 103%.

“We continue to execute well across our businesses and we are seeing robust demand for our enterprise products and cloud services. Strong customer adoption of Office 365, Azure, and Dynamics CRM Online is accelerating our business transition to the cloud,” said Kevin Turner, chief operating officer at Microsoft. “Our investments in SQL database platform, Hyper-V, System Center, and Lync are driving market share gains as these comprehensive solutions enable customers to increase their insight and efficiency.”

Business Outlook

Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast detailed below.

Webcast Details

Amy Hood, executive vice president and chief financial officer, Frank Brod, chief accounting officer, and Chris Suh, general manager of Investor Relations, will host a conference call and webcast at 2:30 p.m. PDT (5:30 p.m. EDT) today to discuss details of the company’s performance for the quarter and certain forward-looking information. The session may be accessed at http://www.microsoft.com/investor. The webcast will be available for replay through the close of business on October 24, 2014.

Adjusted Financial Results and Non-GAAP Measures

For the first quarter of fiscal year 2014, GAAP revenue, operating income, and diluted earnings per share included the deferral of $113 million of revenue primarily related to Windows 8.1 Pre-sales. During the first quarter of fiscal year 2013, GAAP revenue, operating income, and diluted earnings per share included the deferral of $1.4 billion of revenue related to the Windows Upgrade Offer, Windows 8 Pre-sales, and Office Offer. These items are defined below. In addition to these financial results reported in accordance with GAAP, we have provided certain non-GAAP financial information to aid investors in better understanding the company’s performance. Presenting these measures without the impact of these items gives additional insight into operational performance and helps clarify trends affecting the company’s business. For comparability of reporting, management considers this information in conjunction with GAAP amounts in evaluating business performance. These non-GAAP financial measures should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Non-GAAP Definitions

Revenue deferred on Pre-sales of Windows 8.1 to original equipment manufacturers and retailers before general availability (“Windows 8.1 Pre-sales”).

Revenue deferred on sales of Windows 7 with an option to upgrade to Windows 8 Pro at a discounted price (the “Windows Upgrade Offer”) and Pre-sales of Windows 8 to OEMs and retailers before general availability.

Revenue deferred on sales of the previous version of the Microsoft Office system, with a guarantee to be upgraded to the new Office at minimal or no cost (the “Office Upgrade Offer”) and Pre-sales of the new Office to OEMs and retailers before general availability (collectively, the “Office Offer”).

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:

· intense competition in all of Microsoft’s markets;

· increasing focus on services presents execution and competitive risks;

· significant investments in new products and services that may not be profitable;

· acquisitions, joint ventures, and strategic alliances, including our acquisition of Nokia’s Devices and Services business, may have an adverse effect on our business;

· Microsoft’s continued ability to protect its intellectual property rights;

· claims that Microsoft has infringed the intellectual property rights of others;

· the possibility of unauthorized disclosure of significant portions of Microsoft’s source code;

· cyber-attacks and security vulnerabilities in Microsoft products that could reduce revenue or lead to liability;

· improper disclosure of personal data that could result in liability and harm to Microsoft’s reputation;

· outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure;

· government litigation and regulation that may limit how Microsoft designs and markets its products;

· Microsoft’s ability to attract and retain talented employees;

· delays in product development and related product release schedules;

· adverse economic or market conditions my harm our business;

· adverse results in legal disputes;

· unanticipated tax liabilities;

· our hardware and software products may experience quality or supply problems;

· impairment of goodwill or amortizable intangible assets causing a charge to earnings;

· exposure to increased economic and regulatory uncertainties from operating a global business; and

· catastrophic events or geo-political conditions may disrupt our business.

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/investor.

All information in this release is as of October 24, 2013. 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.

For more information, press only:

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

For more information, financial analysts and investors only:

Chris Suh, general manager, Investor Relations, (425) 706-4400

Note to editors: For more information, news and perspectives from Microsoft, please visit the Microsoft News Center at http://www.microsoft.com/news/. 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/investor.





MICROSOFT CORPORATION

INCOME STATEMENTS (In millions, except per share amounts)(Unaudited)

Three Months Ended September 30, 2013 2012 Revenue $ 18,529 $ 16,008 Cost of revenue 5,114 4,168 Gross margin 13,415 11,840 Operating expenses: Research and development 2,767 2,460 Sales and marketing 3,304 2,945 General and administrative 1,010 1,127 Total operating expenses 7,081 6,532 Operating income 6,334 5,308 Other income 74 226 Income before income taxes 6,408 5,534 Provision for income taxes 1,164 1,068 Net income $ 5,244 $ 4,466 Earnings per share: Basic $ 0.63 $ 0.53 Diluted $ 0.62 $ 0.53 Weighted average shares outstanding: Basic 8,339 8,396 Diluted 8,434 8,494 Cash dividends declared per common share $ 0.28 $ 0.23





MICROSOFT CORPORATION

COMPREHENSIVE INCOME STATEMENTS (In millions)(Unaudited)

Three Months Ended September 30, 2013 2012 Net income $ 5,244 $ 4,466 Other comprehensive income: Net unrealized losses on derivatives (net of tax effects of $(3) and $(24)) (26) (45) Net unrealized gains on investments (net of tax effects of $492 and $148) 952 274 Translation adjustments and other (net of tax effects of $33 and $91) 62 169 Other comprehensive income 988 398 Comprehensive income $ 6,232 $ 4,864





MICROSOFT CORPORATION

BALANCE SHEETS (In millions)(Unaudited)

September 30, 2013 June 30, 2013 Assets Current assets: Cash and cash equivalents $ 4,023 $ 3,804 Short-term investments (including securities loaned of $484 and $579) 76,649 73,218 Total cash, cash equivalents, and short-term

investments 80,672 77,022 Accounts receivable, net of allowance for doubtful accounts of $294 and $336 11,007 17,486 Inventories 2,613 1,938 Deferred income taxes 1,258 1,632 Other 3,900 3,388 Total current assets 99,450 101,466 Property and equipment, net of accumulated depreciation of $13,038 and $12,513 10,774 9,991 Equity and other investments 11,995 10,844 Goodwill 14,667 14,655 Intangible assets, net 2,982 3,083 Other long-term assets 2,480 2,392 Total assets $ 142,348 $ 142,431 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 4,841 $ 4,828 Short-term debt 1,300 0 Current portion of long-term debt 2,000 2,999 Accrued compensation 2,856 4,117 Income taxes 834 592 Short-term unearned revenue 18,585 20,639 Securities lending payable 582 645 Other 3,625 3,597 Total current liabilities 34,623 37,417 Long-term debt 12,632 12,601 Long-term unearned revenue 1,629 1,760 Deferred income taxes 2,236 1,709 Other long-term liabilities 9,587 10,000 Total liabilities 60,707 63,487 Commitments and contingencies Stockholders' equity: Common stock and paid-in capital - shares authorized 24,000; outstanding 8,346 and 8,328 67,230 67,306 Retained earnings 11,680 9,895 Accumulated other comprehensive income 2,731 1,743 Total stockholders' equity 81,641 78,944 Total liabilities and stockholders' equity $ 142,348 $ 142,431





MICROSOFT CORPORATION

CASH FLOW STATEMENTS (In millions)(Unaudited)

Three Months Ended September 30, 2013 2012 Operations Net income $ 5,244 $ 4,466 Adjustments to reconcile net income to net cash from operations: Depreciation, amortization, and other 954 710 Stock-based compensation expense 635 603 Net recognized losses on investments and derivatives 93 11 Excess tax benefits from stock-based compensation (205) (177) Deferred income taxes 404 38 Deferral of unearned revenue 7,436 8,209 Recognition of unearned revenue (9,677) (8,770) Changes in operating assets and liabilities: Accounts receivable 6,617 6,156 Inventories (667) (473) Other current assets (556) (385) Other long-term assets (81) (233) Accounts payable (276) (567) Other current liabilities (1,255) (1,287) Other long-term liabilities (461) 183 Net cash from operations 8,205 8,484 Financing Short-term borrowings, maturities less than 90 days, net 712 0 Proceeds from issuance of debt 588 0 Repayments of debt (1,000) 0 Common stock issued 203 417 Common stock repurchased (2,188) (1,632) Common stock cash dividends paid (1,916) (1,676) Excess tax benefits from stock-based compensation 205 177 Net cash used in financing (3,396) (2,714) Investing Additions to property and equipment (1,231) (603) Acquisition of companies, net of cash acquired, and purchases of intangible and other assets (15) (1,145) Purchases of investments (14,768) (20,138) Maturities of investments 347 1,259 Sales of investments 11,117 13,307 Securities lending payable (64) (399) Net cash used in investing (4,614) (7,719) Effect of exchange rates on cash and cash equivalents 24 47 Net change in cash and cash equivalents 219 (1,902) Cash and cash equivalents, beginning of period 3,804 6,938 Cash and cash equivalents, end of period $ 4,023 $ 5,036



