Microsoft Cloud Strength and Hardware Progress Drive Record First-Quarter Revenue

Strong performance across commercial and consumer segments delivers revenue of $23.20 billion.

REDMOND, Wash. — October 23, 2014 — Microsoft Corp. today announced revenue of $23.20 billion for the quarter ended September 30, 2014. Gross margin, operating income and diluted earnings per share (“EPS”) for the quarter were $14.93 billion, $5.84 billion and $0.54 per share, respectively.





These financial results include $1.14 billion of integration and restructuring expenses, or an $0.11 per share negative impact, related to both Microsoft’s restructuring plan announced in July 2014 and the ongoing integration of the Nokia Devices and Services (“NDS”) business.





The following table notes the impact of the integration and restructuring expenses on the company’s financial performance (“Noted Items”). This financial information is provided to aid investors in better understanding the company’s performance. All growth comparisons relate to the corresponding period in the last fiscal year.

Three Months Ended September 30, ($ in millions, except per share amounts and percentages) Revenue Gross Margin Operating Income Diluted EPS 2013 As Reported (GAAP) $18,529 $13,384 $6,334 $0.62 2014 As Reported (GAAP) $23,201 $14,928 $5,844 $0.54 % Y/Y (GAAP) 25% 12% (8)% (13)% 2014 Impact of Noted Items - - $(1,140) $(0.11)

“We are innovating faster, engaging more deeply across the industry, and putting our customers at the center of everything we do, all of which positions Microsoft for future growth,” said Satya Nadella, chief executive officer of Microsoft. “Our teams are delivering on our core focus of reinventing productivity and creating platforms that empower every individual and organization.”





“We delivered a strong start to the year, with continued cloud momentum and meaningful progress across our device businesses,” said Amy Hood, executive vice president and chief financial officer of Microsoft. “We will continue to invest in high-growth opportunities and drive efficiencies across the organization to deliver long-term shareholder value.”





Devices and Consumer revenue grew 47% to $10.96 billion, with the following business highlights:

· Office 365 Home and Personal subscribers totaled more than 7 million, representing more than 25% sequential growth over the previous quarter.

· Surface Pro 3 momentum drove Surface revenue of $908 million.

· New Windows consumer licensing programs drove positive unit growth while OEM non-Pro revenue declined 1%.

· Total Xbox console sales were 2.4 million, growing 102%, and Xbox One launched in 28 new markets.

· Phone hardware revenue exceeded $2.6 billion with ongoing focus on execution discipline.





Commercial revenue grew 10% to $12.28 billion, with the following business highlights:

· Server products and services revenue increased 13%, with double-digit growth for SQL Server, System Center and Windows Server.

· Office Commercial products and services revenue grew 5% as customers transition to Office 365.

· Commercial cloud revenue grew 128% driven by Office 365, Azure and Dynamics CRM.

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

· Windows volume licensing revenue increased 10%.





“Customers are embracing our latest technologies from Surface Pro 3 and Office 365 to Azure and SQL Server,” said Kevin Turner, chief operating officer of Microsoft. “Through great execution by our sales teams and our partners, we have been able to deliver our truly differentiated value to the marketplace.”





Business Outlook

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

Webcast Details

Satya Nadella, chief executive officer, Amy Hood, executive vice president and chief financial officer, Frank Brod, chief accounting officer, John Seethoff, deputy general counsel, 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 23, 2015.

Noted Items Definition

Integration and restructuring expenses include employee severance expenses and costs associated with the consolidation of facilities and manufacturing operations, including asset write-downs and contract termination costs, resulting from Microsoft’s restructuring plan. Integration and restructuring expenses also include systems consolidation and other business integration expenses, as well as transaction fees and direct acquisition costs, associated with the acquisition of NDS.

Integration and restructuring expenses were $1.14 billion during the three months ended September 30, 2014, due mainly to restructuring charges of $1.05 billion, including employee severance expenses and the write-down of certain assets in connection with the restructuring plan.

About Microsoft

Founded in 1975, Microsoft (Nasdaq “MSFT”) is the worldwide leader in software, services, devices 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 may have an adverse effect on our business;

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

· Microsoft’s continued ability to earn expected revenues from 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;

· disclosure of personal data that could cause 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;

· potential liability under anti-corruption and trade protection laws resulting from our international operations;

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

· adverse results in legal disputes;

· unanticipated tax liabilities;

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

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

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

· adverse economic or market conditions may harm our business.

For more information about 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 23, 2014. 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, 2014 2013 Revenue $ 23,201 $ 18,529 Cost of revenue 8,273 5,145 Gross margin 14,928 13,384 Research and development 3,065 2,767 Sales and marketing 3,728 3,304 General and administrative 1,151 979 Integration and restructuring 1,140 0 Operating income 5,844 6,334 Other income, net 52 74 Income before income taxes 5,896 6,408 Provision for income taxes 1,356 1,164 Net income $ 4,540 $ 5,244 Earnings per share: Basic $ 0.55 $ 0.63 Diluted $ 0.54 $ 0.62 Weighted average shares outstanding: Basic 8,249 8,339 Diluted 8,351 8,434 Cash dividends declared per common share $ 0.31 $ 0.28





MICROSOFT CORPORATION

COMPREHENSIVE INCOME STATEMENTS (In millions)(Unaudited)

Three Months Ended September 30, 2014 2013 Net income $ 4,540 $ 5,244 Other comprehensive income (loss): Net unrealized gains (losses) on derivatives (net of tax effects of $4 and $(3)) 319 (26) Net unrealized gains (losses) on investments (net of tax effects of $(102) and $492) (189) 952 Translation adjustments and other (net of tax effects of $(47) and $33) (81) 62 Other comprehensive income 49 988 Comprehensive income $ 4,589 $ 6,232





MICROSOFT CORPORATION

BALANCE SHEETS (In millions)(Unaudited)

September 30, 2014 June 30, 2014 Assets Current assets: Cash and cash equivalents $ 6,302 $ 8,669 Short-term investments (including securities loaned of $180 and $541) 82,891 77,040 Total cash, cash equivalents, and short-term investments 89,193 85,709 Accounts receivable, net of allowance for doubtful accounts of $269 and $301 12,887 19,544 Inventories 3,141 2,660 Deferred income taxes 1,784 1,941 Other 5,434 4,392 Total current assets 112,439 114,246 Property and equipment, net of accumulated depreciation of $15,373 and $14,793 13,229 13,011 Equity and other investments 13,943 14,597 Goodwill 20,081 20,127 Intangible assets, net 6,693 6,981 Other long-term assets 3,271 3,422 Total assets $ 169,656 $ 172,384 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 6,769 $ 7,432 Short-term debt 3,500 2,000 Current portion of long-term debt 1,748 0 Accrued compensation 3,740 4,797 Income taxes 903 782 Short-term unearned revenue 20,713 23,150 Securities lending payable 191 558 Other 7,130 6,906 Total current liabilities 44,694 45,625 Long-term debt 18,472 20,645 Long-term unearned revenue 1,825 2,008 Deferred income taxes 2,714 2,728 Other long-term liabilities 11,781 11,594 Total liabilities 79,486 82,600 Commitments and contingencies Stockholders' equity: Common stock and paid-in capital - shares authorized 24,000; outstanding 8,255 and 8,239 68,362 68,366 Retained earnings 18,051 17,710 Accumulated other comprehensive income 3,757 3,708 Total stockholders' equity 90,170 89,784 Total liabilities and stockholders' equity $ 169,656 $ 172,384





MICROSOFT CORPORATION

CASH FLOWS STATEMENTS (In millions)(Unaudited)

Three Months Ended September 30, 2014 2013 Operations Net income $ 4,540 $ 5,244 Adjustments to reconcile net income to net cash from operations: Depreciation, amortization, and other 1,428 954 Stock-based compensation expense 646 635 Net recognized losses on investments and derivatives 55 93 Excess tax benefits from stock-based compensation (502) (205) Deferred income taxes 301 404 Deferral of unearned revenue 8,022 7,436 Recognition of unearned revenue (10,643) (9,677) Changes in operating assets and liabilities: Accounts receivable 6,627 6,617 Inventories (483) (667) Other current assets (280) (556) Other long-term assets 279 (81) Accounts payable (659) (276) Other current liabilities (1,166) (1,255) Other long-term liabilities 189 (461) Net cash from operations 8,354 8,205 Financing Proceeds from issuance of short-term debt, maturities of 90 days or less, net 2,999 712 Proceeds from issuance of debt 0 588 Repayments of debt (1,500) (1,000) Common stock issued 216 203 Common stock repurchased (2,888) (2,188) Common stock cash dividends paid (2,307) (1,916) Excess tax benefits from stock-based compensation 502 205 Net cash used in financing (2,978) (3,396) Investing Additions to property and equipment (1,282) (1,231) Acquisition of companies, net of cash acquired, and purchases of intangible and other assets (141) (15) Purchases of investments (24,085) (14,768) Maturities of investments 1,693 347 Sales of investments 16,445 11,117 Securities lending payable (367) (64) Net cash used in investing (7,737) (4,614) Effect of exchange rates on cash and cash equivalents (6) 24 Net change in cash and cash equivalents (2,367) 219 Cash and cash equivalents, beginning of period 8,669 3,804 Cash and cash equivalents, end of period $ 6,302 $ 4,023