Microsoft Reports Record First-Quarter Results

$17.37 billion of revenue driven by solid business and consumer demand.

REDMOND, Wash. — Oct. 20, 2011 — Microsoft Corp. today announced record first-quarter revenue of $17.37 billion for the quarter ended Sept. 30, 2011, a 7% increase from the same period of the prior year. Operating income, net income, and diluted earnings per share for the quarter were $7.20 billion, $5.74 billion, and $0.68 per share, which represented increases of 1%, 6%, and 10%, respectively, when compared with the prior year period.

“We saw customer demand across the breadth of our products, resulting in record first-quarter revenue and another quarter of solid EPS growth,” said Peter Klein, chief financial officer at Microsoft. “Our product portfolio is performing well, and we’ve got an impressive pipeline of products and services that positions us well for future growth.”

Since July, Microsoft reported a number of product and business highlights, including:

· The Microsoft Business Division reported $5.62 billion in first quarter revenue, an 8% increase from the prior year period which included the launch of Office 2010. Revenue from Microsoft’s productivity server offerings – including Lync, SharePoint, and Exchange – grew double-digits, and the Dynamics business grew 17% in the quarter.

· The Server & Tools segment posted $4.25 billion in first quarter revenue, a 10% increase over the prior year period and the sixth consecutive quarter of double-digit revenue growth. Microsoft also unveiled a developer preview of “Windows Server 8” at the BUILD developer conference in September.

· Windows and Windows Live Division revenue was $4.87 billion, a 2% increase over the prior period, in line with the PC market. Windows 7 momentum continued with over 450 million licenses sold since launch. At the BUILD conference, Microsoft showcased and released a developer preview of the next major release of Windows, “Windows 8.”

· Windows Phone 7.5 released with a broad array of new features, and received favorable reviews.

· Bing organic US market share grew 350 basis points year over year to 14.7% while Bing-powered US market share, including Yahoo! properties, was approximately 27%. The company also showcased the increasing integration of Bing across other products such as Xbox and Windows Phone.

· Xbox was the top-selling gaming console in the US for the ninth consecutive month. The company launched the Gears of War 3 game with over three million copies sold in the first week, and announced plans to roll out the next generation of TV entertainment on Xbox LIVE with nearly 40 content providers starting this holiday season.

· Microsoft completed its acquisition of Skype.

"We had another strong quarter for Office, SharePoint, Exchange, and Lync, and saw growing demand for our public and private cloud services including Office 365, Dynamics CRM Online, and Windows Azure,” said Kevin Turner, chief operating officer at Microsoft. "With a great set of consumer products like Windows 7 PCs, Windows Phone 7.5, Xbox and Kinect, we are excited about the holiday buying season.”

Business Outlook

Beginning in the second fiscal quarter, Microsoft’s results will include the results of Skype. The company offers updated fiscal 2012 operating expense guidance, including Skype and the associated acquisition-related expenses, of $28.6 billion to $29.2 billion.

Webcast Details

Peter Klein, chief financial officer, Frank Brod, chief accounting officer, and Bill Koefoed, 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 Oct. 20, 2012.

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:

· execution and competitive risks in transitioning to cloud-based computing;

· challenges to Microsoft’s business model;

· intense competition in all of Microsoft’s markets;

· 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;

· actual or perceived 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 and disruptions of services provided to customers directly or through third parties if Microsoft fails to maintain an adequate operations infrastructure;

· government litigation and regulation affecting 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;

· significant business investments that may not gain customer acceptance and produce offsetting increases in revenue;

· unfavorable changes in general economic conditions, disruption of our partner networks or sales channels, or the availability of credit that affect demand for Microsoft’s products and services or the value of our investment portfolio;

· adverse results in legal disputes;

· unanticipated tax liabilities;

· quality or supply problems in Microsoft’s consumer hardware or other vertically integrated hardware and software products;

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

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

· geopolitical conditions, natural disaster, cyberattack or other catastrophic events disrupting Microsoft’s business; and

· acquisitions, joint ventures and strategic alliances that adversely affect the 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 20, 2011. 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:

Bill Koefoed, general manager, Investor Relations, (425) 706-3703

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.





INCOME STATEMENTS (In millions, except per share amounts) (Unaudited) Three Months Ended September 30, 2011 2010 Revenue $17,372 $16,195 Operating expenses: Cost of revenue 3,777 3,139 Research and development 2,329 2,196 Sales and marketing 2,900 2,806 General and administrative 1,163 938 Total operating expenses 10,169 9,079 Operating income 7,203 7,116 Other income 103 114 Income before income taxes 7,306 7,230 Provision for income taxes 1,568 1,820 Net income $5,738 $5,410 Earnings per share: Basic $0.68 $0.63 Diluted $0.68 $0.62 Weighted average shares outstanding: Basic 8,392 8,614 Diluted 8,490 8,695 Cash dividends declared per common share $0.20 $0.16





BALANCE SHEETS (In millions) (Unaudited)

September 30,

2011 June 30,

2011(1) Assets Current assets: Cash and cash equivalents $12,881 $9,610 Short-term investments (including securities loaned of $1,119 and $1,181) 44,522 43,162 Total cash, cash equivalents, and short-term investments 57,403 52,772 Accounts receivable, net of allowance for doubtful accounts of $297 and $333 10,153 14,987 Inventories 2,270 1,372 Deferred income taxes 2,190 2,467 Other 3,255 3,320 Total current assets 75,271 74,918 Property and equipment, net of accumulated depreciation of $10,209 and $9,829 8,033 8,162 Equity and other investments 8,576 10,865 Goodwill 12,537 12,581 Intangible assets, net 1,026 744 Other long-term assets 1,972 1,434 Total assets $107,415 $108,704 Liabilities and stockholders' equity Current liabilities: Accounts payable $3,719 $4,197 Accrued compensation 2,388 3,575 Income taxes 705 580 Short-term unearned revenue 14,345 15,722 Securities lending payable 1,141 1,208 Other 3,245 3,492 Total current liabilities 25,543 28,774 Long-term debt 11,927 11,921 Long-term unearned revenue 1,313 1,398 Deferred income taxes 1,040 1,456 Other long-term liabilities 8,201 8,072 Total liabilities 48,024 51,621 Commitments and contingencies Stockholders' equity: Common stock and paid-in capital - shares authorized 24,000; outstanding 8,410 and 8,376 63,492 63,415 Retained deficit, including accumulated other comprehensive income of $751 and $1,863 (4,101) (6,332) Total stockholders' equity 59,391 57,083 Total liabilities and stockholders' equity $107,415 $108,704 (1) Derived from audited financial statements.

CASH FLOWS STATEMENTS (In millions) (Unaudited) Three Months Ended September 30, 2011 2010 Operations Net income $5,738 $5,410 Adjustments to reconcile net income to net cash from operations: Depreciation, amortization, and other 726 694 Stock-based compensation expense 558 528 Net recognized gains on investments and derivatives (30) (29) Excess tax benefits from stock-based compensation (70) (5) Deferred income taxes 402 (148) Deferral of unearned revenue 6,139 5,881 Recognition of unearned revenue (7,653) (6,862) Changes in operating assets and liabilities: Accounts receivable 4,733 3,674 Inventories (920) (468) Other current assets 260 208 Other long-term assets (75) 62 Accounts payable (442) (400) Other current liabilities (993) (911) Other long-term liabilities 120 560 Net cash from operations 8,493 8,194 Financing Short-term debt borrowings (repayments), maturities of 90 days or less, net 0 814 Proceeds from issuance of debt, maturities longer than 90 days 0 4,721 Repayments of debt, maturities longer than 90 days 0 (814) Common stock issued 336 177 Common stock repurchased (1,934) (4,399) Common stock cash dividends paid (1,341) (1,118) Excess tax benefits from stock-based compensation 70 5 Other 0 (25) Net cash used in financing (2,869) (639) Investing Additions to property and equipment (436) (564) Acquisition of companies, net of cash acquired, and purchases of intangible and other assets (875) 0 Purchases of investments (11,299) (7,417) Maturities of investments 2,825 870 Sales of investments 7,536 1,427 Securities lending payable (66) 727 Net cash used in investing (2,315) (4,957) Effect of exchange rates on cash and cash equivalents (38) 58 Net change in cash and cash equivalents 3,271 2,656 Cash and cash equivalents, beginning of period 9,610 5,505 Cash and cash equivalents, end of period $12,881 $8,161