Microsoft Cloud Powers Third Quarter Results

REDMOND, Wash. — April 26, 2018 — Microsoft Corp. today announced the following results for the quarter ended March 31, 2018, as compared to the corresponding period of last fiscal year:

· Revenue was $26.8 billion and increased 16%

· Operating income was $8.3 billion and increased 23%

· Net income was $7.4 billion and increased 35%

· Diluted earnings per share was $0.95 and increased 36%

“Our results this quarter reflect the trust people and organizations are placing in the Microsoft Cloud,” said Satya Nadella, chief executive officer of Microsoft. “We are innovating across key growth categories of infrastructure, AI, productivity, and business applications to deliver differentiated value to customers.”

Microsoft returned $6.3 billion to shareholders in the form of dividends and share repurchases in the third quarter of fiscal year 2018, an increase of 37%.

“With consistent investment and strong sales execution, this quarter we achieved better than expected performance across all segments,” said Amy Hood, executive vice president and chief financial officer at Microsoft. “We delivered double-digit revenue and operating income growth driven by 58% growth in our commercial cloud revenue.”

Revenue in Productivity and Business Processes was $9.0 billion and increased 17% (up 14% in constant currency), with the following business highlights:

· Office commercial products and cloud services revenue increased 14% (up 12% in constant currency) driven by Office 365 commercial revenue growth of 42% (up 40% in constant currency)

· Office consumer products and cloud services revenue increased 12% (up 9% in constant currency) and Office 365 consumer subscribers increased to 30.6 million

· LinkedIn revenue increased 37% (up 33% in constant currency) with continued acceleration in engagement highlighted by LinkedIn sessions growth of over 30%

· Dynamics products and cloud services revenue increased 17% (up 14% in constant currency) driven by Dynamics 365 revenue growth of 65% (up 62% in constant currency)

Revenue in Intelligent Cloud was $7.9 billion and increased 17% (up 15% in constant currency), with the following business highlights:

· Server products and cloud services revenue increased 20% (up 17% in constant currency) driven by Azure revenue growth of 93% (up 89% in constant currency)

· Enterprise Services revenue increased 8% (5% in constant currency)

Revenue in More Personal Computing was $9.9 billion and increased 13% (up 11% in constant currency), with the following business highlights:

· Windows OEM revenue increased 4% (up 4% in constant currency) driven by OEM Pro revenue growth of 11%

· Windows commercial products and cloud services revenue increased 21% (up 17% in constant currency) driven by an increased volume of multi-year agreements and the mix of products that carry higher in-quarter revenue recognition

· Gaming revenue increased 18% (up 16% in constant currency) driven by Xbox software and services revenue growth of 24% (up 21% in constant currency) mainly from third party title strength

· Surface revenue increased 32% (up 27% in constant currency) against a prior year comparable impacted by product end-of-life-cycle dynamics

· Search advertising revenue excluding traffic acquisition costs increased 16% (up 14% in constant currency) driven by higher revenue per search and search volume

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, Carolyn Frantz, deputy general counsel and corporate secretary, and Michael Spencer, general manager of investor relations, will host a conference call and webcast at 2:30 p.m. Pacific time (5:30 p.m. Eastern time) 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/en-us/investor. The webcast will be available for replay through the close of business on April 26, 2019.

New Accounting Standards

We adopted new accounting standards related to revenue recognition and leases effective July 1, 2017. The prior periods presented here have been restated to reflect adoption of these new standards.

Constant Currency

Microsoft presents constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars using the average exchange rates from the comparative period rather than the actual exchange rates in effect during the respective periods. All growth comparisons relate to the corresponding period in the last fiscal year. Microsoft has provided this non-GAAP financial information to aid investors in better understanding our performance. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with generally accepted accounting principles (GAAP).

Financial Performance Constant Currency Reconciliation

Three Months Ended March 31, ($ in millions, except per share amounts) Revenue Operating Income Net Income Diluted Earnings per Share 2017 As Reported $23,212 $6,723 $5,486 $0.70 2018 As Reported $26,819 $8,292 $7,424 $0.95 Percentage Change Y/Y 16% 23% 35% 36% Constant Currency Impact $506 $216 $254 $0.03 Percentage Change Y/Y Constant Currency 13% 20% 31% 31%

Segment Revenue Constant Currency Reconciliation

Three Months Ended March 31, ($ in millions) Productivity and Business Processes Intelligent Cloud More Personal Computing 2017 As Reported $7,707 $6,730 $8,775 2018 As Reported $9,006 $7,896 $9,917 Percentage Change Y/Y 17% 17% 13% Constant Currency Impact $193 $162 $151 Percentage Change Y/Y Constant Currency 14% 15% 11%

Selected Product and Service Revenue Constant Currency Reconciliation

Three Months Ended March 31, 2018 Percentage Change Y/Y (GAAP) Constant Currency Impact Percentage Change Y/Y Constant Currency Office commercial products and cloud services 14% (2)% 12% Office 365 commercial 42% (2)% 40% Office consumer products and cloud services 12% (3)% 9% LinkedIn 37% (4)% 33% Dynamics products and cloud services 17% (3)% 14% Dynamics 365 65% (3)% 62% Server products and cloud services 20% (3)% 17% Azure 93% (4)% 89% Enterprise Services 8% (3)% 5% Windows OEM 4% 0% 4% Windows commercial products and cloud services 21% (4)% 17% Search advertising excluding traffic acquisition costs 16% (2)% 14% Surface 32% (5)% 27% Gaming 18% (2)% 16% Xbox software and services 24% (3)% 21%

About Microsoft

Microsoft (Nasdaq “MSFT” @microsoft) enables digital transformation for the era of an intelligent cloud and an intelligent edge. Its mission is to empower every person and every organization on the planet to achieve more.

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 our markets that may lead to lower revenue or operating margins;

· increasing focus on services presenting execution and competitive risks;

· significant investments in new products and services that may not achieve expected returns;

· acquisitions, joint ventures, and strategic alliances that may have an adverse effect on our business;

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

· a change in our ability to earn expected revenues from our intellectual property rights;

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

· the possibility that we may fail to protect our source code;

· the possibility that we may not be able to protect information on our products and services from use by others;

· cyberattacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position;

· disclosure and misuse of personal data that could cause liability and harm to our reputation;

· abuse of our advertising or social platforms that may harm our reputation or user engagement;

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

· government litigation and regulatory activity relating to competition rules that may limit how we design and market our products;

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

· laws and regulations relating to the handling of personal data that may impede the adoption of our services or result in increased costs, legal claims, or fines against us;

· the dependence of our business on our ability to attract and retain talented employees;

· claims against us that may result in adverse outcomes in legal disputes;

· additional tax liabilities;

· quality or supply problems;

· exposure to increased economic and operational uncertainties from operating a global business, including the effects of foreign currency exchange;

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

· adverse economic or market conditions that may harm our business; and

· changes in our sales organization that may impact revenues.

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/en-us/investor.

All information in this release is as of April 26, 2018. 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:

Microsoft Media Relations, WE Communications for Microsoft, (425) 638-7777,rrt@we-worldwide.com

For more information, financial analysts and investors only:

Michael Spencer, 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. Pacific time conference call with investors and analysts, is available at http://www.microsoft.com/en-us/investor.





MICROSOFT CORPORATION

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

Three Months Ended March 31, Nine Months Ended March 31, 2018 2017 2018 2017 Revenue: Product $15,114 $14,513 $47,338 $47,754 Service and other 11,705 8,699 32,937 23,212 Total revenue 26,819 23,212 80,275 70,966 Cost of revenue: Product 3,425 3,075 11,903 12,034 Service and other 5,844 4,985 16,708 13,771 Total cost of revenue 9,269 8,060 28,611 25,805 Gross margin 17,550 15,152 51,664 45,161 Research and development 3,715 3,355 10,793 9,523 Sales and marketing 4,335 3,872 12,709 11,169 General and administrative 1,208 1,202 3,483 3,126 Operating income 8,292 6,723 24,679 21,343 Other income, net 349 371 1,115 600 Income before income taxes 8,641 7,094 25,794 21,943 Provision for income taxes 1,217 1,608 18,096 4,523 Net income $7,424 $5,486 $7,698 $17,420 Earnings per share: Basic $0.96 $0.71 $1.00 $2.25 Diluted $0.95 $0.70 $0.99 $2.22 Weighted average shares outstanding: Basic 7,698 7,725 7,706 7,756 Diluted 7,794 7,813 7,798 7,840 Cash dividends declared per common share $0.42 $0.39 $1.26 $1.17





COMPREHENSIVE INCOME STATEMENTS (In millions)(Unaudited)

Three Months Ended March 31, Nine Months Ended March 31, 2018 2017 2018 2017 Net income $7,424 $5,486 $7,698 $17,420 Other comprehensive income (loss), net of tax: Net change related to derivatives 7 (225) (106) 18 Net change related to investments (1,016) 65 (2,182) (846) Translation adjustments and other 255 349 508 (125) Other comprehensive income (loss) (754) 189 (1,780) (953) Comprehensive income $6,670 $5,675 $5,918 $16,467





BALANCE SHEETS (In millions)(Unaudited)

March 31, 2018 June 30, 2017 Assets Current assets: Cash and cash equivalents $9,221 $7,663 Short-term investments 123,049 125,318 Total cash, cash equivalents, and short-term investments 132,270 132,981 Accounts receivable, net of allowance for doubtful accounts of $311 and $345 17,208 22,431 Inventories 2,084 2,181 Other 5,097 5,103 Total current assets 156,659 162,696 Property and equipment, net of accumulated depreciation of $28,377 and $24,179 27,929 23,734 Operating lease right-of-use assets 6,859 6,555 Equity and other investments 2,818 6,023 Goodwill 35,582 35,122 Intangible assets, net 8,544 10,106 Other long-term assets 7,106 6,076 Total assets $245,497 $250,312 Liabilities and stockholders' equity Current liabilities: Accounts payable $7,623 $7,390 Short-term debt 230 9,072 Current portion of long-term debt 3,447 1,049 Accrued compensation 5,149 5,819 Short-term income taxes 814 718 Short-term unearned revenue 21,370 24,013 Other 7,500 7,684 Total current liabilities 46,133 55,745 Long-term debt 73,480 76,073 Long-term income taxes 30,669 13,485 Long-term unearned revenue 2,585 2,643 Deferred income taxes 2,417 5,734 Operating lease liabilities 5,751 5,372 Other long-term liabilities 5,223 3,549 Total liabilities 166,258 162,601 Commitments and contingencies Stockholders' equity: Common stock and paid-in capital - shares authorized 24,000; outstanding 7,690 and 7,708 70,418 69,315 Retained earnings 9,974 17,769 Accumulated other comprehensive income (loss) (1,153) 627 Total stockholders' equity 79,239 87,711 Total liabilities and stockholders' equity $245,497 $250,312





CASH FLOWS STATEMENTS (In millions)(Unaudited)

Three Months Ended March 31, Nine Months Ended March 31, 2018 2017 2018 2017 Operations Net income $7,424 $5,486 $7,698 $17,420 Adjustments to reconcile net income to net cash from operations: Depreciation, amortization, and other 2,710 2,453 7,745 6,435 Stock-based compensation expense 969 883 2,928 2,353 Net recognized gains on investments and derivatives (438) (590) (1,645) (1,553) Deferred income taxes (396) (284) (2,754) 261 Changes in operating assets and liabilities: Accounts receivable 1,285 1,415 5,326 5,813 Inventories (75) (16) 107 249 Other current assets (149) (31) (113) 304 Other long-term assets (213) (387) (835) (680) Accounts payable (393) (425) 138 (769) Unearned revenue 91 (45) (2,780) (2,929) Income taxes 645 1,247 17,280 2,654 Other current liabilities 546 671 (975) (1,057) Other long-term liabilities 145 283 346 1 Net cash from operations 12,151 10,660 32,466 28,502 Financing Repayments of short-term debt, maturities of 90 days or less, net (7,373) (1,302) (7,324) (8,447) Proceeds from issuance of debt 0 547 7,183 42,593 Repayments of debt (4,883) (211) (9,379) (4,554) Common stock issued 251 179 747 551 Common stock repurchased (3,781) (2,062) (8,359) (10,023) Common stock cash dividends paid (3,232) (3,012) (9,473) (8,836) Other, net (640) (375) (946) (175) Net cash from (used in) financing (19,658) (6,236) (27,551) 11,109 Investing Additions to property and equipment (2,934) (1,695) (7,652) (5,846) Acquisition of companies, net of cash acquired, and purchases of intangible and other assets (248) (802) (454) (25,586) Purchases of investments (26,885) (43,918) (105,000) (147,874) Maturities of investments 7,674 4,860 19,252 22,234 Sales of investments 26,256 36,444 90,553 117,754 Securities lending payable (19) (1,080) (90) (94) Net cash from (used in) investing 3,844 (6,191) (3,391) (39,412) Effect of foreign exchange rates on cash and cash equivalents 25 12 34 4 Net change in cash and cash equivalents (3,638) (1,755) 1,558 203 Cash and cash equivalents, beginning of period 12,859 8,468 7,663 6,510 Cash and cash equivalents, end of period $9,221 $6,713 $9,221 $6,713



