Microsoft Cloud Strength Drives Third Quarter Results

REDMOND, Wash. — April 24, 2019 — Microsoft Corp. today announced the following results for the quarter ended March 31, 2019, as compared to the corresponding period of last fiscal year:

· Revenue was $30.6 billion and increased 14%

· Operating income was $10.3 billion and increased 25%

· Net income was $8.8 billion and increased 19%

· Diluted earnings per share was $1.14 and increased 20%

“Leading organizations of every size in every industry trust the Microsoft cloud. We are accelerating our innovation across the cloud and edge so our customers can build the digital capability increasingly required to compete and grow,” said Satya Nadella, CEO of Microsoft.

Microsoft returned $7.4 billion to shareholders in the form of share repurchases and dividends in the third quarter of fiscal year 2019.

“Demand for our cloud offerings drove commercial cloud revenue to $9.6 billion this quarter, up 41% year-over-year,” said Amy Hood, executive vice president and chief financial officer of Microsoft. “We continue to drive growth in revenue and operating income with consistent execution from our sales teams and partners and targeted strategic investments.”

Revenue in Productivity and Business Processes was $10.2 billion and increased 14% (up 15% in constant currency), with the following business highlights:

· Office Commercial products and cloud services revenue increased 12% (up 14% in constant currency) driven by Office 365 Commercial revenue growth of 30% (up 31% in constant currency)

· Office Consumer products and cloud services revenue increased 8% (up 10% in constant currency) and Office 365 Consumer subscribers increased to 34.2 million

· LinkedIn revenue increased 27% (up 29% in constant currency) with record levels of engagement highlighted by LinkedIn sessions growth of 24%

· Dynamics products and cloud services revenue increased 13% (up 15% in constant currency) driven by Dynamics 365 revenue growth of 43% (up 44% in constant currency)

Revenue in Intelligent Cloud was $9.7 billion and increased 22% (up 24% in constant currency), with the following business highlights:

· Server products and cloud services revenue increased 27% (up 29% in constant currency) driven by Azure revenue growth of 73% (up 75% in constant currency)

· Enterprise Services revenue increased 4% (up 5% in constant currency)

Revenue in More Personal Computing was $10.7 billion and increased 8% (up 9% in constant currency), with the following business highlights:

· Windows OEM revenue increased 9% (up 9% in constant currency)

· Windows Commercial products and cloud services revenue increased 18% (up 20% in constant currency)

· Surface revenue increased 21% (up 25% in constant currency)

· Gaming revenue increased 5% (up 7% in constant currency) driven by Xbox software and services revenue growth of 12% (up 15% in constant currency)

· Search advertising revenue excluding traffic acquisition costs increased 12% (up 14% in constant currency)

Business Outlook

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

Quarterly Highlights, Product Releases, and Enhancements

Every quarter Microsoft delivers hundreds of products, either as new releases, services, or enhancements to current products and services. These releases are a result of significant research and development investments, made over multiple years, designed to help customers be more productive and secure and to deliver differentiated value across the cloud and the edge.

Here are the major product releases and other highlights for the quarter, organized by product categories, to help illustrate how we are accelerating innovation across our businesses while expanding our market opportunities.

Webcast Details

Satya Nadella, chief executive officer, Amy Hood, executive vice president and chief financial officer, Frank Brod, chief accounting officer, Keith Dolliver, deputy general counsel, 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 24, 2020.

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 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 2018 As Reported $26,819 $8,292 $7,424 $0.95 2019 As Reported $30,571 $10,341 $8,809 $1.14 Percentage Change Y/Y 14% 25% 19% 20% Constant Currency Impact $(420) $(208) $(126) $(0.02) Percentage Change Y/Y Constant Currency 16% 27% 20% 22%

Segment Revenue Constant Currency Reconciliation

Three Months Ended March 31, ($ in millions) Productivity and Business Processes Intelligent Cloud More Personal Computing 2018 As Reported $9,006 $7,896 $9,917 2019 As Reported $10,242 $9,649 $10,680 Percentage Change Y/Y 14% 22% 8% Constant Currency Impact $(133) $(144) $(143) Percentage Change Y/Y Constant Currency 15% 24% 9%

Selected Product and Service Revenue Constant Currency Reconciliation

Three Months Ended March 31, 2019 Percentage Change Y/Y (GAAP) Constant Currency Impact Percentage Change Y/Y Constant Currency Office Commercial products and cloud services 12% 2% 14% Office 365 Commercial 30% 1% 31% Office Consumer products and cloud services 8% 2% 10% LinkedIn 27% 2% 29% Dynamics products and cloud services 13% 2% 15% Dynamics 365 43% 1% 44% Server products and cloud services 27% 2% 29% Azure 73% 2% 75% Enterprise Services 4% 1% 5% Windows OEM 9% 0% 9% Windows Commercial products and cloud services 18% 2% 20% Search advertising excluding traffic acquisition costs 12% 2% 14% Surface 21% 4% 25% Gaming 5% 2% 7% Xbox software and services 12% 3% 15%

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 cloud-based 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;

· legal changes, our evolving business model, piracy, and other factors may decrease the value of our intellectual property;

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

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

· 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;

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

· 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, fines, or reputational damage;

· 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;

· changes in our sales organization that may impact revenues;

· the development of the internet of things presenting security, privacy, and execution risks;

· issues about the use of artificial intelligence in our offerings that may result in competitive harm, legal liability, or reputational harm; and

· damage to our reputation or our brands that may harm our business and operating results.

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 March 31, 2019. 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, 2019 2018 2019 2018 Revenue: Product $15,448 $15,114 $48,966 $47,338 Service and other 15,123 11,705 43,160 32,937 Total revenue 30,571 26,819 92,126 80,275 Cost of revenue: Product 3,441 3,425 12,975 11,903 Service and other 6,729 5,844 19,523 16,708 Total cost of revenue 10,170 9,269 32,498 28,611 Gross margin 20,401 17,550 59,628 51,664 Research and development 4,316 3,715 12,363 10,793 Sales and marketing 4,565 4,335 13,251 12,709 General and administrative 1,179 1,208 3,460 3,483 Operating income 10,341 8,292 30,554 24,679 Other income, net 145 349 538 1,115 Income before income taxes 10,486 8,641 31,092 25,794 Provision for income taxes 1,677 1,217 5,039 18,096 Net income $8,809 $7,424 $26,053 $7,698 Earnings per share: Basic $1.15 $0.96 $3.39 $1.00 Diluted $1.14 $0.95 $3.36 $0.99 Weighted average shares outstanding: Basic 7,672 7,698 7,679 7,706 Diluted 7,744 7,794 7,759 7,798





COMPREHENSIVE INCOME STATEMENTS (In millions)(Unaudited)

Three Months Ended March 31, Nine Months Ended March 31, 2019 2018 2019 2018 Net income $8,809 $7,424 $26,053 $7,698 Other comprehensive income (loss), net of tax: Net change related to derivatives (33) 7 (93) (106) Net change related to investments 714 (1,016) 1,334 (2,182) Translation adjustments and other 67 255 (252) 508 Other comprehensive income (loss) 748 (754) 989 (1,780) Comprehensive income $9,557 $6,670 $27,042 $5,918





BALANCE SHEETS (In millions)(Unaudited)

March 31, 2019 June 30, 2018 Assets Current assets: Cash and cash equivalents $11,212 $11,946 Short-term investments 120,406 121,822 Total cash, cash equivalents, and short-term investments 131,618 133,768 Accounts receivable, net of allowance for doubtful accounts of $336 and $377 19,269 26,481 Inventories 1,951 2,662 Other 7,049 6,751 Total current assets 159,887 169,662 Property and equipment, net of accumulated depreciation of $35,431 and $29,223 33,648 29,460 Operating lease right-of-use assets 7,121 6,686 Equity investments 2,403 1,862 Goodwill 41,861 35,683 Intangible assets, net 8,103 8,053 Other long-term assets 10,258 7,442 Total assets $263,281 $258,848 Liabilities and stockholders' equity Current liabilities: Accounts payable $7,544 $8,617 Current portion of long-term debt 6,515 3,998 Accrued compensation 5,764 6,103 Short-term income taxes 1,950 2,121 Short-term unearned revenue 24,251 28,905 Other 7,837 8,744 Total current liabilities 53,861 58,488 Long-term debt 66,585 72,242 Long-term income taxes 29,514 30,265 Long-term unearned revenue 3,884 3,815 Deferred income taxes 1,838 541 Operating lease liabilities 5,972 5,568 Other long-term liabilities 6,763 5,211 Total liabilities 168,417 176,130 Commitments and contingencies Stockholders' equity: Common stock and paid-in capital - shares authorized 24,000; outstanding 7,666 and 7,677 77,791 71,223 Retained earnings 18,338 13,682 Accumulated other comprehensive loss (1,265) (2,187) Total stockholders' equity 94,864 82,718 Total liabilities and stockholders' equity $263,281 $258,848





CASH FLOWS STATEMENTS (In millions)(Unaudited)

Three Months Ended March 31, Nine Months Ended March 31, 2019 2018 2019 2018 Operations Net income $8,809 $7,424 $26,053 $7,698 Adjustments to reconcile net income to net cash from operations: Depreciation, amortization, and other 2,926 2,710 8,758 7,745 Stock-based compensation expense 1,172 969 3,462 2,928 Net recognized gains on investments and derivatives (95) (438) (470) (1,645) Deferred income taxes (320) (396) (740) (2,754) Changes in operating assets and liabilities: Accounts receivable 460 1,285 7,258 5,326 Inventories 12 (75) 710 107 Other current assets (14) (149) (864) (113) Other long-term assets (517) (213) (969) (835) Accounts payable (197) (393) (1,032) 138 Unearned revenue 20 91 (4,543) (2,780) Income taxes 276 645 (879) 17,280 Other current liabilities 649 546 (1,017) (975) Other long-term liabilities 339 145 350 346 Net cash from operations 13,520 12,151 36,077 32,466 Financing Repayments of short-term debt, maturities of 90 days or less, net 0 (7,373) 0 (7,324) Proceeds from issuance of debt 0 0 0 7,183 Repayments of debt 0 (4,883) (3,000) (9,379) Common stock issued 274 251 834 747 Common stock repurchased (4,753) (3,781) (14,910) (8,359) Common stock cash dividends paid (3,526) (3,232) (10,290) (9,473) Other, net 404 (640) (835) (946) Net cash used in financing (7,601) (19,658) (28,201) (27,551) Investing Additions to property and equipment (2,565) (2,934) (9,874) (7,652) Acquisition of companies, net of cash acquired, and purchases of intangible and other assets (269) (248) (2,107) (454) Purchases of investments (5,846) (26,885) (42,255) (105,000) Maturities of investments 5,893 7,674 14,889 19,252 Sales of investments 1,424 26,256 30,831 90,553 Securities lending payable 0 (19) 0 (90) Net cash from (used in) investing (1,363) 3,844 (8,516) (3,391) Effect of foreign exchange rates on cash and cash equivalents 18 25 (94) 34 Net change in cash and cash equivalents 4,574 (3,638) (734) 1,558 Cash and cash equivalents, beginning of period 6,638 12,859 11,946 7,663 Cash and cash equivalents, end of period $11,212 $9,221 $11,212 $9,221



