Microsoft Reports Record $0.77 Earnings Per Share in Second Quarter

Holiday sales and business demand drive record revenue.

REDMOND, Wash. — Jan. 27, 2011 — Microsoft Corp. today announced record second-quarter revenue of $19.95 billion for the quarter ended Dec. 31, 2010. Operating income, net income and diluted earnings per share for the quarter were $8.17 billion, $6.63 billion and $0.77 per share, respectively.

Prior year results reflect the recognition of $1.71 billion of deferred revenue relating to the Windows 7 Upgrade Option program and sales of Windows 7 before general availability in October 2009. Second-quarter growth rates for revenue and earnings per share were 5% and 4%, respectively. Without the deferred recognition in the prior year, second-quarter growth rates for revenue and earnings per share were 15% and 28%, respectively.

(In millions, except per share amounts) Three Months Ended December 31, 2010 As Reported (GAAP) 2009 As Reported (GAAP) Deferred Revenue Recognition 2009 As Adjusted (Non-GAAP) Percentage Change (GAAP) Percentage Change (Non-GAAP) Revenue $19,953 $19,022 $1,711 $17,311 5% 15% Operating Income $8,165 $8,513 $1,711 $6,802 -4% 20% Diluted Earnings Per Share $0.77 $0.74 $0.14 $0.60 4% 28%

“We are enthusiastic about the consumer response to our holiday lineup of products, including the launch of Kinect. The 8 million units of Kinect sensors sold in just 60 days far exceeded our expectations,” said Peter Klein, chief financial officer at Microsoft. “The pace of business spending, combined with strong consumer demand, led to another quarter of operating margin expansion and solid earnings per share growth.”

Among the factors driving Microsoft’s record revenues and earnings per share was the 55% growth in revenue for the Entertainment & Devices Division, as the success of the Kinect sensor boosted sales of Xbox 360 consoles, Xbox Live subscriptions and Xbox games.

Microsoft Business Division revenue grew 24% year-over-year. Office 2010 is the fastest-selling consumer version of Office in history, with license sales over 50% ahead of Office 2007 over an equivalent period following launch.

“Business demand for our productivity and infrastructure products and cloud solutions is strong. Office had a huge quarter, exceeding everyone’s expectations, and our roadmap for cloud productivity with Office 365 makes products like SharePoint, Exchange, Lync and Dynamics CRM even more attractive to our customers,” said Kevin Turner, chief operating officer at Microsoft. “Windows 7 continues to be the fastest-growing operating system in history, and our recent System on a Chip announcement demonstrates our commitment that Windows will have the power and flexibility to run everywhere and on every device.”

Among the other product and business highlights Microsoft reported in the quarter:

· Microsoft announced it has now sold over 300 million Windows 7 licenses, and Windows 7 is now running on over 20% of Internet-connected PCs.

· Windows Phone 7 launched during the quarter in 30 countries and on 60 operators and nine different devices. Microsoft announced developers are adding Windows Phone 7 applications to the marketplace at a rate of over 100 per day.

· Bing completed the integration of Yahoo! search in the U.S. and Canada and continues to gain share.

· Windows Azure developer momentum continued this quarter, with Pixar Animation Studios, ADP with NVoicePay and others demonstrating compelling uses of the platform.

· Internet Explorer 9 is Microsoft’s fastest downloaded beta browser of all time with over 20 million downloads to date.

· At International CES 2011 in early January, Microsoft announced that the next version of Windows will support System on a Chip architectures.

· The company announced that during the quarter, it bought back $5 billion in stock and declared $1.3 billion in dividends.

Business Outlook

Microsoft reaffirms operating expense guidance of $26.9 billion to $27.3 billion for the full year ending June 30, 2011.

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. PST (5:30 p.m. EST) 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 Jan. 27, 2012.

Adjusted Financial Results and Non-GAAP Measures

In addition to financial results reported in accordance with generally accepted accounting principles (GAAP), we have provided certain non-GAAP financial information to aid investors in better understanding the company’s performance. For revenue, operating income and earnings per share growth, we excluded the impact of deferred revenue recognized in the prior year fiscal quarter relating to the Windows 7 Upgrade Option program and sales of Windows 7 before general availability in October 2009. Presenting these measures without the impact of this item 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 provided should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

To aid comparability of prior results, we have also recast certain prior period amounts within our Form 10-Q that conforms to the way we internally managed and monitored segment performance during the current fiscal year. In addition to the reconciliation in this release, our supplementary earnings slide deck at http://www.microsoft.com/investor contains a reconciliation of adjusted financial results and a reconciliation between reported and recast segment results.

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 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 and joint ventures 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 Jan. 27, 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. PST 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 December 31, Six Months Ended December 31, 2010 2009 2010 2009 Revenue $ 19,953 $ 19,022 $36,148 $ 31,942 Operating expenses: Cost of revenue 4,833 3,628 7,972 6,470 Research and development 2,185 2,079 4,381 4,144 Sales and marketing 3,825 3,619 6,631 6,409 General and administrative 945 1,183 1,883 1,924 Total operating expenses 11,788 10,509 20,867 18,947 Operating income 8,165 8,513 15,281 12,995 Other income 332 370 446 653 Income before income taxes 8,497 8,883 15,727 13,648 Provision for income taxes 1,863 2,221 3,683 3,412 Net income $ 6,634 $ 6,662 $12,044 $ 10,236 Earnings per share: Basic $ 0.78 $ 0.75 $ 1.41 $ 1.15 Diluted $ 0.77 $ 0.74 $ 1.39 $ 1.14 Weighted average shares outstanding: Basic 8,497 8,856 8,555 8,885 Diluted 8,570 8,951 8,646 8,975 Cash dividends declared per common share $ 0.16 $ 0.13 $ 0.32 $ 0.26

Microsoft Corporation Balance Sheets (In millions) December 31, 2010 (Unaudited) June 30, 2010(1) Assets Current assets: Cash and cash equivalents $ 4,023 $ 5,505 Short-term investments (including securities loaned of $982 and $62) 37,229 31,283 Total cash, cash equivalents, and short-term investments 41,252 36,788 Accounts receivable, net of allowance for doubtful accounts of $317 and $375 12,874 13,014 Inventories 861 740 Deferred income taxes 2,548 2,184 Other 2,149 2,950 Total current assets 59,684 55,676 Property and equipment, net of accumulated depreciation of $9,279 and $8,629 7,799 7,630 Equity and other investments 10,022 7,754 Goodwill 12,502 12,394 Intangible assets, net 992 1,158 Other long-term assets 1,307 1,501 Total assets $ 92,306 $ 86,113 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 3,863 $ 4,025 Short-term debt 0 1,000 Accrued compensation 2,402 3,283 Income taxes 1,439 1,074 Short-term unearned revenue 12,063 13,652 Securities lending payable 1,355 182 Other 3,190 2,931 Total current liabilities 24,312 26,147 Long-term debt 9,671 4,939 Long-term unearned revenue 1,354 1,178 Deferred income taxes 826 229 Other long-term liabilities 7,662 7,445 Total liabilities 43,825 39,938 Commitments and contingencies Stockholders' equity: Common stock and paid-in capital - shares authorized 24,000; outstanding 8,403 and 8,668 61,646 62,856 Retained deficit, including accumulated other comprehensive income of $1,697 and $1,055 (13,165) (16,681) Total stockholders' equity 48,481 46,175 Total liabilities and stockholders' equity $ 92,306 $ 86,113 (1) Derived from audited financial statements.





Microsoft Corporation Cash Flows Statements (In millions) (Unaudited)

Three Months Ended December 31, Six Months Ended December 31, 2010 2009 2010 2009 Operations Net income $ 6,634 $ 6,662 $ 12,044 $ 10,236 Adjustments to reconcile net income to net cash from operations: Depreciation, amortization, and other 663 615 1,357 1,261 Stock-based compensation expense 553 485 1,081 928 Net recognized gains on investments and derivatives (226) (188) (255) (254) Excess tax benefits from stock-based compensation (4) (15) (9) (24) Deferred income taxes (117) 550 (265) 504 Deferral of unearned revenue 6,834 6,926 12,715 13,605 Recognition of unearned revenue (7,301) (9,126) (14,163) (15,363) Changes in operating assets and liabilities: Accounts receivable (3,270) (2,789) 404 (41) Inventories 380 558 (88) 139 Other current assets (77) 686 131 451 Other long-term assets 118 16 180 (62) Accounts payable 216 3 (184) (33) Other current liabilities (500) 282 (1,411) (921) Other long-term liabilities 283 304 843 650 Net cash from operations 4,186 4,969 12,380 11,076 Financing Short-term debt repayments, maturities of 90 days or less, net (1,000) (475) (186) (97) Proceeds from issuance of debt, maturities longer than 90 days 0 1,046 4,721 1,741 Repayments of debt, maturities longer than 90 days 0 (573) (814) (1,396) Common stock issued 660 729 837 977 Common stock repurchased (5,052) (3,867) (9,451) (5,407) Common stock cash dividends paid (1,363) (1,152) (2,481) (2,309) Excess tax benefits from stock-based compensation 4 15 9 24 Other 0 0 (25) 0 Net cash used in financing (6,751) (4,277) (7,390) (6,467) Investing Additions to property and equipment (491) (376) (1,055) (811) Acquisition of companies, net of cash acquired (69) (63) (69) (102) Purchases of investments (5,896) (4,287) (13,313) (14,777) Maturities of investments 1,836 1,896 2,706 5,394 Sales of investments 2,603 3,361 4,030 7,778 Securities lending payable 447 (623) 1,174 1,227 Net cash used in investing (1,570) (92) (6,527) (1,291) Effect of exchange rates on cash and cash equivalents (3) (1) 55 28 Net change in cash and cash equivalents (4,138) 599 (1,482) 3,346 Cash and cash equivalents, beginning of period 8,161 8,823 5,505 6,076 Cash and cash equivalents, end of period $ 4,023 $ 9,422 $ 4,023 $ 9,422