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January 24, 2008 at 16:15 PM EST
Microsoft Reports Record Second Quarter Results
Robust holiday sales and enterprise demand drive revenue growth of 30%

REDMOND, Wash., Jan. 24 /PRNewswire-FirstCall/ -- Microsoft Corp. today announced second quarter records for revenue, operating income and diluted earnings per share of $16.37 billion, $6.48 billion and $0.50, respectively. Compared to the year ago period, these figures represent growth of 30%, 87% and 92% for revenue, operating income and diluted earnings per share, respectively.

(Logo: http://www.newscom.com/cgi-bin/prnh/20000822/MSFTLOGO)

Results in the prior year were impacted by the deferral of $1.64 billion of revenue and operating income and $0.11 of diluted earnings per share from the second to the third quarter of fiscal 2007, due primarily to technology guarantee programs. Without these deferrals, second quarter growth rates for revenue, operating income and earnings per share would be 15%, 27% and 32%, respectively.

"Revenue of over $16 billion this quarter exceeds our previous record by $2 billion," said Chris Liddell, chief financial officer at Microsoft. "We are extremely pleased by the broad based strength of our business performance and field execution. Throughout the first half of our fiscal year, all of our businesses met or beat our expectations."

Since Windows Vista became generally available one year ago, Microsoft's Client business has grown over 20% on average and sales of Windows Vista have surpassed 100 million licenses.

"We are pleased with the progress of Windows Vista in the market. We've hit our stride with partners and customers and are looking forward to the release of our first service pack later this quarter," said Kevin Johnson, president of the Platforms and Services Division at Microsoft.

Sales to business customers remained brisk in the quarter with Microsoft Business Division and the Server and Tools business each experiencing double-digit revenue growth rates over the prior year and together increased revenue over $1 billion versus the comparable quarter last year. Microsoft Business Division generated 23% business revenue growth driven by the versions of Microsoft Office, Microsoft SharePoint and Microsoft Exchange that were launched last November.

"We are in the midst of another strong year with great momentum heading into calendar year 2008," said Kevin Turner, chief operating officer at Microsoft. "We continue to see healthy demand from both businesses and consumers in the United States and our growth in emerging markets is especially strong. Looking across Brazil, Russia, India and China, our field revenue reached a combined growth rate over 65% this quarter. As we look ahead, our Windows Server 2008 launch, with our virtualization solution, will further our quest to bring exceptional value to our customers."

Microsoft rolled out new consumer focused offerings during the quarter such as Windows Home Server, new versions of the Zune media player and the next generation of Windows Live Online Services. Exiting the calendar year, the life to date sales of Xbox 360 consoles reached 17.7 million units, representing a 70% increase from the prior year.

Business Outlook

Microsoft management offers the following guidance for the quarter ending March 31, 2008:

    -- Revenue is expected to be in the range of $14.3 billion to
       $14.6 billion.
    -- Operating income is expected to be in the range of $5.6 billion to
       $5.7 billion.
    -- Diluted earnings per share are expected to be in the range of $0.43 to
       $0.45.

Management offers the following guidance for the full fiscal year ending June 30, 2008:

    -- Revenue is expected to be in the range of $59.9 billion to $60.5
       billion.
    -- Operating income is expected to be in the range of $24.2 billion to
       $24.4 billion.
    -- Diluted earnings per share are expected to be in the range of $1.85 to
       $1.88.

Webcast Details

Microsoft will hold an audio webcast at 2:30 p.m. PST (5:30 p.m. EST) today with Chris Liddell, senior vice president and chief financial officer, Frank Brod, corporate vice president and chief accounting officer, and Colleen Healy, general manager of Investor Relations, 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/msft. The webcast will be available for replay through the close of business on January 26, 2009.



                        Three Months Ended          Three Months Ended
                        December 31, 2007            December 31, 2006
    ($ in millions,
     except per
     share amounts)                    Diluted                       Diluted
                          Operating   earnings         Operating    earnings
                   Revenue   income  per share  Revenue   income  per share*
    As reported    $16,367   $6,481      $0.50  $12,542   $3,472       $0.26
    Technology
     Guarantee &
     pre-shipment
     deferrals                                   $1,637   $1,637       $0.11
    As adjusted                                 $14,179   $5,109       $0.38
       * Items may not add due to rounding


                                     Year over Year
                                         Growth
                                                    Diluted
    ($ in millions, except             Operating   earnings
     per share amounts)        Revenue    income  per share

    As reported                    30%       87%        92%
    As adjusted                    15%       27%        32%

This information has been provided to aid readers of the financial statements in further understanding the company's financial performance and the impact that certain items and events had on the financial results may not be indicative of trends affecting the company's business. For comparability of reporting, management considers this information in conjunction with GAAP amounts in evaluating business performance. The non-GAAP financial measures provided above should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

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:

    -- 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;
    -- 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 produce offsetting
       increases in revenue;
    -- changes in general economic conditions that affect demand for computer
       hardware or software;
    -- adverse results in legal disputes;
    -- unanticipated tax liabilities;
    -- Microsoft's consumer hardware products may experience quality or supply
       problems;
    -- impairment of goodwill or amortizable intangible assets causing a
       charge to earnings;
    -- exposure to increased economic and regulatory uncertainties from
       operating a global business;
    -- geo-political conditions, natural disaster, cyber-attack or other
       catastrophic events disrupting Microsoft's business;
    -- acquisitions and joint ventures that adversely affect the business;
    -- improper disclosure of personal data could result in liability and harm
       to Microsoft's reputation;
    -- sales channel disruption such as the bankruptcy of a major distributor;
       and
    -- Microsoft's ability to implement operating cost structures that align
       with revenue growth.

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/msft.

All information in this release is as of January 24, 2008. 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.



    Microsoft Corporation
    Income Statements
    (In millions, except per share amounts) (Unaudited)

                                        Three Months Ended   Six Months Ended
                                           December 31,        December 31,
                                          2007     2006       2007      2006
    Revenue                             $16,367  $12,542    $30,129   $23,353
    Operating expenses:
     Cost of revenue                      3,543    3,620      6,218     5,316
     Research and development             1,885    1,637      3,722     3,423
     Sales and marketing                  3,392    2,999      6,006     5,190
     General and administrative           1,066      814      1,784     1,478
      Total operating expenses            9,886    9,070     17,730    15,407
    Operating income                      6,481    3,472     12,399     7,946
    Investment income and other             339      333        637       900
    Income before income taxes            6,820    3,805     13,036     8,846
    Provision for income taxes            2,113    1,179      4,040     2,742
    Net income                           $4,707   $2,626     $8,996    $6,104

    Earnings per share:
    Basic                                 $0.50    $0.27      $0.96     $0.62
    Diluted                               $0.50    $0.26      $0.95     $0.61

    Weighted average shares outstanding:
    Basic                                 9,361    9,806      9,370     9,867
    Diluted                               9,503    9,942      9,519     9,996

    Cash dividends declared per common
     share                                $0.11    $0.10      $0.22     $0.20



    Microsoft Corporation
    Balance Sheets
    (In millions)

                                                 December 31,        June 30,
                                                    2007             2007 (1)
                                                 (Unaudited)
    Assets
    Current assets:
     Cash and equivalents                           $7,460            $6,111
     Short-term investments (including
      securities pledged as collateral of
      $1,984 and $2,356)                            13,616            17,300
       Total cash and short-term investments        21,076            23,411
     Accounts receivable, net of allowance
      for doubtful accounts of $149 and $117        11,621            11,338
     Inventories, net                                  755             1,127
     Deferred income taxes                           1,483             1,899
     Other current assets                            2,840             2,393
      Total current assets                          37,775            40,168
    Property and equipment, net                      4,965             4,350
    Equity and other investments                     9,413            10,117
    Goodwill                                        10,309             4,760
    Intangible assets, net                           1,717               878
    Deferred income taxes                            1,200             1,389
    Other long-term assets                           1,960             1,509
       Total assets                                $67,339           $63,171

    Liabilities and stockholders' equity
    Current liabilities:
     Accounts payable                               $3,612            $3,247
     Accrued compensation                            1,977             2,325
     Income taxes                                      863             1,040
     Short-term unearned revenue                    10,221            10,779
     Securities lending payable                      2,166             2,741
     Other current liabilities                       3,219             3,622
      Total current liabilities                     22,058            23,754
    Long-term unearned revenue                       1,957             1,867
    Other long-term liabilities                      8,893             6,453
    Commitments and contingencies
    Stockholders' equity:
    Common stock and paid-in capital - shares
     authorized 24,000; outstanding 9,329 and
     9,380                                          62,528            60,557
    Retained deficit, including accumulated
     other comprehensive income of $1,628 and
     $1,654                                        (28,097)          (29,460)
      Total stockholders' equity                    34,431            31,097
       Total liabilities and stockholders'
        equity                                     $67,339           $63,171

    (1) Derived from audited financial statements



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

                                        Three Months Ended   Six Months Ended
                                           December 31,         December 31,
                                           2007    2006       2007      2006
    Operations
      Net income                          $4,707  $2,626     $8,996    $6,104
      Depreciation, amortization, and
       other noncash items                   481     365        916       614
      Stock-based compensation               360     437        693       893
      Net recognized gains on investments   (134)    (29)      (321)     (235)
      Excess tax benefits from
       stock-based payment arrangements      (33)     (8)      (102)      (48)
      Deferred income taxes                  323    (517)       680      (351)
      Unearned revenue                     5,995   6,029      9,816     9,246
      Recognition of unearned revenue     (5,368) (4,265)   (10,333)   (8,315)
      Accounts receivable                 (2,586) (2,945)       220      (444)
      Other current assets                   445     723        210      (357)
      Other long-term assets                 (55)   (264)       (66)     (399)
      Other current liabilities              325    (354)      (864)   (1,196)
      Other long-term liabilities            107     244        600       591
        Net cash from operations           4,567   2,042     10,445     6,103
    Financing
      Common stock issued                  2,335   4,449      2,981     4,834
      Common stock repurchased            (4,057) (5,797)    (6,987)  (13,480)
      Common stock cash dividends         (1,034)   (980)    (1,972)   (1,877)
      Excess tax benefits from
       stock-based payment arrangements       33       8        102        48
      Other                                    -      (3)         -       (23)
       Net cash used in financing         (2,723) (2,323)    (5,876)  (10,498)
    Investing
      Additions to property and equipment   (695)   (572)    (1,205)     (983)
      Acquisition of companies, net of
       cash acquired                        (433)   (125)    (5,829)     (461)
      Purchases of investments            (6,317) (9,102)   (12,314)  (21,957)
      Maturities of investments              470   1,325        800     2,159
      Sales of investments                 6,696   7,448     15,816    26,149
      Securities lending payable            (770)   (932)      (574)     (404)
       Net cash from (used in) investing  (1,049) (1,958)    (3,306)    4,503
    Effect of exchange rates on cash
     and equivalents                          28      22         86        37
    Net change in cash and equivalents       823  (2,217)     1,349       145
    Cash and equivalents, beginning of
     period                                6,637   9,076      6,111     6,714
    Cash and equivalents, end of period   $7,460  $6,859     $7,460    $6,859



    Microsoft Corp.
    Segment Revenue and Operating Income / (Loss)
    (In millions) (Unaudited)

                                         Three Months Ended  Six Months Ended
                                            December 31,       December 31,
                                           2007    2006       2007      2006
    Revenue
    Client                                $4,335  $2,586     $8,473    $5,893
    Server and Tools                       3,278   2,843      6,178     5,339
    Online Services Business                 863     625      1,534     1,161
    Microsoft Business Division            4,811   3,513      8,922     6,941
    Entertainment and Devices Division     3,060   2,969      4,989     3,980
    Unallocated and Other                     20       6         33        39
    Total revenue                        $16,367 $12,542    $30,129   $23,353

    Operating Income / (Loss)
    Client                                $3,358  $1,838     $6,727    $4,485
    Server and Tools                       1,172     981      2,132     1,751
    Online Services Business                (245)   (118)      (510)     (236)
    Microsoft Business Division            3,185   2,152      5,879     4,391
    Entertainment and Devices Division       357    (302)       524      (423)
    Corporate-Level Activity              (1,346) (1,079)    (2,353)   (2,022)
    Total operating income                $6,481  $3,472    $12,399    $7,946

Source: Microsoft Corporation

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