Microsoft Reports Second-Quarter Results

Modest revenue growth despite difficult economy; announces cost management initiatives.

REDMOND, Wash., Jan. 22 /PRNewswire-FirstCall/ -- Microsoft Corp. today announced revenue of $16.63 billion for the second quarter ended Dec. 31, 2008, a 2% increase over the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $5.94 billion, $4.17 billion and $0.47, declines of 8%, 11% and 6%, respectively, compared with the prior year.

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Client revenue declined 8% as a result of PC market weakness and a continued shift to lower priced netbooks. However, strong annuity licensing drove Server & Tools revenue growth of 15%. Entertainment and Devices revenue grew 3% driven by strong holiday demand for Xbox 360 consoles with a record 6 million units sold in the quarter.

During the quarter, Microsoft showcased significant new product innovations by debuting Windows 7, Windows Azure, Office Web applications, Windows Server 2008 R2 and Office Communications Server 2007 R2. Microsoft also announced general availability of Silverlight 2, Exchange Online, SharePoint Online, Windows Small Business Server 2008, Windows Essential Business Server 2008 and a new release of Microsoft Dynamics NAV.

"While we are not immune to the effects of the economy, I am confident in the strength of our product portfolio and soundness of our approach," said Steve Ballmer, chief executive officer at Microsoft. "We will continue to manage expenses and invest in long-term opportunities to deliver value to customers and shareholders, and we will emerge an even stronger industry leader than we are today."

In light of the further deterioration of global economic conditions, Microsoft announced additional steps to manage costs, including the reduction of headcount-related expenses, vendors and contingent staff, facilities, capital expenditures and marketing. As part of this plan, Microsoft will eliminate up to 5,000 jobs in R&D, marketing, sales, finance, legal, HR, and IT over the next 18 months, including 1,400 jobs today. These initiatives will reduce the company's annual operating expense run rate by approximately $1.5 billion and reduce fiscal year 2009 capital expenditures by $700 million.

Business Outlook

"Economic activity and IT spend slowed beyond our expectations in the quarter, and we acted quickly to reduce our cost structure and mitigate its impact," said Chris Liddell, chief financial officer at Microsoft. "We are planning for economic uncertainty to continue through the remainder of the fiscal year, almost certainly leading to lower revenue and earnings for the second half relative to the previous year. In this environment, we will focus on outperforming our competitors and addressing our cost structure."

Due to the volatility of market conditions going forward, Microsoft is no longer able to offer quantitative revenue and EPS guidance for the balance of this fiscal year. Microsoft offers operating expense guidance of approximately $27.4 billion for the full year ending June 30, 2009. This information supercedes the fiscal year 2009 guidance that Microsoft provided on Oct. 23, 2008. Management will discuss second-quarter results, and the company's qualitative business outlook on a conference call and webcast at 8 a.m. PST (11 a.m. EST) today.

Webcast Details

Steve Ballmer, chief executive officer, Chris Liddell, senior vice president and chief financial officer, Frank Brod, corporate vice president and chief accounting officer, and Bill Koefoed, general manager of Investor Relations, will host a conference call and webcast 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 Jan. 22, 2010.

About Microsoft

Founded in 1975, Microsoft (Nasdaq: MSFT - News) 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 gain customer acceptance
       and produce offsetting increases in revenue;
    -- changes in general economic conditions or the availability of credit
       that affect the value of our investment portfolio or demand for
       Microsoft's products and services;
    -- 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;
    -- acquisitions and joint ventures that adversely affect the business;
    -- improper disclosure of personal data could result in liability and harm
       to Microsoft's reputation;
    -- outages and disruptions of online services if Microsoft fails to
       maintain an adequate operations infrastructure;
    -- 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 Web site at http://www.microsoft.com/msft.

All information in this release is as of Jan. 22, 2009. 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,
                                            2008     2007     2008     2007

    Revenue                                $16,629  $16,367  $31,690  $30,129
    Operating expenses:
      Cost of revenue                        3,907    3,543    6,755    6,218
      Research and development               2,290    1,885    4,573    3,722
      Sales and marketing                    3,662    3,420    6,706    6,103
      General and administrative               831    1,066    1,718    1,784
        Total operating expenses            10,690    9,914   19,752   17,827
    Operating income                         5,939    6,453   11,938   12,302
    Other income (expense)                    (301)     367     (309)     734
    Income before income taxes               5,638    6,820   11,629   13,036
    Provision for income taxes               1,464    2,113    3,082    4,040
    Net income                              $4,174   $4,707   $8,547   $8,996

    Earnings per share:
    Basic                                    $0.47    $0.50    $0.95    $0.96
    Diluted                                  $0.47    $0.50    $0.94    $0.95

    Weighted average shares outstanding:
    Basic                                    8,903    9,361    8,994    9,370
    Diluted                                  8,914    9,503    9,052    9,519

    Cash dividends declared per common
     share                                   $0.13    $0.11    $0.26    $0.22



    Microsoft Corporation
    Balance Sheets
    (In millions)

                                                 December 31,         June 30,
                                                    2008              2008 (1)
                                                  (Unaudited)
    Assets
    Current assets:
    Cash and cash equivalents                        $8,346           $10,339
    Short-term investments (including securities
     pledged as collateral of $417 and $2,491)       12,369            13,323
      Total cash, cash equivalents, and
       short-term investments                        20,715            23,662
      Accounts receivable, net of allowance for
       doubtful accounts of $254 and $153            10,953            13,589
      Inventories                                       968               985
      Deferred income taxes                           1,504             2,017
      Other                                           3,590             2,989
        Total current assets                         37,730            43,242
    Property and equipment, net of accumulated
     depreciation of $6,959 and $6,302                6,996             6,242
    Equity and other investments                      3,922             6,588
    Goodwill                                         12,490            12,108
    Intangible assets, net                            1,815             1,973
    Deferred income taxes                             1,109               949
    Other long-term assets                            1,724             1,691
          Total assets                              $65,786           $72,793

    Liabilities and stockholders' equity
    Current liabilities:
      Accounts payable                               $3,533            $4,034
      Short-term debt                                 2,000                 -
      Accrued compensation                            2,239             2,934
      Income taxes                                      848             3,248
      Short-term unearned revenue                    11,532            13,397
      Securities lending payable                        469             2,614
      Other                                           3,089             3,659
        Total current liabilities                    23,710            29,886
    Long-term unearned revenue                        1,534             1,900
    Other long-term liabilities                       6,064             4,721
    Commitments and contingencies
    Stockholders' equity:
    Common stock and paid-in capital - shares
     authorized 24,000; outstanding 8,889 and 9,151  61,392            62,849
    Retained deficit, including accumulated other
     comprehensive income of $585 and $1,140        (26,914)          (26,563)
        Total stockholders' equity                   34,478            36,286
          Total liabilities and stockholders'
           equity                                   $65,786           $72,793

    (1) Derived from audited financial statements



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

                                             Three              Six
                                          Months Ended      Months Ended
                                           December 31,      December 31,
                                           2008     2007    2008     2007
    Operations
      Net income                          $4,174  $4,707   $8,547   $8,996
      Depreciation, amortization, and
       other noncash items                   632     481    1,217      916
      Stock-based compensation expense       417     360      860      693
      Net recognized losses (gains) on
       investments and derivatives           139    (134)     175     (321)
      Excess tax benefits from stock-
       based payment arrangements             (2)    (33)     (46)    (102)
      Deferred income taxes                  454     323      830      680
      Unearned revenue                     5,969   5,995   10,155    9,816
      Recognition of unearned revenue     (6,364) (5,368) (12,408) (10,333)
      Accounts receivable                 (1,647) (2,586)   2,338      220
      Other current assets                   797     445      239      210
      Other long-term assets                 (69)    (55)    (185)     (66)
      Other current liabilities              614     325   (3,938)    (864)
      Other long-term liabilities            668     107    1,368      600
        Net cash from operations           5,782   4,567    9,152   10,445
    Financing
      Net proceeds from short-term debt       21       -    1,996        -
      Common stock issued                     96   2,335      324    2,981
      Common stock repurchased            (2,820) (4,057)  (9,313)  (6,987)
      Common stock cash dividends         (1,157) (1,034)  (2,155)  (1,972)
      Excess tax benefits from stock-
       based payment arrangements              2      33       46      102
        Net cash used in financing        (3,858) (2,723)  (9,102)  (5,876)
    Investing
      Additions to property and equipment   (842)   (695)  (1,620)  (1,205)
      Acquisition of companies, net of
       cash acquired                        (450)   (433)    (827)  (5,829)
      Purchases of investments            (6,596) (6,317) (10,842) (12,314)
      Maturities of investments              290     470      754      800
      Sales of investments                 5,700   6,696   12,775   15,816
      Securities lending payable            (601)   (770)  (2,144)    (574)
        Net cash used in investing        (2,499) (1,049)  (1,904)  (3,306)
    Effect of exchange rates on cash and
     cash equivalents                        (83)     28     (139)      86
    Net change in cash and cash
     equivalents                            (658)    823   (1,993)   1,349
    Cash and cash equivalents, beginning
     of period                             9,004   6,637   10,339    6,111
    Cash and cash equivalents, end of
     period                               $8,346  $7,460   $8,346   $7,460



    Microsoft Corporation
    Segment Revenue and Operating Income (Loss)
    (In millions) (Unaudited)

                                           Three Months Ended Six Months Ended
                                              December 31,      December 31,
                                             2008     2007     2008     2007
    Revenue
    Client                                  $3,982   $4,334   $8,200   $8,473
    Server and Tools                         3,743    3,261    7,149    6,143
    Online Services Business                   866      863    1,636    1,534
    Microsoft Business Division              4,876    4,815    9,825    8,932
    Entertainment and Devices Division       3,183    3,076    4,997    5,024
    Unallocated and other                      (21)      18     (117)      23
    Consolidated                           $16,629  $16,367  $31,690  $30,129

    Operating Income (Loss)
    Client                                  $2,946   $3,386   $6,219   $6,778
    Server and Tools                         1,489    1,154    2,635    2,092
    Online Services Business                  (471)    (247)    (950)    (513)
    Microsoft Business Division              3,140    3,185    6,442    5,879
    Entertainment and Devices Division         151      375      329      560
    Corporate-level activity                (1,316)  (1,400)  (2,737)  (2,494)
    Consolidated                            $5,939   $6,453  $11,938  $12,302