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Microsoft Reports Record Second Quarter Results

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.

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.

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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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