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REDMOND, Wash. — July 18, 2000 —1:30 pm PDT — Microsoft Corp. today announced revenue of $22.96 billion for the fiscal year ended June 30, 2000, a 16 percent increase over the $19.75 billion reported last year. Net income totaled $9.42 billion. Diluted earnings per share were $1.70, a 20 percent increase compared to $1.42 in fiscal 1999. For the quarter ended June 30, 2000, diluted earnings per share were $0.44, a 10 percent increase over the $0.40 for the corresponding quarter last year. Revenue and net income were $5.80 billion and $2.41 billion compared to $5.76 billion and $2.20 billion, respectively, for the same quarter last year. "We experienced another record year of business results despite many challenges. In particular, the Asia region rebounded nicely and our consumer business experienced a significant increase in revenue," said John Connors, chief financial officer at Microsoft. "Although we remain guarded in the near term about business PC growth rates, we look forward to the tremendous opportunity in front of us with the Windows® 2000 generation of server products — including Windows 2000® and the soon-to-be-available SQL Server™ 2000 and Exchange Server 2000." Microsoft® Windows 2000 continued to gain broad customer and industry support during the quarter. Many large organizations, including Royal Dutch/Shell, Xerox Corp., Reed Elsevier and Motorola Inc., have committed to and are deploying Windows 2000 Professional, citing it as the most manageable and reliable version of Windows to date. In addition, leading PC manufacturers including Compaq Computer Corp., Dell Computer Corp., Hewlett-Packard Co., IBM Corp. and Toshiba Corp., are deploying Windows 2000 Professional internally across their organizations, signaling their endorsement of Windows 2000 as the ideal platform for corporate desktops. Customer enthusiasm for Windows 2000 Server also was strong in the quarter, with ABN AMRO, InfoSpace Inc. and Data Return Corp. as showcase examples of the accelerating deployment momentum for the platform in multinational corporations and new economy dot-com and e-commerce companies. Sales of Windows 2000 Advanced Server in the quarter doubled over Windows NT® Server 4.0 Enterprise Edition in the prior year, reflecting increasing customer adoption of Microsoft's software-based approach to achieving the high levels of scalability and reliability demanded by today's mission-critical applications. For example, on June 13th, it was announced that Windows 2000 would be the platform for the mission-critical Integrated Warfare System on the first of the U.S. Navy's next generation aircraft carriers, the CVN-77, also dubbed the "Smart Carrier." On June 22, 2000, Microsoft unveiled the Microsoft .NET platform, its next generation of software and services that will enable a new era of personal empowerment and business opportunity for consumers, businesses and software developers. Based on open Internet standards and protocols, particularly the Extensible Markup Language (XML), this new family of products and technologies will be aimed at making computing and communications easier for all users. Microsoft .NET also will create opportunities for developers to build Internet services and businesses more easily and to integrate those offerings directly with their business partners and customers. "By creating the next-generation platform through which devices and services on the Web can cooperate with each other, Microsoft is driving new opportunities for developers and industry partners that will elevate the user experience to new levels of power and simplicity," said Steve Ballmer, president and CEO at Microsoft. "We are leading the Internet revolution to its next stage, ensuring that the wealth of information and resources out there works together easily and seamlessly." During the quarter, the MSN™ network of Internet services continued its impressive run and established itself as the Internet's largest network. The consolidated network of MSN Web sites also recorded industry-leading gains in several key metrics during the quarter, including 20 percent growth in the average minutes of use per MSN user, and 19 percent growth in total reach in the U.S. since July 1999. MSN Internet Access continued the robust growth demonstrated during the prior quarter, with the subscriber base growing 20 percent to 3 million. MSN has established the broadest global presence in the industry, with availability in 33 markets and 17 languages. With strong growth in users worldwide, MSN is now the number one Web site in the United Kingdom, Canada, Australia and New Zealand and among the top three in most global markets, according to Nielsen//NetRatings. On July 12, 2000, at the annual Microsoft Professional Developers Conference, Microsoft and Intel Corp. announced a preview release of the 64-bit Windows operating system for the Intel Itanium processor. Microsoft also announced the availability of software development kits (SDKs) and driver development kits (DDKs) for developers building 64-bit applications, key milestones in the company's continued investment in enabling the next generation of scalability and reliability for mission-critical enterprise computing. During the quarter, Microsoft also announced the release to manufacturing of Windows Me, the latest version of the Windows operating system designed specifically for the home user. Retail availability of Windows Me is set for Thursday, Sept. 14, 2000. This press release contains statements that are forward-looking. These statements are based on current expectations that are subject to risks and uncertainties. Actual results will vary because of factors such as PC shipment growth; technological shifts; customer demand; competitive products and pricing; product mix; product ship schedules; life cycles; terms and conditions; litigation; and other issues discussed in the company's Form 10-K and other SEC filings. Founded in 1975, Microsoft (Nasdaq "MSFT") is the worldwide leader in software, services and Internet technologies for personal and business computing. The company offers a wide range of products and services designed to empower people through great software — any time, any place and on any device. Microsoft, Windows, Windows NT and MSN, are either registered trademarks or trademarks of Microsoft Corp. in the United States and/or other countries. The names of actual companies and products mentioned herein may be the trademarks of their respective owners. Item 1. Financial Statements MICROSOFT CORPORATION
MICROSOFT CORPORATION
MICROSOFT CORPORATION
Revenue Revenue for fiscal year 2000 was $22.96 billion, an increase of 16% over fiscal 1999. The revenue growth was driven by strong licensing of the Microsoft® suite of products including Microsoft Windows NT® Workstation, Windows® 2000 Professional, Windows NT Server, Windows 2000 Server, Microsoft Office 2000, and SQL Server™. Consumer revenue including Internet access, the online properties, entertainment software, and hardware peripherals also grew strongly. Partially offsetting those items was slower growth from Windows operating systems sold through the original equipment manufacturer (OEM) channel due to slow demand for business PCs throughout a significant portion of the fiscal year. Revenue was $5.80 billion in the fourth quarter of fiscal 2000, compared to $5.76 billion in the fourth quarter of fiscal 1999. Reported revenue in the June quarter of fiscal 1999 was positively impacted by $200 million related to the fulfillment of the Microsoft Office 2000 Technology Guarantee and a reduction in estimated channel returns of $250 million. Business Divisions Microsoft has three major segments: Productivity Applications and Developer; Windows Platforms; and Consumer and Other. Productivity Applications and Developer products include desktop applications such as Microsoft Office, server applications such as Microsoft SQL Server and Microsoft Exchange Server, and software developer tools. Revenue in the June quarter was $2.64 billion, compared to $2.93 billion in the same quarter of the prior year. Reported revenue from Microsoft Office integrated suites in the June quarter of fiscal 1999 included $200 million of revenue related to the fulfillment of the Microsoft Office 2000 Technology Guarantee. For the fiscal year, Productivity Applications and Developer revenue grew 19% to $10.47 billion. Revenue growth from Microsoft Office integrated suites, including the Premium, Professional, Small Business, and Standard Editions was very solid. Revenue from server applications grew strongly compared to fiscal 1999, largely due to the strong success of SQL Server 7.0. Software developer tools revenue declined, due to increased licensing through the lower priced subscription-based model. Windows Platforms products include primarily Windows 98, Windows 2000 Professional, Windows 2000 Server, Windows NT Workstation, and Windows NT Server. Revenue was $2.37 billion in the fourth quarter, compared to $2.25 billion in the fourth quarter of the prior year. For the fiscal year, revenue grew 10% to $9.38 billion. Windows desktop operating systems revenue growth was modest due to soft demand for business PCs during the majority of the year; a slowdown in shipments in anticipation of the post mid-year availability of Windows 2000 operating systems; and, as expected, a longer business migration and deployment cycle for the newest Windows operating system offerings. In addition, Windows desktop operating systems average earned revenue per licensed operating system decreased compared to the prior fiscal year. Windows Platform Server revenue growth over the prior year was particularly strong led by increased adoption by customers of Windows NT Server and Windows 2000 Server. Consumer and Other products include Internet access and online services; learning and entertainment software; PC input devices; consulting; and training and certification. Revenue in the June quarter increased 34% to $796 million. For the fiscal year, consumer and other revenue climbed to $3.11 billion, a 28% increase over the prior year. Online revenue growth was very strong, despite the company's lower net prices for Internet access subscriptions compared to the prior year. Additionally, the continued success of the Company's new hardware product offerings and strong sell-through of entertainment software produced robust revenue growth. Distribution Channels Microsoft distributes its products primarily through OEM licenses, organizational licenses, and retail packaged product. OEM channel revenue represents license fees from original equipment manufacturers who pre-install Microsoft products, primarily on PCs. Microsoft has three major geographic sales and marketing organizations: the South Pacific and Americas Region; the Europe, Middle East, and Africa Region; and the Asia Region. Sales of organizational licenses and packaged products via these channels are primarily to and through distributors and resellers. OEM fourth quarter revenue of $1.73 billion compared to $1.64 billion in the comparable quarter of fiscal 1999. For the year, OEM revenue was $7.01 billion, a 10% increase in comparison to fiscal 1999. The relatively low growth rate was due to lower business PC shipment growth percentages, especially as a result of the soft demand for business PCs and component shortages for a portion of the year. These issues combined with post mid-year availability of the newest business operating system, Windows 2000 Professional, resulted in lower revenue growth. Average earned revenue per license also declined compared to the prior year, due in part to a mix shift to the lower-priced Windows 98 operating system reflecting the softness in demand for business PCs and lower prices on operating systems licensed through certain OEM channel sectors. South Pacific and Americas Region revenue in the June quarter was $2.23 billion, compared to $2.36 billion in the prior year. For the fiscal year, South Pacific and Americas Region revenue was $8.33 billion, a 15% increase compared to $7.25 billion in fiscal 1999. Online revenue, Office integrated suites, SQL Server, and Windows NT Server sales were the primary drivers of the revenue growth. Strong retail sales of hardware devices and consumer software also contributed to the growth over the prior year. Revenue growth was particularly strong in Latin America and Australia, moderate in Canada, and modest in the United States. Europe, Middle East, and Africa Region fourth quarter revenue of $1.15 billion, compared to $1.20 billion in the fourth quarter of the prior year. For the fiscal year, the region's revenue increased 16% to $5.02 billion. Retail sales of Windows operating systems and Office licensing produced moderate growth in the region. Growth from SQL Server licensing, new hardware devices offerings, and entertainment software was exceptionally strong. Revenue growth, measured in constant dollars, was very healthy in Germany and Italy, robust in the Middle East, and low in the United Kingdom. Weakening local currencies negatively impacted translated revenue compared to the prior year. Fiscal year revenue in the region would have grown 23% if foreign exchange rates were constant with those in the prior fiscal year. Asia Region revenue in the June quarter increased 21% to $689 million from the June quarter of the prior year. For the fiscal year, Asia region revenue grew 46% to $2.60 billion. The region's growth rate reflected strong performance resulting from improved local economic conditions. Revenue growth was also influenced by robust growth of localized versions of Microsoft Office 2000, especially the Office Personal edition sold in Japan; Windows platform and server licensing; and strong adoption of SQL Server. Revenue grew strongly in nearly all countries in the Asia region. Strengthening local currencies positively impacted translated revenue compared to the prior year. Fiscal 2000 revenue in the region would have grown 32% if foreign exchange rates were constant with those of the prior year. Translated international revenue is affected by foreign exchange rates. The net impact of foreign exchange rates on revenue was negative in the June quarter compared to a year ago, due to weaker European currencies versus the U.S. dollar, offset partially by stronger Japanese yen versus the U.S. dollar. Had the rates from the prior year comparable quarter been in effect in the fourth quarter of fiscal 2000, translated international revenue billed in local currencies would have been $65 million higher. For the fiscal year, revenue would have also been $60 million higher. Certain manufacturing, selling, distribution, and support costs are disbursed in local currencies, and a portion of international revenue is hedged, thus offsetting a portion of the translation exposure. Operating Expenses Cost of revenue as a percent of revenue was 13.5% in the fourth quarter, up from 11.6% in the fourth quarter of the prior year. For the year, cost of revenue as a percent of revenue was 13.1%, compared to 14.3% in the prior fiscal year. The prior year's percentages were positively impacted by the recognition of revenue in connection with the reduction in estimated channel returns and a reduction in estimates of obsolete inventory and other manufacturing costs. The June quarter of fiscal 1999 was also positively impacted by the recognition of previously unearned revenue related to the Office 2000 Technology Guarantee. Additionally, cost of revenue in fiscal 2000 reflected lower costs associated with WebTV® Networks' operations, partially offset by the growth in hardware peripheral costs. Research and development expenses in the fourth quarter increased 11% from the fourth quarter of the prior year to $1.04 billion. Research and development in the prior year fourth quarter was negatively impacted by a fiscal 1999 charge related to stock options. For fiscal 2000, research and development expenses increased 27% to $3.78 billion. The growth was driven primarily by higher headcount-related costs and investments in new product initiatives. Sales and marketing expenses were $1.17 billion in the June quarter, or 20.1% of revenue, compared to $900 million in the fourth quarter of the prior year. For the fiscal year, sales and marketing expenses reached $4.14 billion, or 18% of revenue, compared to $3.23 billion in fiscal 1999. Sales and marketing expenses as a percent of revenue increased due to higher relative marketing costs associated with new product releases and online marketing. General and administrative costs were $184 million in the fourth quarter compared to $297 million in the comparable quarter of the prior year. The decrease reflects lower litigation costs in the fourth quarter of fiscal 2000. On a full year basis, general and administrative costs were $1.01 billion, compared to $689 million in fiscal 1999. In the second quarter of fiscal 2000, expenses included the settlement of the lawsuit with Caldera, Inc. Fiscal 2000 general and administrative costs also reflect increased legal fees and certain employee stock option-related expenses. Other expenses incorporate miscellaneous items, including certain gains; recognition of Microsoft's share of joint venture activities for the MSNBC entities, Wireless Knowledge, and other new and existing joint venture activities; and charitable contributions and miscellaneous taxes. Investment Income and Income Taxes Fourth quarter investment income increased to $1.13 billion from $485 million in the fourth quarter of the prior year. Net realized gains represented about $650 million of the investment income in the fourth quarter of fiscal 2000, compared to approximately $100 million in the comparable quarter of the prior year. For fiscal 2000, investment income totaled $3.18 billion, compared to $1.80 billion in the prior year. The increase was due in part to the recognition of net realized gains and in part to the larger investment portfolio. The effective tax rate for fiscal 2000 was 34%. Excluding the tax impact of the gain on the sale of Softimage, the effective tax rate for fiscal 1999 was 35%. Unearned Revenue A portion of Microsoft's revenue is earned ratably over the product life cycle or, in the case of subscriptions, over the period of the license agreement. End users receive certain elements of the Company's products over a period of time. These elements include items such as browser technologies and technical support. Consequently, Microsoft's earned revenue reflects the recognition of the fair value of these elements over the product's life cycle. The percentage of revenue recognized ratably ranges from approximately 15% to 25% of Windows desktop operating systems and approximately 10% to 20% of desktop applications, depending on the terms and conditions of the license and prices of the elements. Product life cycles are currently estimated at three years for Windows operating systems and 18 months for desktop applications. The Company also sells subscriptions to certain products via maintenance and certain organization license agreements. At June 30, 2000, unearned revenue was $4.82 billion. Windows Platforms products unearned revenue was $2.61 billion and unearned revenue associated with Productivity Applications and Developer products totaled $1.99 billion. Unearned revenue for Consumer and Other totaled $210 million. Balance Sheet and Cash Flow Cash and short-term investments totaled $23.80 billion as of June 30, 2000. Cash flow from operations was $2.70 billion in the June quarter and $9.11 billion for fiscal year 2000. Equity and other investments at June 30, 2000 were $17.73 billion. The sequential quarter decrease was due to a net decrease in the market value of publicly traded securities in the portfolio, partially offset by new investment purchases. Compared to June 30, 1999, equity and other investments increased $3.35 billion, largely due to new investments. In January 2000, the Company merged with Visio Corporation in a transaction that has been accounted for as a pooling of interests. Microsoft issued 14 million shares in exchange for the outstanding stock of Visio. Visio's assets and liabilities, which were nominal, are included with those of Microsoft as of the merger. Operating results for Visio from periods prior to the merger were not material to the combined results of the two companies. Accordingly, the financial statements for such periods have not been restated. Additionally, the Company terminated its stock repurchase program in January 2000. At June 30, 2000, Microsoft had 157 million outstanding put warrants giving holders the right to sell shares of Microsoft common stock to the Company with strike prices ranging from $70 to $78 per share and expirations ranging from September 2000 to December 2002. These put warrant contracts permit a net-share settlement at the Company's option. Employee Stock Options (ESOs) The Company encourages broad-based employee ownership of Microsoft stock through an ESO program in which the majority of employees are eligible to participate. At June 30, 2000, 832 million vested and unvested options were outstanding, compared to 5.283 billion common shares outstanding. Microsoft follows APB 25 to account for ESOs, which generally does not require income statement recognition of options granted at the market price on the date of issuance. FICA and Medicare payroll taxes associated with stock option expenses are recorded as an expense. Other events such as the accelerated vesting of options can also trigger recording an expense. These costs were reflected in each operating expense line item in the income statement. In the June quarter of fiscal 2000, these costs totaled $91 million, and for the full fiscal year 2000, these costs were $453 million. Earnings per share calculations reflect exercised ESOs and the dilutive effect of outstanding ESOs under the treasury stock method. In addition, as required by Statement of Financial Accounting Standards 123 (SFAS 123), the Company discloses the value of ESO grants using the Black-Scholes option valuation method and the pro forma impact of expensing such value over the vesting period of the ESOs in the notes to its annual financial statements. ESOs are often granted upon hire to new employees, annually to the majority of employees, and non-annually to certain other employees. In the table below, Microsoft has electively disclosed the pro forma income statements for the June quarter and the fiscal year in accordance with SFAS 123.
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