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Microsoft Reports Record Profits  

Microsoft Reports Record Profits

Robust demand for Windows Vista and the 2007 Microsoft Office system drives 72% growth in earnings per share

Income Statements

Balance Sheets

Cash Flows Statements

Segment Revenue/Operating Income(Loss) 		Third Quarter Form 10-Q

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Earnings Release  

REDMOND, Wash. — Apr. 26, 2007 — Microsoft Corp. today announced revenue of $14.40 billion for the quarter ended March 31, 2007, a 32% increase over the same period of the prior year. This revenue drove record profits with operating income of $6.59 billion and net income of $4.93 billion. Diluted earnings per share for the quarter grew 72% to $0.50, and included $0.02 in tax benefits and $0.01 in legal charges.

 These results reflect $1.67 billion of revenue and operating income, $1.14 billion of net income and $0.12 of diluted earnings per share that were previously deferred primarily related to the technology guarantee programs for Windows Vista™ and the 2007 Microsoft® Office release.

“I am extremely pleased that we delivered a quarter of strong double-digit growth for revenue, operating income and EPS,” said Chris Liddell, chief financial officer at Microsoft. “And I am looking forward to a very good finish to this fiscal year with strength continuing into fiscal 2008.”

Net cash flow from operations was $7.29 billion and Microsoft returned $7.72 billion in cash to shareholders through share buybacks and dividends this quarter.

 “This quarter marked the consumer launches of Windows Vista and the 2007 Microsoft Office system, and we are delighted with the positive customer response these products have received,” said Kevin Turner, chief operating officer at Microsoft. “We continue to deliver on our compelling product cycle and build upon strong field sales and marketing execution in order to drive revenue and profit growth for the company.”

 Business Outlook

Microsoft management offers the following guidance for the quarter ending June 30, 2007:

  • Revenue is expected to be in the range of $13.1 billion to $13.4 billion.

  • Operating income is expected to be in the range of $5.0 billion to $5.2 billion.

  • Diluted earnings per share are expected to be $0.37 to $0.39.

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

  • Revenue is expected to be in the range of $56.5 billion to $57.5 billion.

  • Operating income is expected to be in the range of $22.0 billion to $22.5 billion.

  • Diluted earnings per share are expected to be in the range of $1.68 to $1.72.

    •  Additional details on fiscal year 2008 guidance will be provided in the fourth quarter earnings announcement and during the company’s Financial Analyst Meeting on the 26th of July.

    Webcast Details

    Microsoft will hold an audio webcast at 2:30 p.m. PDT (5:30 p.m. EDT) 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 April 26, 2008.

     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.
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     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;

  • the level of corporate spending and changes in general economic conditions that affect demand for computer hardware or software;

  • adverse results in legal disputes;

  • unanticipated tax liabilities;

  • key component shortages and delays in Xbox 360 product delivery;

  • impairment of goodwill or amortizable intangible assets causing a charge to earnings;

  • changes in accounting that may affect Microsoft’s reported earnings and operating income;

  • exposure to increased economic and regulatory uncertainties from operating a global business;

  • general economic and geo-political conditions;

  • natural disaster, cyber-attack or other catastrophic event disrupting Microsoft’s business;

  • acquisitions and joint ventures that adversely affect the business;

  • limitations on the availability of insurance and resulting uninsured losses;

  • improper disclosure of personal data could result in liability and harm Microsoft’s reputation

  • sales channel disruption such as the bankruptcy of a major distributor;

  • implementation of operating cost structures that align with revenue growth;

  • continued access to third party distribution channels for MSN® and other online offerings;

  • disruption to Microsoft’s operations as a result of weather-related events; and

  • foreign currency, interest rate, fixed income, equity and commodity price risks.

    •  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 April 26, 2007. 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, financial analysts and investors only:
    Colleen Healy, general manager, Investor Relations, (425) 706-3703

     For more information, press only:
    Rapid Response Team, Waggener Edstrom Worldwide, (503) 443-7070, rrt@waggeneredstrom.com

     Note to editors: If you are interested in viewing additional information on Microsoft, please visit the Microsoft web page at http://www.microsoft.com/presspass/on Microsoft’s corporate information pages. 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. PDT conference call with investors and analysts, are available at http://www.microsoft.com/msft.

    Item 1. Financial Statements

    MICROSOFT CORPORATION

    INCOME STATEMENTS
    (In millions, except per share amount) (Unaudited)
    Three Months Ended
    March 31,         		Nine Months Ended
    March 31,
    2007 2006 2007 2006
    Revenue $14,398 $10,900 $37,751 $32,478
    Operating Expenses:
      Cost of revenue
    		2,140 2,028 7,456 5,520
      Research and development
    		1,750 1,617 5,173 4,723
      Sales and marketing
    		2,936 2,362 8,126 6,996
      General and administrative
    		983 1,005 2,461 2,648
      Total operating expenses
    		7,809 7,012 23,216 19,887
    Operating income 6,589 3,888 14,535 12,591
    Investment income and other 382 427 1,282 1,413
    Income before income taxes 6,971 4,315 15,817 14,004
    Provision for income taxes 2,045 1,338 4,787 4,233
    Net income $4,926 $2,977 $11,030 $9,771
    Earnings per share:
      Basic
    		$ 0.51 $ 0.29 $ 1.12 $ 0.93
      Diluted
    		$ 0.50 $ 0.29 $ 1.11 $ 0.92
    Weighted average shares outstanding:
      Basic
    		9,725 10,303 9,821 10,521
      Diluted
    		9,862 10,415 9,955 10,627
    Cash dividends declared per common share $ 0.10 0.09 $ 0.30 $ 0.26

    MICROSOFT CORPORATION

    BALANCE SHEETS
    (In millions)

    March 31, 2007 June 30, 2006 (1)
    (Unaudited)
    Assets
    Current assets:
      Cash and equivalents
    		$ 7,611 $ 6,714
      Short-term investments (including securities pledged as collateral of $2,758 and $3,065)
    		20,625 27,447
      Total cash and short-term investments
    		28,236 34,161
    Accounts receivable, net of allowance for doubtful accounts of $141 and $142 8,454 9,316
    Inventories, net 1,750 1,478
    Deferred income taxes 1,969 1,940
    Other current assets 2,374 2,115
      Total current assets
    		42,783 49,010
    Property and equipment, net 3,923 3,044
    Equity and other investments 9,624 9,232
    Goodwill 4,217 3,866
    Intangible assets, net 699 539
    Deferred income taxes 1,417 2,611
    Other long-term assets 1,228 1,295
      Total assets
    		$63,891 $69,597
    Liabilities and stockholders' equity
    Current liabilities:
      Accounts payable
    		$ 2,843 $ 2,909
      Accrued compensation
    		1,878 1,938
      Income taxes
    		1,930 1,557
      Short-term unearned revenue
    		8,551 9,138
      Securities lending payable
    		3,032 3,117
      Other current liabilities
    		3,393 3,783
      Total current liabilities
    		21,627 22,442
    Long-term unearned revenue 1,732 1,764
    Other long-term liabilities 5,559 5,287
    Commitments and contingencies
    Stockholders' equity:
    Common stock and paid-in capital - shares authorized 24,000; outstanding 9,572 and 10,062 60,827 59,005
    Retained deficit, including accumulated other
      comprehensive income of $1,535 and $1,229
    		(25,854) (18,901)
      Total stockholders' equity
    		34,973 40,104
      Total liabilities and stockholders' equity
    		$63,891 $69,597

    (1) Derived from audited financial statements.

    MICROSOFT CORPORATION

    CASH FLOWS STATEMENTS
    (In millions)(Unaudited)
    Three Months Ended
    March 31,         		Nine Months Ended
    March 31,
    2007 2006 2007 2006
    Operations
      Net income
    		$4,926 $2,977 $11,030 $9,771
      Depreciation, amortization, and other noncash items
    		445 177 1,059 642
      Stock-based compensation expense
    		321 374 1,214 1,352
      Net recognized gains on investments
    		(61) (59) (296) (264)
      Excess tax benefits from stock-based payment arrangements
    		(7) (23) (55) (67)
      Deferred income taxes
    		981 (271) 630 (229)
      Unearned revenue
    		4,551 3,670 13,797 10,372
      Recognition of unearned revenue
    		(6,121) (3,615) (14,436) (10,656)
      Accounts receivable
    		1,455 972 1,011 368
      Other current assets
    		7 (134) (350) (828)
      Other long-term assets
    		(32) (4) (431) (12)
      Other current liabilities
    		772 229 (424) (69)
      Other long-term liabilities