Microsoft_Investor_Relations_News_Release

Microsoft Announces Solid Fiscal Year 2002 Results

Strong Customer Demand for Windows XP and EnterpriseServers Drive Revenue Growth

Redmond, Wash. – July 18, 2002 –Microsoft Corp. today announced revenue of $7.25 billion for the quarter ended June 30, 2002, a 10 percent increase over the $6.58 billion for the same quarter last year. Operating income for the fourth quarter was $2.87 billion, compared to $2.75 billion in the same period last year. Netincome and diluted earnings per share for the fourth quarter of 2002 were $1.53 billion and $0.28,which included an after-tax charge for investment impairments of $806 million or $0.15. For the same period of the previous year, net income and diluted earnings per share were $65 million and $0.01, including after-tax charges for investment impairments of $2.63 billion or $0.47.

The company also announced revenue of $28.37 billion for the full fiscal year ended June 30, 2002, a 12 percent increase over the $25.30 billion reported last year. Operating income was $11.91 billion, compared to $11.72 billion in the same period last year. Net income and diluted earnings per share for fiscal year 2002 were $7.83 billion and $1.41,which included after-tax charges for investment impairments of $0.53, estimated expenses in connection with consumer class action lawsuits recorded in the December 2001 quarter of $0.08, and a one-time gain on the sale of Expedia recorded in the March 2002 quarter of $0.15. For the previous year, net income and diluted earnings per share were $7.35 billion and $1.32, which included after-tax charges for investment impairments of $0.58.

“The fourth quarter capped a great year for Microsoft, with solid revenue growth,successful product launches and our continued focus on managing costs. Robust customer demand for Windows® XP and other desktop software enabled us to deliver strong operating results this quarter, in spite of continued uncertainty in the technology markets,” said John Connors, chief financial officer at Microsoft. “While the current environment remains challenging, we’re making important investments in product development, marketing and in our sales force that will position us for success in the current year and beyond.”

Desktop software revenue was $4.97 billion, up 9 percent in the June quarter. For the full fiscal year, revenue was $18.90 billion, up 7 percent from the prior year. This solid performance was driven by strong growth in client operating systems revenue of 20 percent and 16 percent for the quarter and year, respectively. Demand was particularly robust for the Professional versions of Windows, leading revenue to outgrow the personal computer systems market. Desktop applications revenue also grew on the strength of continuing demand for Office by enterprise customers. Further, Microsoft® Visio® and Microsoft Project both achieved record sales in the fourth quarter.

Enterprise software and services revenue was $1.35 billion for the fourth quarter, up 4 percent from the prior year. For the fiscal year, revenue was $5.11 billion, up 6 percent from the prior year. Revenue for the Windows Server family of products grew by 13 percent this quarter and 10 percent for the full year, outperforming the underlying server hardware market by a wide margin. “Microsoft SQL Server™continued to outgrow its competition, and we were thrilled to see our other server products, such as BizTalk™ Server and Content Management Server, gain traction and perform nicely,” said Paul Flessner, senior vice president, of the .NET Enterprise Server Division at Microsoft. “With the upcoming releases of Windows .NET Server and other new server releases, such as Exchange and Content Management Server, we believe customers will continue to recognize the benefits of increased business value and decreased total cost of ownershipachieved by implementing solutions, including XML Web services, on the Microsoft platform.”

Business Outlook

Management offers the following guidance for the quarter ending Sept. 30, 2002:

  • Revenue is expected to be in the range of $7.0 billion and $7.1 billion.
  • Operating income is expected to be in the range of $2.9 billion and $3.0 billion.
  • Diluted earnings per share is expected to be either $0.42 or $0.43.

Management offers the following guidance for the full fiscal year ending June 30, 2003:

  • Revenue is expected to be in the range of $31.4 billion and $32.0 billion.
  • Operating income is expected to be in the range of $13.3 billion and $13.6 billion.
  • Diluted earnings per share is expected to be in the range of $1.85 to $1.91.

Webcast Details

Microsoft will hold an audio webcast at 2:30 pm PDT (5:30 p.m. EDT) today with John Connors to discuss details regarding the company’s performance for the quarter and other forward-looking information. The session may be accessed at The webcast will be available for replay through the close of business on Friday, July 26, 2002.

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: entry into markets with vigorous competition, market acceptance of new products and services, continued acceptance of existing products and services, changes in licensing programs, product price discounts, delays in product development and related product release schedules, and reliance on sole source suppliers for key components of Xbox that could result in component shortages and delays in product delivery, any of which may cause revenues and income to fall short of anticipated levels; obsolete inventory or product returns by distributors, resellers and retailers; warranty and other claims on hardware products such as Xbox; changes in the rate of PC shipments; technological shifts; customer demand for our product and services; the support of third party software developers for new or existing platforms; the availability of competitive products or services such as the Linux operating system at prices below our prices or for no charge; the affects of the Consent Decree in United States v.Microsofton the Windows operating system and server business, including those associated with protocol and other disclosures required by the Decree and the ability of PC manufacturers to hide end user access to certain new Windows features; the ability to have access to MSN service distribution channels controlled by third parties; the risk of unanticipated increased costs for network services; the continued ability to obtain or protect intellectual property rights; changes in product and service mix; maturing product life cycles; product sale terms and conditions; the company’s ability to efficiently integrate acquired businesses such as Navision a/s; implementation of operating cost structures that align with revenue growth; the financial condition of our customers and vendors; unavailability of insurance; uninsured losses; adverse results in litigation; the effects of terrorist activity and armed conflict such as disruptions in general economic activity and changes in our operations and security arrangements; general economic conditions that affect demand for computer hardware or software; currency fluctuations; trade sanctions or changes to U.S. tax law resulting from the World Trade Organization decision with respect to the extraterritorial income provisions of U.S. tax law; and financial market volatility or other changes affecting the value of our investments,such as the AT&T securities held by Microsoft, that may result in a reduction in carrying value and recognition of losses including impairment charges.

For further information regarding risks and uncertainties associated with Microsoft’s business, please refer to the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” 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 Microsoft’s investor relations website at

All information in this release is as of July 18, 2002. 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.

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.

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Microsoft, Windows, Visio and BizTalk 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.

For more information, financial analysts only:

Krish Srinivasan, senior director, Investor Relations (425) 706-3703

For more information, press only:

Rachel Wayne, Waggener Edstrom, (503) 443-7000,

Katy Fonner, Waggener Edstrom, (503) 443-7000,

Caroline Boren, Waggener Edstrom, (425) 683-7000,

Note to editors: If you are interested in viewing additional information on Microsoft, please visit the Microsoft Web page at on Microsoft’s corporate information pages. Shareholder and financial information as well as today’s 2:30 p.m. PDT conference call with investors and analysts is available at

Microsoft Corporation

Financial Highlights

Fourth Quarter 2002

(All growth percentages are comparisons

to the comparable quarter of fiscal year 2001)

Revenue

Revenue for the fourth quarter of fiscal year 2002 was $7.25 billion, an increase of 10% over the fourth quarter of fiscal 2001. The revenue growth was driven primarily by the licensing of Microsoft Windows XP Home and Professional operating systems and the continued globalization of the Microsoft Xbox video game system.

Product Revenue

Microsoft currently has four segments: Desktop and Enterprise Software and Services; Consumer Software, Services, and Devices; Consumer Commerce Investments; and Other.

Desktop and Enterprise Software and Services includes Desktop Applications; Desktop Platforms; and Enterprise Software and Services. Desktop and Enterprise Software and Services revenue was $6.32 billion for the fourth quarter, an increase of 8% from $5.84 billion recorded in the fourth quarter of the prior year.

Desktop Applications includes revenue from Microsoft Office; Microsoft Project; Visio; client access licenses (CALs) for Windows NT Server and Windows 2000 Server, Exchange, and BackOffice; Microsoft Great Plains; and bCentral. Revenue from Desktop Applications was $2.52 billion in the June quarter of fiscal 2002, increasing slightly from the $2.51 billion in the prior year’s June quarter. Office revenue increased slightly from the prior year comparable quarter driven by multi-year licensing agreements and OEM licensing. Additionally, a decline in consumer purchases in the Asia region, most notably Japan, led to a decrease in Office revenue in this region. Revenue from client access licenses declined slightly in the fourth quarter due to a ramp up in licensing of Exchange, BackOffice, and Windows NT Server and Windows 2000 Server CALs in the prior year’s comparable quarter and the impact of a growing annuity licensing mix, which deferred revenue to future quarters. Microsoft Great Plains revenue for the June quarter grew strongly from the fourth quarter of fiscal 2001.

Desktop Platforms includes revenue from Windows XP Professional and Home, Windows 2000 Professional, Windows NT Workstation, Windows Me, Windows 98, and other desktop operating systems. Desktop Platforms revenue was $2.44 billion in the fourth quarter, representing 20% growth from the fourth quarter of the prior year. The quarterly revenue growth reflected a continued mix shift to the higher priced Windows 2000 and Windows XP Professional operating system, continued mix shift to indirect OEMs, and strong multi-year annuity licensing. This growth was achieved despite a decline in reported PC shipments compared to the fourth quarter of fiscal 2001.

Enterprise Software and Services includes Server Platforms; Server Applications; developer tools and services; and Enterprise services. June quarter revenue was $1.35 billion, increasing 4% from $1.29 billion in the June quarter of fiscal 2001. Server Platforms revenue growth was 13%, driven by a modest overall increase in Windows-based server shipments and increased deployment of Windows 2000 Server. Server Applications revenue grew slightly from the prior year’s fourth quarter as SQL Server revenue grew strongly and a significant portion of revenue was deferred to future quarters. Enterprise services revenue, representing consulting and product support services, was up 10% compared to the prior year’s comparable quarter. Revenue from developer tools, training and certification, and other services declined 14% from the June quarter of fiscal 2001, as a result of a higher mix of MSDN subscription licensing, deferring revenue to future quarters.

Consumer Software, Services, and Devices includes Xbox video game system, MSN Internet access, MSN network services, PC and online games, learning and productivity software, mobility, and embedded systems. Consumer Software, Services, and Devices revenue reached $822 million in the fourth quarter of fiscal 2002, compared to $509 million in the fourth quarter of the prior year. The majority of the revenue growth from the prior year stemmed from Xbox video game system sales. MSN Internet access revenue performed well as a result of an increase in both the subscriber base and average revenue per subscriber due to a reduction in promotional subscriber programs. Despite a difficult economic environment in the online advertising marketplace, MSN network services remained steady.

Consumer Commerce Investments include the HomeAdvisor online real estate service and the CarPoint online automotive service. Fourth quarter revenue totaled $13 million, compared to $96 million in the prior year’s fourth quarter. The decline in revenue compared to a year ago reflects the sale of Microsoft’s majority ownership of Expedia, Inc. during the third quarter of fiscal 2002.

Other primarily includes Hardware and Microsoft Press. Other revenue was $101 million in the fourth quarter of fiscal 2002, declining from $128 million reported in the prior year’s June quarter. Lower sales of Microsoft Press books and lower hardware peripheral sales contributed to the decline in revenue.

Distribution Channels

Microsoft distributes its products primarily through OEM licenses, organizational licenses, online services and products, and retail packaged products. 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 retail packaged products via these channels are primarily to and through distributors and resellers.

OEM fourth quarter revenue was $2.34 billion, up 17% from revenue of $2.00 billion in the comparable quarter of fiscal 2001. While reported licenses declined in the fourth quarter compared to the prior year, a strong increase in the mix of the higher priced Windows 2000 and Windows XP Professional licenses, and stronger system builder OEMs licenses, led to higher average revenue per license and contributed to the overall OEM revenue growth.

South Pacific and Americas Region revenue in the June quarter was $2.98 billion, an increase of 12% compared to $2.66 billion in the prior year’s June quarter. Revenue from the United States was the primary driver of the region’s revenue growth, reflecting continued strong sales of Xbox. Strong multi-year enterprise and government licensing contributed greatly to the growth. The growth was also influenced by MSN Internet access subscriptions.

Europe, Middle East, and Africa Region revenue was $1.22 billion, increasing 7% from the $1.15 billion reported in the fourth quarter of the prior year. The majority of the growth was a result of strong multi-year licensing agreements in the fourth quarter of fiscal 2002. Revenue growth from Windows XP Home and Professional operating systems and Enterprise Software was very healthy.

Asia Region revenue decreased 9% to $704 million from $777 million in the June quarter of the prior year. The region’s revenue decline was impacted by continued weak economic conditions and declining consumer PC shipments, which affected the sales of localized versions of Microsoft Office XP, particularly in Japan, partially offset by the sale of Xbox consoles in the fourth quarter of fiscal 2002. Had foreign exchange rates been constant with those of the fourth quarter of 2001, revenue in the region would have decreased 6% instead of decreasing 9%.

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, primarily due to a weaker Japanese yen versus the U.S. dollar. Had the rates from the prior year’s comparable quarter been in effect in the fourth quarter of fiscal 2002, translated international revenue billed in local currencies would have been approximately $25 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

Effective July 1, 2001, Microsoft adopted Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires business combinations to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separate from goodwill. SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. There was no impairment of goodwill upon adoption of SFAS 142. Goodwill amortization (on a pre-tax basis) was $96 million in the fourth quarter of fiscal 2001.

Cost of revenuewas $1.37 billion, or 18.9% of revenue, in the fourth quarter, compared to $867 million, or 13.2% of revenue, in the fourth quarter of the prior year. The sales of the Xbox video game console drove the majority of the increase from the prior year.