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					                                                                   For Release 1:30 p.m. PDT
                                                                                 Oct. 18, 2000

                   Microsoft Announces Strong Results Driven
                 By Windows 2000 Professional and Windows Me

       REDMOND, Wash. — Oct. 18, 2000 — Microsoft Corp. today announced income

before accounting change of $2.58 billion for the quarter ended Sept. 30, an 18 percent

increase over the $2.19 billion reported last year. Revenue totaled $5.80 billion and diluted

earnings per share before accounting change were $0.46. Diluted earnings per share for the

Sept. 2000 quarter were $0.40 after including the required adoption of Statement of Financial

Accounting Standards No. 133 (SFAS 133), “Accounting for Derivative Instruments and

Hedging Activities”.

       “Results were solid across all businesses, led by accelerating deployments of

Windows® 2000 Professional in the business sector and Windows Me in the consumer arena.

We also continued to make great progress with our server products, proving our ability to

deliver mission-critical solutions to customers such as Lycos, FreeMarkets, RadioShack, The

Home Shopping Network and GMAC,” said John Connors, chief financial officer at

Microsoft. “While we remain guarded about worldwide economic conditions, we are

extremely enthusiastic about our Windows 2000 generation of server products.”

       At Microsoft’s Enterprise 2000 launch on Sept. 26, Microsoft President and Chief

Executive Officer Steve Ballmer, along with leading enterprise partners and customers such

as Compaq Computer Corp., Intel, Dell, Hewlett-Packard, Unisys, Andersen Consulting and

IBM, outlined a new generation of industry-standard hardware, software and consulting

services to build and run today’s most demanding enterprise applications. At the event,

Microsoft demonstrated cutting-edge solutions addressing the emerging opportunities
presented by the new digital economy and announced eight new server applications, including

Microsoft® SQL Server™ 2000 and Exchange 2000 Server. Microsoft also launched

Windows 2000 Datacenter Server, the most powerful server operating system ever offered by

the company. These products, comprising the .NET Enterprise Server family, provide a rich

set of building blocks for quickly building, deploying and managing integrated, Web-based

solutions.

       “We are breaking new ground with the Windows 2000 platform and the .NET

Enterprise Server family,” Ballmer said. “Microsoft is creating end-to-end solutions for

partners and customers to win in a changing industry, where business agility and the use of

information technology to drive revenue and profit growth have become critical.”

       In early October, SQL Server 2000 achieved a record-breaking TPC-C benchmark,

delivering 505,302.77 transactions per minute (tpmC) on a 24-node Compaq ProLiant 8500

cluster of servers running Windows 2000 Advanced Server. This result represents the best-

ever published TPC-C performance number, and at a price/performance ratio of $20.68/tpmC,

is a third lower than the closest competitor.

       On Sept. 14, Microsoft announced the availability of Microsoft Windows Millennium

Edition (Windows Me), the new operating system for home PC users. Windows Me delivers

exciting technology advancements in the areas of digital media, home networking, gaming,

online experience and PC health.

       During the quarter, MSN®, the Web’s largest network with more than 210 million

unique users worldwide, announced several key relationships with industry leaders. MSN and

Sprint PCS announced an alliance to bring MSN Mobile services and content, such as the

MSN Hotmail® Web-based e-mail service, the MSN Messenger Service, the MSN
MoneyCentral™ personal finance online service, MSNBC.com and Expedia, Inc. to Internet-

ready phones. MSN and Compaq Computer Corp. announced the availability of the Compaq

iPaq Home Internet Appliance, the first MSN Companion device. MSN Companions are a

convenient and affordable way for users to get connected to the Internet. Also, MSN and

RadioShack announced MSN High Speed broadband Internet access via DSL or satellite

available through the 5,600 Microsoft Internet Centers at RadioShack company-owned and

dealer stores.

           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, MSN, Hotmail, and MoneyCentral, are either registered trademarks or trademarks of Microsoft Corp. in the United
States and/or other countries. Expedia and Expedia.com are either registered trademarks or trademarks of Expedia Inc. in the U.S. and/or
other countries.

The names of actual companies and products mentioned herein may be the trademarks of their respective owners.
Microsoft Corporation
Income Statements
(In millions, except earnings per share)


                                                      Three Months Ended
                                                           Sept. 30
                                           1999                            2000
Revenue                                    $5,384                          $5,800
Operating expenses:
  Cost of revenue                             712                             859
  Research and development                    813                             956
  Sales and marketing                         922                           1,038
  General and administrative                  148                            170
     Total operating expenses               2,595                           3,023
Operating income                            2,789                           2,777
Losses on equity investees and other         (19)                            (52)
Investment income                             550                           1,127
Income before income taxes                  3,320                           3,852
Provision for income taxes                  1,129                           1,271
Income before accounting change             2,191                           2,581
Cumulative effect of accounting change            0                         (375)
Net income                                 $2,191                          $2,206


Earnings per share:
  Basic before accounting change           $ 0.43                          $ 0.49
  Diluted before accounting change         $ 0.40                          $ 0.46


  Basic                                    $ 0.43                          $ 0.42
  Diluted                                  $ 0.40                          $ 0.40

Average shares outstanding:
  Basic                                     5,129                           5,299
  Diluted                                   5,527                           5,557
Microsoft Corporation
Balance Sheets
(In millions)


                                                 June 30, 2000   Sept. 30, 2000
Assets
Current assets:
Cash and equivalents                                  $ 4,846          $ 2,641
Short-term investments                                 18,952           22,070
 Total cash and short-term investments                 23,798           24,711
Accounts receivable                                     3,250            3,172
Deferred income taxes                                   1,708            1,734
Other                                                   1,552            1,776
  Total current assets                                 30,308           31,393
Property and equipment, net                             1,903            1,973
Equity and other investments                           17,726           20,525
Other assets                                            2,213            2,198
    Total assets                                      $52,150          $56,089


Liabilities and stockholders' equity
Current liabilities:
 Accounts payable                                     $ 1,083          $ 1,101
 Accrued compensation                                     557              420
 Income taxes                                             585              442
 Unearned revenue                                       4,816            4,766
 Other                                                  2,714            2,577
  Total current liabilities                             9,755            9,306
Deferred income taxes                                   1,027            1,440
Stockholders' equity:
 Common stock and paid-in capital                      23,195           26,661
 Retained earnings                                     18,173           18,682
  Total stockholders' equity                           41,368           45,343
    Total liabilities and stockholders' equity        $52,150          $56,089
Microsoft Corporation
Channel and Business Division Revenue
(In millions)


                                                                 Three Months Ended
                                                                      Sept. 30
                                                        1999                          2000
Channels
South Pacific and Americas Region                       $1,868                        $2,188
Europe, Middle East, and Africa Region                   1,183                         1,085
Asia Region                                               593                           708
OEM                                                      1,740                         1,819
 Total revenue                                          $5,384                        $5,800


Business Divisions
Desktop Applications                                    $2,213                        $2,139
Desktop Platforms                                        1,667                         1,883
    Desktop Software                                     3,880                         4,022
    Enterprise Software and Services                      949                          1,037
         Desktop and Enterprise Software and Services    4,829                         5,059
Consumer Software, Services, and Devices                  366                           479
Consumer Commerce Investments                              18                            97
Other                                                     171                           165
 Total revenue                                          $5,384                        $5,800
                                          Microsoft Corporation
                                            Financial Highlights
                                             First Quarter 2001
                                  (All growth percentages are comparisons
                               to the comparable quarter of fiscal year 2000)


Revenue
Revenue for the first quarter of fiscal year 2001 was $5.80 billion, an increase of 8% over the first quarter of
fiscal 2000. The revenue growth was driven by licensing of Microsoft® Windows NT® Workstation,
Windows® 2000 Professional, Windows Millennium Edition, and SQL Server™. Revenue from Consumer
Software, Services, and Devices also grew strongly. Reported revenue in the September quarter of fiscal 2000
was positively impacted by $150 million related to the fulfillment of the Microsoft Office 2000 Technology
Guarantee.

Product Revenue
Microsoft has the six major businesses: Desktop Applications; Desktop Platforms; Enterprise Software and
Services; Consumer Software, Services, and Devices; Consumer Commerce Investments; and Other.

Desktop Software includes Desktop Applications and Desktop Platforms. Desktop Applications includes
revenue from Microsoft Office, Project, Visio, and client access licenses for Windows NT Server/2000,
Exchange, and BackOffice. Desktop Platforms includes revenue from Windows 2000 Professional, Windows
NT Workstation, Windows Millennium Edition (Windows Me), Windows 98, and other desktop operating
systems. Desktop Software revenue in the September quarter totaled $4.02 billion, compared to $3.88 billion in
the same quarter of the prior year. Revenue from Desktop Applications was $2.14 billion in the September
quarter of fiscal 2001, compared to $2.21 billion in the prior year. Reported revenue from Microsoft Office
integrated suites in the September quarter of fiscal 2000 included $150 million of revenue related to the
fulfillment of the Microsoft Office 2000 Technology Guarantee. Client access license revenue declined from the
first quarter of the prior year due to anticipation of the availability of new product versions. Desktop Platforms
revenue was $1.88 billion in the first quarter, representing 13% growth from the first quarter of the prior year.
Increased migration to Windows 2000 Professional and the availability of Windows Me drove revenue growth in
Desktop Platforms. Business PC shipments continue to improve, however, remain relatively soft compared to
growth rates in the prior year first quarter. In addition, Windows desktop operating systems average earned
revenue per licensed operating system decreased compared to the prior fiscal year.

Enterprise Software and Services includes Windows NT Server and Windows 2000 Server operating systems;
SQL Server and client access licenses; Exchange Server; developer tools; consulting services; product support
services; and training and certification. Revenue in the September quarter increased 9% to $1.04 billion. The
Windows NT Server and Windows 2000 Server family of products continues to make progress with new mission
critical deployments. SQL Server revenue growth, aided by the availability of SQL Server 2000 mid-quarter
was robust compared to the September quarter of fiscal 2000. Other server application products revenue
experienced declining growth from the prior year’s first quarter due to unearned revenue associated with the
Exchange 2000 Server Technology Guarentee, and in the face of a new product release. Revenue from
consulting and product support services was strong.

Consumer Software, Services, and Devices includes MSN Internet access, MSN network services, WebTV
Internet access and services, gaming, learning and productivity software, mobile and wireless devices, and
embedded systems. Revenue reached $479 million in the first quarter of fiscal 2001, up 31% from the first
quarter of the prior year. MSN Internet access, MSN network services, WebTV, and gaming grew strongly
while revenue from learning and productivity software was relatively flat. Revenue from mobile and wireless
devices and embedded systems also grew strongly, but from a relatively small base.

Consumer Commerce Investments include Expedia, Inc., the HomeAdvisor online real estate service, and the
CarPoint online automotive service. First quarter revenue totaled $97 million, compared to $18 million in the
prior year’s first quarter. Acquisitions of Travelscape and Vacationspot by Expedia, Inc. and increased overall
reach of all properties led to the strong revenue growth compared to the prior year.
Other primarily includes Hardware and Press. Other revenue was $165 million in the September quarter of
fiscal 2001, declining slightly from $171 million reported in the prior year’s September quarter.

Distribution Channels
Microsoft distributes its products primarily through OEM licenses, organizational licenses, online services and
products, 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 first quarter revenue was $1.82 billion, compared to $1.74 billion in the comparable quarter of fiscal 2000.
The relatively low growth in revenue was due to continued sluggishness in business PC shipments and lower
average earned revenue per license due to increased sales to multinational customers. Migration to Windows NT
Workstation and Windows 2000 Professional in the OEM channel continues to increase.

South Pacific and Americas Region revenue in the September quarter was $2.19 billion, up 17% compared to
$1.87 billion in the prior year. Windows Me, Windows NT Workstation, Windows 2000 Professional, SQL
Server, enterprise consulting and support services, and MSN online revenue were the primary drivers of the
revenue growth. The revenue growth for the quarter resulted primarily from increased U.S. revenue.

Europe, Middle East, and Africa Region revenue was $1.09 billion, down 8% from revenue of $1.18 billion in
the first quarter of the prior year. The declining growth was largely a result of weakening local currencies,
which negatively impacted translated revenue compared to the prior year. Revenue in the region would have
been flat compared to the first quarter of fiscal 2000 if foreign exchange rates were constant with those of the
prior year. The recognition of revenue related to the fulfillment of the Microsoft Office 2000 Technology
Guarantee in the first quarter of fiscal 2000 also negatively impacted revenue growth.

Asia Region revenue increased 19% to $708 million from the September quarter of the prior year. The region’s
growth rate reflected strong revenue from localized versions of Microsoft Office 2000, especially the Office
Personal suite, Windows NT Workstation and Windows 2000 Professional operating systems, and 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. First quarter 2001 revenue in the region would have
grown 13% 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 September 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 first quarter of fiscal 2001, translated international revenue
billed in local currencies would have 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 14.8% in the first quarter, up from 13.2% in the first quarter of the
prior year. Higher online costs and consulting and product support services costs drove the increase over the
prior year’s comparable quarter. Additionally, the September quarter of fiscal 2000 was positively impacted by
the recognition of previously unearned revenue related to the Office 2000 Technology Guarantee and additional
packaged product costs associated with the launch of Windows Me.

Research and development expenses in the first quarter increased 18% from the first quarter of the prior year to
$956 million. The growth was driven primarily by higher headcount-related costs, investments in new product
initiatives, and development costs for recently released products.
Sales and marketing expenses were $1.04 billion in the September quarter, or 17.9% of revenue, compared to
$922 million in the first quarter of the prior year, or 17.1% of revenue. 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 $170 million in the first quarter compared to $148 million in the
comparable quarter of the prior year. The increase reflects higher legal fees.

Non-operating Items, Investment Income, and Income Taxes
Losses on equity investees and other incorporates Microsoft’s share of all joint venture activities including the
MSNBC entities, Avanade, Wireless Knowledge, and other equity investments.

First quarter investment income increased to $1.13 billion from $550 million in the first quarter of the prior year.
The increase was due to net realized gains and the larger investment portfolio. Net realized gains represented
about $600 million of the investment income in the first quarter of fiscal 2001. Investment income in the
September quarter of fiscal 2000 included a gain of $156 million related to the sale of Sidewalk and $50 million
in other net realized gains.

The Company was required to adopt Standard of Financial Accounting Standards, SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, which requires that all derivatives be recognized as either assets
or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the
use of the derivative. Adoption of this new accounting standard resulted in cumulative after-tax reductions in net
income of $375 million in the first quarter of fiscal 2001.

The effective tax rate for fiscal 2001 is 33%. The effective tax rate for fiscal 2000 was 34%.

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 September 30, 2000, unearned revenue was $4.77 billion. Desktop Applications unearned revenue was $1.68
billion, compared to $1.73 billion at September 30, 1999. Desktop Platforms unearned revenue was $2.36
billion, compared to $1.85 billion at September 30, 1999. Enterprise Software and Services unearned revenue
was $400 million, compared to $427 million at September 30, 1999. Unearned revenue associated with
Consumer Software, Services, and Devices and Other was $328 million, compared to $118 million a year ago.

Balance Sheet and Cash Flow
Cash and short-term investments totaled $24.71 billion as of September 30, 2000. Cash flow from operations
was $2.96 billion in the September 2000 quarter.

Equity and other investments at September 30, 2000 were $20.53 billion. The sequential quarter increase was
due to new investments, principally Telewest, Inc., partially offset by a net decrease in the market value of
publicly traded securities in the portfolio.

During the September quarter, the Company repurchased 25.5 million shares of common stock under its stock
repurchase program. At September 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 December 2000 to March 2003. 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 September 30, 2000, 860 million vested and
unvested options were outstanding, compared to 5.316 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 first quarter of fiscal 2001, these costs were $101 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 September quarter and trailing twelve months in accordance with SFAS 123.
ALTERNATIVE PRESENTATION OF ACCOUNTING FOR ESOS UNDER SFAS 123
(In millions, except earnings per share)(Unaudited)
                                             Three Months Ended         Twelve Months Ended
                                                 Sept. 30, 2000            Sept. 30, 2000
                                           Reported      Pro forma (1) Reported Pro forma (1)
Revenue                                         $5,800        $5,800    $23,372       $23,372
Operating expenses:
  Cost of revenue                                   859           969         3,149          3,470
  Research and development                          956         1,391         3,915          5,231
  Sales and marketing                             1,038         1,178         4,242          4,657
  General and administrative                        170           259         1,072          1,351
     Total operating expenses                     3,023         3,797        12,378         14,709
Operating income                                  2,777         2,003        10,994          8,663
Losses on equity investees and other                (52)          (52)          (89)           (89)
Investment income                                 1,127         1,127         3,903          3,903
Income before income taxes                        3,852         3,078        14,808         12,477
Provision for income taxes                        1,271         1,016         4,996          4,212
Income before accounting change                   2,581         2,062         9,812          8,265
Cumulative effect of accounting change              375           375           375            375
Net income                                       $2,206        $1,687       $ 9,437        $ 7,890

Diluted EPS becfore accounting change            $ 0.46        $ 0.37       $ 1.77         $ 1.49
Diluted EPS                                      $ 0.40        $ 0.30       $ 1.70         $ 1.42
Weighted average shares outstanding               5,557         5,557        5,544          5,544
Options granted                                      65            65          321            321

(1) Pro forma information as if the Company applied SFAS 123 for ESOs granted after
July 1, 1995.
Microsoft, WebTV, Windows, and Windows NT are either registered trademarks or trademarks of Microsoft Corporation 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.

				
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