10-QPeriod: Q2 FY2004

MICROSOFT CORP Quarterly Report for Q2 Ended Dec 31, 2003

Filed February 6, 2004For Securities:MSFT

Summary

Microsoft Corporation reported strong revenue growth for the second quarter and first six months of fiscal year 2004, driven by robust PC shipment growth and increased licensing of key products like Office 2003 and Windows Server. Revenue for the quarter reached $10.15 billion, a 19% increase year-over-year, with similar growth seen in the first six months. While revenue showed significant upward momentum, operating income experienced a decline, largely attributable to a substantial $2.21 billion stock-based compensation expense related to the company's employee stock option transfer program implemented in the quarter. Despite this, the company maintained a strong financial position with cash and short-term investments totaling $52.78 billion at the end of the period.

Key Highlights

  • 1Revenue increased by 19% to $10.15 billion for the second quarter of fiscal year 2004, compared to the prior year, driven by strong PC shipment growth and increased licensing of Office 2003 and Windows Server.
  • 2For the first six months of fiscal year 2004, revenue grew by 13% to $18.37 billion year-over-year.
  • 3Operating income for the second quarter declined by 34% to $1.48 billion, primarily due to a significant $2.21 billion stock-based compensation expense related to an employee stock option transfer program.
  • 4Consolidated operating income for the first six months also decreased by 12% to $4.62 billion, largely due to the same stock-based compensation expense.
  • 5The company's cash and short-term investments grew to $52.78 billion as of December 31, 2003, indicating a strong liquidity position.
  • 6Significant legal proceedings and investigations, including antitrust cases in the U.S. and Europe, continue to be a factor, with ongoing settlements and potential financial impacts disclosed.
  • 7Microsoft adopted the fair value recognition provisions of SFAS 123 for stock-based compensation, leading to increased expense recognition and restatements of prior periods.

Frequently Asked Questions

Revenue growth was primarily driven by the strong performance of PC shipments, which increased by an estimated 12% year-over-year. This was complemented by increased licensing of key products such as Office 2003, Windows operating systems through OEMs, and Server and Tools products. The growth in MSN revenue also contributed to the overall increase.

The substantial decrease in operating income was primarily due to a one-time charge of $2.21 billion related to Microsoft's employee stock option transfer program, which was completed in the second quarter of fiscal year 2004. This program involved employees transferring their stock options, resulting in a significant stock-based compensation expense.

Microsoft continues to maintain a strong liquidity position with $52.78 billion in cash and short-term investments. The company plans to continue investing in sales, marketing, product support infrastructure, and advanced technologies. They also utilize share repurchases to manage dilution from stock-based compensation plans and have initiated a cash dividend.

Microsoft is involved in several significant legal proceedings, including ongoing antitrust cases from the U.S. Department of Justice and state Attorneys General, as well as actions from the European Commission. Additionally, there are numerous patent infringement lawsuits and other antitrust and unfair competition class action lawsuits. While the company is actively defending these cases, some have resulted in settlements and others are still pending, with potential for material financial impact.