(FOOL CONFERENCE CALL SYNOPSIS)*
Randy Befumo (MF Templar)

One Microsoft Way
Redmond, WA 98052-6399
206-882-8080
http://www.microsoft.com/

ALEXANDRIA, Va., October 21, 1996/FOOLWIRE/ --- Total revenues for the first quarter of the fiscal year were $2.3 billion dollars, a 14% increase over the $2.02 billion reported during the same quarter last year. This was a two percent gain over the last year. Net income was $614 million and earnings per share (EPS) were $0.95 EPS, representing a 22% increase over the $0.78 EPS reported one year ago and 9% over the prior quarter. This was the lowest year-over-year quarterly revenue growth in Microsoft's history, but was up against a tough comparison last year with the introduction of Windows '95. On a positive note, EPS growth exceeded revenue growth, reflecting good cost controls and an evolving business model.

(Go to the Microsoft Financial Forum for an online version of Microsoft's annual report.)

[EDITOR'S NOTE -- 16 BIT VERSUS 32 BIT. As a point of reference for investors unfamiliar with Microsoft's product line, Windows 3.1 is a 16 bit operating system and Windows95 and Windows NT are 32 bit operating systems. When the company talks about 16 bit sales, it is products related to Windows 3.1 whereas when it talks about 32 bit it is sales related to Windows95 and Windows NT.]

APPLICATIONS & CONTENT PRODUCT GROUP. Revenues were $1.11 billion, a 13% increase over last year. This was driven by increased sales desktop applications, particularly the 32 bit versions Office and OfficePro. Sequentially, revenues decreased 14% due to usual seasonal pattern and the decline in 16 bit applications.

DESKTOP APPLICATIONS DIVISION. Two trends continued from last quarter -- more 32 bit apps and more OfficePro -- continued this quarter. The company sold more 32 bit applications than 16 bit applications for the first time. For the fourth quarter in a row, OfficePro sold better than standard Office. The installed base of Office and Office applications now exceeds 50 million. Between Internet Assistant and FrontPage, more than one million customers are using Microsoft Web authoring tools. Publisher '97 was released to great customer satisfaction.

INTERACTIVE MEDIA. Interactive Media saw the release of Encarta '97 and Encarta '97 Deluxe. MSNBC Interactive and MSNBC cable were launched in July. MSN, with over 1.6 million subscriberss, was relaunched on the Web just before the end of the quarter. While revenue growth in many software category was slow, revenue from entertainment titles increased "nicely."

PLATFORM GROUP. Revenues were $1.19 billion, up 15% over last year and 22% over the prior quarter. These revenues were driven by rising customer acceptance of 32 bit operating systems. Desktop operating systems experienced good growth driven by increased PC shipments, mix shift to 32 bit operating systems and increased market share. Revenues from upgrade versions of Windows95 decreased compared to last year, the quarter Windows95 was released. Total quarterly unit volume and revenues from Windows95 continued to set records.

SERVER PRODUCTS. Windows NT 4.0 was released and shipments of this product increased dramatically. NT shipments were up four times over the same quarter last year and up two times over the prior quarter. Revenues from server systems and server applications increased 250% over the prior year. The new version of the NT server had good growth as did the new version of the SQL (sequel) server on the BackOffice bundle. Internet Information Server (IIS) continued to gain share with 14,000 new IIS sites in September alone.

INTERNET PLATFORM AND TOOLS DIVISION. This unit had good revenues, up from the preceding quarter, primarily due to increased sales of MS+, C++, MSDN and the September release of Visual J++. Internet Explorer shipped to rave reviews, millions of downloads in its first six weeks and the company inked distribution deals with a key Internet Service Providers (ISPs). Microsoft released beta versions of IE for UNIX and Windows 3.1, strengthening their offerings in the corporate Internet space.

SALES CHANNELS; ORIGINAL EQUIPMENT MANUFACTURERS (OEMs) CHANNEL. Royalties from OEMs were up with earned revenues from the OEM channel were $663 million in the quarter, a 21% increase over last year and two percent over the last quarter. FINISHED GOODS CHANNEL. The finished goods year over year growth rate slowed in the U.S., Canada and Europe due to strong sales of Windows 95 last year at its debut.

GEOGRAPHIC BREAKDOWN. Quarterly finished goods revenue in the U.S. and Canada increased 9% over last year and 19% over the prior quarter to $812 million fueled by NT and Office growth. European revenues of $427 million were flat compared to last year and down 9% from last quarter, reflecting usual seasonal trends and weak economic conditions. Revenues from the international channel were $393 million, an increase of 32% over last year but down 19% from last quarter. This reflects strength across most products, particularly in Japan. The sequential decline was due to the expected fall-off of sales of Windows 95, which was released later in the year internationally than in the U.S. and Canada. Operating results were affected by negative comparisons with the U.S. dollar, although Microsoft was hedged against most of this move. Channel inventories appear to be in solid shape for the holiday season and the launch of Office 97.

COST STRUCTURE. Cost of revenues as a percent of revenues declined to 10.9% from 16.0% last year. This was driven by improved efficiencies, mix shift from retail upgrades to a more typical mix of upgrades, standard package products, corporate and OEM licenses and a shift to CD-ROM.

OPERATING EXPENSE. Reflecting their efforts to control costs and evolve into a more flexible business model, headcount was flat. Research and development was 18.8% of sales, an increase driven by increased headcount related costs and third-party development expense. Fast growing areas included server products and interactive media. R&D was down 5% sequentially due to lower third-part development expense. Sales and marketing was 27.2% of revenues compared to 30.8% in the prior year. Sales and marketing decreased due to the high level of costs associated with the launch of Windows 95 last year. General and administrative costs were $86 million compared to $63 million last year, down $4 million from last year.

NON-OPERATING ITEMS & BALANCE SHEET. Interest income increased to $92 million from $66 million last year due to the larger investment portfolio. Other expenses increased due to recognition of their share of expenses with new joint ventures. Cash and short-term investments were $7.1 billion, an increase of only 2% due to the increased repurchase of common stock. Accounts receivable increased 34% to $855 million, due to growth in gross sales, the timing of OEM invoices and some seasonal extension of days sales outstanding (DSOs) to the far east. Equity investments increased to $896 million reflecting new investments and increased market value of existing investments. Unearned revenues increased $91 million to $651 million. Approximately $525 million represents the unearned portion of operating systems due to support, maintenance and enhancements. The company repurchased 5.1 million shares of common stock.

CASH-FLOWS. Quarterly cash-flow from operations increased $783 million, up from $500 million last year but down from $906 million in the preceding quarter due to the increase in accounts receivable.

FORECAST. PC sales, Windows 95, BackOffice and Windows NT are all growing. Office 97 is starting out strong, boding well with for their largest revenue franchise. The company are heading towards a $10 billion year, but analysts should not get too carried away with expectations. They continue to have large R&D plans and will spend $2.1 billion on this. Microsoft expects better than average sequential increases in December and March, although not as much as in prior years. December, March and June will be tough comparisons against the blow-out Windows 96 debut year.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.