As expected, a last-minute spending spree by larger businesses buoyed the current quarter and greatly added to the amount of unearned revenue on Microsoft's balance sheet. Microsoft entered the quarter with about two-thirds of eligible companies waiting to sign onto a controversial new licensing programme ahead of an important 31 July deadline. Microsoft closed the quarter with unearned revenue of $7.74bn, compared with $5.61bn a year earlier. Unearned revenue is revenue that is secured through contract but not yet received. Unearned revenue for desktop applications, such as Office, was $3.49bn compared with $2.19bn a year ago. PC versions of Windows unearned revenue rose to $3.20bn from $2.59bn year over year. Under the new programme, companies must sign up for a two- to three-year "Software Assurance" maintenance programme to continue receiving discounted upgrades. But in the process, Microsoft also eliminated the most popular means of buying licenses, effectively raising rates between 33 and 107 percent, according to market researcher Gartner. In anticipation of last-minute sign-ups, which would carry additional revenue benefit over into the first month of Microsoft's fiscal year 2003, some analysts had predicted fourth-quarter earnings as high as 46 cents a share. The majority of unearned revenue comes from software licensing, but not all. Microsoft also includes undelivered items, such as technical support in the mix. This later category, for example, accounts for 20 to 25 percent of the Windows XP Home unearned revenue and 10 to 15 percent each for Windows XP Professional and desktop applications. "Growth in unearned revenue on the balance sheet was very strong, up 38 percent year over year and $830 million sequentially, reflecting the large number of annuity agreements signed during the quarter," Scott Boggs, Microsoft's corporate controller. Microsoft's corporate controller predicted $6bn of the $7.74bn in unearned revenue would be realised next year. For the current quarter, recognition of previously deferred licensing income accounted for 20 percent of fourth-quarter revenue. "Unearned revenue for the enterprise software and services business was up an eye-popping 102 percent over last year, as more customers took the opportunity to include more server products in their annuity licenses," Boggs said. The year-over-year increase for desktop applications was 59 percent. But the long-term impact of the licensing programme remains uncertain, with at least one-third of eligible customers refusing to sign up. On Tuesday, Jeff Parker, president and co-founder of research firm Directions on Microsoft, warned Microsoft could face trouble ahead. "Software Assurance could boost Microsoft's bottom line in the short run, as customers rush to get into the programme on favourable terms by 31 July," he said. "But a crunch may come two to three years from now, when the bulk of Software Assurance memberships begin to expire, if customers feel they didn't get their money's worth and decide not to renew." In a broader context, some analysts charge the licensing rate hikes, which affected a disproportionately large number of businesses because of massive Windows and Office market share, may have hurt new computer sales. Microsoft's "complex new licensing agreements (31 July) deadline have also contributed to stalling PC demand," said US Bancorp Piper Jaffray analyst Ashok Kumar. "Domestically, demand appears stable though CIOs remain focused on reducing cash burn." PC shipments dropped slightly for the second quarter, marking the fifth-consecutive quarterly decline, IDC revealed on Thursday. Segments a mixed bag
Internationally, the South Pacific and the Americas accounted for $2.98bn in sales compared with $2.66bn a year ago and $2.76bn in the third quarter; regional sales rose 12 percent year over year. Revenue for Europe, the Middle East and Africa was $1.22bn, compared with $1.15bn a year earlier and $1.39bn in the third quarter. Asia saw revenue fall 9 percent to $704m from $777m in fourth quarter of 2001; sales were $818m in the previous quarter. Original equipment manufacturer ( OEM) revenue reached $2.34bn compared with $2bn a year earlier and the third quarter's $2.29bn. Combined revenue for desktop and server software and services revenue rose 8 percent to $5.84bn from $6.32bn a year earlier. Revenue for the segment topped $6bn in the third quarter. Desktop application revenue reached $2.52bn, up from $2.51bn a year earlier and $2.44bn sequentially. Windows desktop sales topped $2.44bn, up 20 percent from $2.04bn a year earlier; revenue was $2.29bn in the third quarter. Higher sales of Windows 2000 and Windows XP Professional greatly contributed to the sales increase. Enterprise software sales reached $1.35bn, up from $1.29bn year over year and from $1.28bn sequentially. Sales in the consumer software, services and devices group, which includes Internet access, online services and the Xbox game console, rose to $822m from $509m a year earlier. Revenue from consumer commerce investments, which includes HomeAdvisor and CarPoint, reached $13m, compared to $96m a year earlier and $45m in the third quarter.
See the Finance News Section for the latest financial news in the high-tech sector.
Have your say instantly, and see what others have said. Go to the Finance forum.
Let the editors know what you think in the Mailroom.
