Analyst estimates exceeded Microsoft guidance partly because they anticipated last-minute sales from Microsoft's Licensing 6 program. Companies looking to participate in the program, which would guarantee reduced costs on future upgrades, had until 31 July to move to the "current" version of Microsoft software. Otherwise, they would not qualify for the program. Companies faced the same deadline for signing on to the Licensing 6 program itself, which many Microsoft customers received poorly. The new program raised rates anywhere from 33 percent to 107 percent, according to market research company Gartner. Last week, Microsoft chief executive Steve Ballmer acknowledged that the company could have done a better job of introducing and implementing the program. Microsoft gained two benefits from the flurry of last-minute sign-ups: Increased sales and more unearned revenue on the balance sheet. But the increase in unearned revenue was slower than in earlier quarters, in part because the deadline for new licensing sign-ups was set for a date one month into Microsoft's first fiscal quarter. Under the Licensing 6 program, businesses pay for upgrades on an annuity basis. Microsoft accounts for the fees as deferred revenue, which is regularly accounted for as revenue on the balance sheet throughout the life of the contract. In the fourth quarter, Microsoft posted $7.74bn in unearned revenue, up $830m from the third quarter. Unearned revenue swelled further during the just-reported first quarter to $9.13bn -- mostly from licensing -- up from $5.85bn a year earlier. Most of this unearned revenue comes from software licensing, but not all. Microsoft also includes undelivered items, such as software moved through retail or technical support. The nonlicensing category accounts for anywhere from 10 percent to 25 percent of unearned revenue. Financial analysts attempted to estimate the impact of Licensing 6, which in the long term could smooth out Microsoft revenue. In a Monday research note, Prudential Securities analyst John McPeake predicted Microsoft's unearned revenue would grow 50 percent year over year. "We also think that due to Microsoft's Volume Licensing changes, the company will likely experience less volatility than others in the enterprise software space," he wrote. New organisational results
Microsoft's first-quarter results reflect a recent reorganisation of the company's business units, with some groups breaking revenue for the first time. Under the old structure, Microsoft reported revenue for desktop applications, desktop operating systems, enterprise software, consumer and other products. For fiscal 2002, ended 30 June, Microsoft reported revenue of $28.4bn, up from $25.3bn a year earlier. The revenue by group broke down into $9.6bn from desktop applications; $9.3bn from desktop operating systems; $5.1bn from enterprise software; and $4.4bn consumer and other products. Under the new structure, Microsoft will report revenue for seven divisions: client, information worker, MSN, home and entertainment, CE/mobility, server platforms and business solutions. The client group includes desktop and embedded operating systems; information worker is made up of Office, other standalone applications and professional product support; MSN encompasses online network and access services; home and entertainment includes the Xbox game console, consumer hardware and software, PC online games and the TV platform; CE/mobility refers to mobile devices; server platforms is made up of server operating systems, .Net servers, developer tools, premiere support and consulting, training certification and Microsoft Press books; and business solutions includes Great Plains, bCentral and Navision. The new organisation separates sales for products that previously had been lumped together. Office and Great Plains, for example, were part of the desktop applications group. Microsoft moved Great Plains, the accounting application acquired last year for $1.1bn, to the Business Solutions group. In July, Microsoft acquired its other major software component, Navision, for $1.45bn. The company also broke out MSN into a separate division, making the first quarter the first time revenue had been publicly disclosed for MSN. The move marks a renewed focus on the consumer Web and online access network, as Microsoft struggles to bring MSN to profitability. For the quarter, MSN's revenue dropped to $427m compared with $430m a year earlier, according to Microsoft. Revenue for the client group rose 33 percent year over year to $2.85bn. Strong Windows XP sales contributed greatly to the results. The information worker division saw sales rise 26 percent to $2.27bn, from $1.81bn a year earlier. Microsoft is expected to release the next version of the group's product suite, code-named Office 11, in mid-2003. Revenue for the home and entertainment division reached $485m, up from $267m year over year. Sales of consumer hardware and software declined, while the Xbox game console saw sales gains. CE/mobility posted sales of $17m, up from $14m a year earlier. Sales of server platforms reached $1.59bn, up 14 percent year over year. The group benefited from strong sales of Visual Studio .Net and SQL Server. Business solutions reported revenue of $106m compared with $74m a year earlier. Regionally, the Americas accounted for $2.73bn in sales, compared with $2.35bn a year ago, up 17 percent year over year. Revenue for the Europe, Middle East and Africa region grew 36 percent to $1.5bn from $1.11bn a year earlier. Japan and Asia-Pacific saw a 24 percent sales decrease, to $860m from $692m a year earlier. Original equipment manufacturer (OEM) revenue reached $2.65bn, a 34 percent increase over the $1.98bn posted a year earlier. Microsoft ended the quarter with $40.9bn in cash, up from $38.7bn the previous quarter.
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