As in previous quarters, Microsoft resisted the downward pull of the economy by way of unearned revenue, which is revenue for software that has yet to be delivered. Unearned revenue accounted for about 26 percent of the company's total revenue during the third quarter, compared with 22 percent of revenue in the second quarter and 23 percent in the first quarter. Money collected through Microsoft's Licensing 6 programme is counted as unearned revenue. In May 2001, the software company announced the programme, under which companies pay up front for products under two-year or three-year "Software Assurance" contracts. The programme met with stiff customer resistance for removing the choice of when to upgrade and for raising licensing fees from 33 percent to 107 percent, according to research firm Gartner. Microsoft completed the transition to Licensing 6 on 1 August. A last-minute sign-up spree for Licensing 6 led to a huge spike in Microsoft's unearned revenue during the last part of fiscal 2002 and the start of the new fiscal year. During the first quarter, unearned revenue swelled to $9.13bn, mostly from licensing, up from $5.85bn a year earlier. The company ended the second quarter with $8.83bn in unearned revenue. But as Microsoft begins to realise unearned revenue on the balance sheet, the big boost is starting to level out. "We expect that deferred revenue will continue to show a decline for the next couple of quarters before the company can begin rebuilding its unearned revenue balance," Merrill Lynch Jason Maynard wrote in a Tuesday research note. Unearned revenue declined $304m from the second quarter to the third, according to Microsoft. The company closed the third quarter with $8.53bn in unearned revenue. It expects to realise $2.55bn in the fourth quarter, $1.94bn in the first quarter of fiscal 2004, $1.4bn in the second quarter, $916m in the third quarter and $1.73bn in the last quarter. The earliest wave of Licensing 6 participants won't be ready to sign up again, assuming that they choose to do so, until 31 October. "This the first date on which Software Assurance will begin to expire," said Paul DeGroot, an analyst with market researcher Directions on Microsoft. "This would be for customers who bought SA... as soon as SA was available, on 1 October, 2001." Still, Microsoft is getting ready to release many new products over the next two to three quarters, which could help boost revenue. But many of the products are focused on the enterprise, where adoption tends to take place at a slower rate. The products to be launched this year include: Windows Server 2003, scheduled for a 24 April release; Office 2003; Exchange Server 2003; Windows Rights Management Services (RMS); and Real-Time Communications Server 2003. Many interdependencies between products means "that if one slips past the ship date, others will, too", DeGroot said. For example, Office relies on features in Exchange and RMS. A delay of RMS could affect Office, while an Office delay could hold up Exchange. Segment results
Third-quarter revenue for Microsoft's Client group, which covers desktop and embedded operating systems, was $2.54bn, compared with $2.3bn a year earlier and $2.55bn in the second quarter. The Information Worker division, which handles Office and other desktop productivity software, saw sales rise 9 percent to $2.33bn from a year earlier. The group reported $2.29bn in the second quarter. The online unit MSN posted revenue that rose to $508m, compared with $404m a year earlier and $459m in the second quarter. MSN subscription revenue rose 9 percent and paid services -- largely from paid search and ads -- rose 55 percent. Revenue for Microsoft's Home and Entertainment division, which looks after the Xbox game console, declined 42 percent to $453m, from $778m a year earlier. (Second-quarter revenue topped $1.33bn.) Lower Xbox sales largely contributed to the dramatic decrease in revenue. CE/Mobility posted sales of $38m, up from $21m a year earlier. Sales of Server Platforms reached $1.83bn, up 21 percent year over year. During the second quarter, revenue reached $1.76bn. Business Solutions, which covers Great Plains and bCentral, reported a third-quarter revenue of $147m, compared with $75m a year earlier and $135m in the second quarter.
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