Corporates evading Microsoft Corp's unpopular new licensing program by renewing existing contracts have caused an unexpected spike in both net and unearned revenues for the first fiscal quarter 2003.
Redmond, Washington-based Microsoft Corp yesterday announced a 26% jump in net revenue to $7.75bn with a $1.4bn jump in unearned revenue to $914m for the three months to September 30.
Microsoft attributed the spike to a headlong rush by corporates renewing their existing Upgrade Advantage (UA) contracts before the program officially expired on July 31.
Microsoft launched the replacement Software Assurance (SA) under the Licensing 6.0 program, introduced on August 1. SA covers upgrades to products introduced during the three-year lifecycle of a customers' contract, but was widely judged by many to be more expensive and less-cost effective than existing contracts.
Microsoft confessed surprise at the spike, warning Wall St analysts who yesterday congratulated the company that this is a one-off event. In extended trading, the company's shares jumped to $53.10, up from its Nasdaq close of $50.77.
Chief financial office John Connors warned: "[We] saw a lot of demand for UA in advance of the July 31 date. Much more than expected.
"Total revenue will tick slightly down for the next few quarters," he said, calling the first quarter "exceptional". UA is booked-up front by Microsoft, accounting for the spike, and "is earned" afterwards.
Microsoft does not break-out figures that would show which percentage of customers using older Select and Open Agreements who have moved from UA to SA. However, Connors said Microsoft's sales force "has to work hard on building the sales pipeline for the rest of the fiscal year" - meaning they must now work hard migrating customers to Licensing 6.0 and SA.
Connors warned of further factors effecting quarterly and annual revenue. These include a change in the way Microsoft bills OEMs for software, effectively tying the company more to changing fluctuations in vendors' inventory.
The company is also benefiting from the continued strength of the Euro against the dollar - a fact that could change - while warning economic factors remain uncertain. "Corporate wallets are not closed, but they are gripped pretty tight," Connors said.
For the first quarter of fiscal 2003, Microsoft reported net income of $2.73bn and $0.50 earnings per diluted share that included an after tax charge for investment impairments of $291m or $0.05. That compares to net income of $1.28bn and earnings per diluted share of $0.23 with after-tax charge for investment impairments of $1.22bn.
Driving revenue and income were sales of Windows XP, which helped grow client revenue 33% to $2.85bn, with the business edition accounting for 63% of all operating system sales. Server platform revenue grew 14% to $1.6bn and the company's "information worker" category of tools - which includes Office XP - grew 26% to $2.27bn.
For the company's second quarter, ending December 31, Microsoft said it expects revenue between $8.5bn - $8.6bn and diluted earnings per share of either $0.45 or $0.46.