Microsoft Reports First Quarter Earnings

Microsoft beat analyst expectations slightly on Thursday with its financial results for the first quarter, but the company reported a bigger-than-expected drop in unearned revenue from multi-year licensing agreements (read Licensing 6.0).

Microsoft announced revenues of $8.22 billion for the quarter ended Sept. 30, a 6 percent increase from the $7.75 billion in the year-ago quarter. Operating income worked out to $3.15 billion, up from $3.03 billion in the year-ago quarter.

Thomson First Call, a poll of financial analysts, had been looking for earnings of 29 cents per share. Microsoft over delivered by a penny at 30 cents, which included diluted earnings per share of 24 cents and an equity compensation expense of 6 cents. The new earnings per share beats the year-ago quarter by two cents.

While Microsoft had been expecting a drop-off of $200 million to $300 million in unearned revenue from multi-year contracts, according to the Wall Street Journal, the actual figure for the quarter was more than twice as bad as Microsoft's worst case scenario.

"Unearned revenue as of September 30, 2003 decreased $768 million from June 30, 2003 reflecting a sequential decrease in new and recurring multi-year licensing agreements, deferral of revenue associated with technology guarantees for Office System 2003, and recognition of unearned revenue from multi-year licensing in prior periods," Microsoft said in its financial statements.

In an earnings conference call, Microsoft CFO John Connors said Microsoft had been too optimistic on contracts from large customers and that sales people had been distracted helping customers cope with the Blaster virus.

Consumer spending helped Microsoft weather the Licensing 6.0 shortfall. "While corporate IT spending was slow to improve this quarter, we saw strength across all of our consumer businesses, driving higher than expected revenue for the company," Connors said in a statement.

Microsoft did manage to snatch some positive metrics from the jaws of a tough quarter for its corporate sales:

  • Server and Tools business grew 15 percent year-over-year to $1.87 billion this quarter.
  • SQL Server and Exchange Server saw double-digit revenue growth on growing enterprise edition sales.
  • Windows Server 2003 has sold two times as many licenses as Windows 2000 Server over the same period of time since the launch.
  • The seats-sold count for Exchange is now at 120 million.

    For the next quarter, ending Dec. 31, Microsoft is projecting higher revenues of $9.7 billion to $9.8 billion, higher operating income from $3.2 billion to $3.3 billion and diluted earnings per share of 23 cents to 24 cents, including equity compensation of 6 cents -- about the same as the current quarter.

  • About the Author

    Scott Bekker is editor in chief of Redmond Channel Partner magazine.