Microsoft posts surprisingly strong Q1

Better than expected adoption of Microsoft’s new software licensing program propelled the software maker past Wall Street earnings targets Thursday.

For the first quarter of its 2003 fiscal year, which ended Sept. 30, Microsoft reported $7.75 billion in revenue, a 26% increase over revenue of $6.13 billion collected in the same quarter last year, the company said in a statement issued after the close of the market.

Net income was $2.73 billion, or $0.50 per share, after accounting for a $291 million charge related to investment losses, which knocked $0.05 per share off its earnings. In the first fiscal quarter last year, Microsoft had net income of $1.28 billion, or $0.23 per share, after accounting for investment charges.

Microsoft was expected to report earnings of $0.43 per share on revenue of $7.12 billion, according to a survey of analysts polled by First Call/Thomson Financial, which couldn’t say whether the consensus estimate includes or excludes one-time charges.

One notable figure for the quarter has to do with unearned revenue, which is comprised of sales booked but not collected. Microsoft reported having a total of $9.13 billion in unearned revenue Thursday as of the last day of the first quarter, a figure that stood at $5.85 billion at the end of last year’s first quarter.

Financial analysts said this week that unearned revenue was positioned for a spike due to adoption of Microsoft’s subscription-based licensing program, where business customers pay an up front fee for software in addition to annual fees that make them eligible for software upgrades during the life of the contract.

“During the quarter, we saw broader customer adoption of our licensing programs than we anticipated, as customers recognized the value of entering into long-term licensing agreements for our products” John Connors, chief financial officer at Microsoft, said in the statement.

The fourth fiscal quarter of 2002 was the first to benefit from new long-term contracts from customers who signed up for Microsoft’s new licensing program. In that quarter, Microsoft’s unearned revenue stood at $7.7 billion.

Microsoft will collect much of the $9.13 billion in unearned revenue over the next 12 months, the company said Thursday. In the current quarter it will recognize $2.52 billion, followed by $1.85 billion in the third quarter, $1.46 billion in the fourth quarter, and $1.01 billion in the first quarter of fiscal 2004.

The company Thursday offered new guidance for the current quarter, which it said could be affected by an “uncertain” global economy and a slowdown in new enterprise customer contracts following a recent increase in contracts. That boost was driven by a July 31 deadline that gave customers a discount if they moved to the subscription-based licensing plans.

“We do expect to see customer purchasing behavior return to normal levels,” Connors said during a conference call with reporters and analysts.

It expects revenue to be between $8.5 billion and $8.6 billion, ahead of analyst consensus estimates of $8.43 billion. Earnings per share will fall short of Wall Street targets of $0.50 per share, as the company said it expects earnings per share to be $0.45 or $0.46.

Shedding some light on the performance of various divisions at Microsoft, the company has changed the way it breaks out revenue by segment. For example, it now reports a figure for revenue collected from its MSN division, which includes Internet access subscriptions, services and related software.

The results by segment are as follows:

• The Information Worker segment, which includes Microsoft’s Office franchise, brought in $2.27 billion, a 26% gain over the $1.81 billion reported in the first fiscal quarter last year.

• Its Client division, made up mainly of Microsoft’s desktop Windows operating systems and revenue from CALs (Client Access Licenses) for its desktop software, reported revenue of $2.85 billion in the first quarter, a 33% boost over the $2.14 billion in the first fiscal quarter of the prior year.

• Strong Windows XP sales through business contracts and retail sales buoyed that division, Microsoft said. Since its launch nearly a year ago, more than 67 million copies of Windows XP have been sold by retailers and computer manufacturers, it said.

• The Server Platforms division, which includes Windows server operating systems and various enterprise server software products, such as SQL Server and Exchange, was up 14% year over year to $1.59 billion from $1.39 billion in the first fiscal quarter of 2002. 

• Microsoft’s emerging Business Solutions division, composed of software and services through bCentral, and the recently acquired businesses of Great Plains Software and Navision A/S, recorded $106 million in revenue compared to $74 million in the prior year’s first quarter. The division added more than 1,400 new customers, the company said.

• MSN saw a slight decline compared to the previous year’s first fiscal quarter, with $427 million, down from $430 million in the prior year quarter. Although subscriptions to its Internet access service were up by 23%, the sale of its stake in Expedia dug into revenue figures, the company said.

• Revenue from the the CE/Mobility unit, which makes Windows CE and software for mobile devices, was $17 million, compared to $14 million in the prior year’s first quarter. 

• In the Home and Entertainment division, the Xbox video game console and related software helped boost revenue to $485 million in the first quarter of fiscal 2003 compared to $267 million in the equivalent quarter last year.