Microsoft reaps record $10 billion, but results still stir concern

Microsoft Corp. reported more than $10 billion in quarterly revenue for the first time in its history, as the strengthening economy boosted business and consumer spending on computers and software.

But much of the outside attention yesterday focused on an aspect of the company's financial results that troubles some analysts and investors.

Microsoft's balance of unearned revenue -- billings from long-term corporate software deals that are counted as revenue over time -- fell by nearly $400 million in the quarter ended Dec. 31. The company said it had been expecting a decline of $200 million to $300 million.

The trend was the subject of many of the questions during Microsoft's conference call with analysts. Yet the decline wasn't nearly as much as the company experienced in the previous quarter, and some analysts said there was too much critical focus on unearned revenue, given a number of positive signs elsewhere in the results.

"The Street has become fixed on this unearned number, but there's this major piece that's missing from that logic," said Gene Munster, senior software research analyst with the Piper Jaffray securities firm.

Even if fewer corporate customers are signing long-term contracts, which include benefits such as automatic upgrades, they are still buying the company's software, Munster said.

He cited, as an example, strong sales of Microsoft Office 2003, one of the factors the company credited for fueling its revenue growth in the recent quarter.

Although the unearned revenue balance is important to watch, "the more important factor" is the improved outlook in other aspects of the company's financial performance, agreed Alan Davis, an analyst with brokerage firm McAdams Wright Ragen.

Curt Anderson, Microsoft's senior director of investor relations, called it a "stellar quarter" for the company in that respect.

He cited revenue growth of more than 20 percent in each of the company's three core divisions: Client, which consists of Windows operating systems for desktop PCs; Server and Tools, which includes operating systems and programs for computer servers; and Information Worker, consisting of Microsoft Office and related products.

"We feel like we're at the beginning of some improved (information technology) spending," he said.

The unearned revenue balance dipped to $7.85 billion, from $8.2 billion in the previous quarter. Anderson said balance was "a little bit lower than the company had anticipated." He said the larger-than-expected drop was largely a function of timing, with some contracts being completed in January, after the quarter ended.

Microsoft's reported net income for the quarter was $1.55 billion, or 14 cents a share, down from the $1.87 billion and 17 cents a share it reported in the same quarter last year, after various charges. But the results in the recent quarter were reduced by a one-time charge of 14 cents a share resulting from a program in which Microsoft employees sold their otherwise worthless stock options to an investment bank.

Analysts surveyed by Thomson One Analytics had been expecting Microsoft to report net income of 30 cents a share, not counting that 14-cent charge or an additional charge of 6 cents related to the company's long-term decision to count stock-based compensation as an expense. On that basis, Microsoft posted earnings of 34 cents a share, beating the Wall Street consensus.

The company won't disclose net income for any of its seven divisions until it makes its quarterly filing with the Securities and Exchange Commission, but it reported rising quarterly revenue in its MSN, Microsoft Business Solutions and Mobile and Embedded Devices divisions.

Revenue in the company's Home and Entertainment division was down 5 percent in the quarter, despite an overall increase of 2 percent in revenue from Xbox video-game consoles and software, which are part of that division.

Nintendo of America, which markets the competing GameCube console, said yesterday that it jumped into the No. 2 position in United States unit sales for the full year 2003, after cutting the GameCube's price. But Microsoft said the Xbox still exceeds the GameCube in total units sold since the consoles were launched in 2001.

"The last two weeks in December, we were back outselling them, and that trend has continued," said Microsoft executive Mitch Koch, who oversees Xbox sales as vice president of sales and marketing in the Home and Entertainment Division.

P-I reporter Todd Bishop can be reached at 206-448-8221 or toddbishop@seattlepi.com

Add P-I Business headlines to