New Licensing Model Fuels Big Quarter for Microsoft

Microsoft's operating income for the first quarter of fiscal year 2003 was $4.05 billion, compared to $2.9 billion in the same period last year, while net income was $2.73 billion and diluted earnings per share were 50 cents, which included an after-tax charge for investment impairments of $291 million, or 5 cents per share. For the same period of the previous year, net income was $1.28 billion and diluted earnings per share were 23 cents.

However, the company warned that the its Q1 results would in all likelihood not be repeated because of an unusual spike in upgrades through the new software licensing model. "This truly was an exceptional quarter. While we could not be more pleased with our revenue and profit results, I think it is important to highlight a couple of the contributors that are not likely to occur again," said Microsoft CFO John Connors during the earnings call. "We experienced stronger than expected sales of Windows, Office and Server product through our volume licensing and annuity programs."

The controversial new licensing model, which includes Upgrade Advantage (UA), Software Assurance and Licensing 6.0 programs, offers licenses through a subscription, which requires companies to enter into multi-year agreements and pay for eventual upgrades in advance. The new model has come under fire from customers and partners as some have had to pay more for Microsoft products under the new programs. Connors said there was a large demand for upgrades through the Upgrade Assurance model due to the program's July 31 deadline. "We do expect customer purchasing behavior return to more modest levels," Connors said.

The new model licensing also allows Microsoft to account for some software sales as unearned revenue that can be recognized in later quarters. Microsoft said it has approximately $9 billion in deferred revenue that can be recorded in the future.

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As for products and business units, Microsoft saw many positives, including strong sales of Windows XP, which drove its client business to 33 percent growth year over year. The company said more than 67 million copies of Windows XP have been sold worldwide.

Revenue for the server platforms business grew 14 percent in the first quarter, thanks to Windows 2000 Server and Microsoft SQL Server 2000 family of products. Microsoft said SQL Server 2000 gained market share through increasing demand for SQL Server Enterprise Edition, which experienced 51 percent revenue growth during the quarter. Microsoft Business Solutions revenue came in at just over $100 million for the quarter, thanks to the addition of Navision, a business software vendor based in Denmark that Microsoft acquired for roughly $1.3 billion last spring.

While Windows .NET Server has experienced significant delays and was pushed back to a mid-2003 launch date, Microsoft said interest was high, with more 200,000 customers signed up for the product through the Customer Preview Program.

For the quarter ending Dec. 31, 2002, Microsoft expects revenue in the range of $8.5 billion to $8.6 billion. Operating income is expected to be in the range of $3.2 billion to $3.3 billion. Diluted earnings per share is expected to be either 45 cents or 46 cents.

For the full fiscal year ended June 30, 2003, Microsoft anticipates revenue in the range of $32.2 billion and $32.6 billion, while operating income is expected to be in the range of $14.1 billion and $14.4 billion and diluted earnings per share is expected to be in the range of $1.89 and $1.95.