Unearned Revenue Drops in Q1'04

Unearned revenue dropped significantly in the first quarter of fiscal year 2004, which ended Sept. 30, 2003, as sales and renewals of multiyear licensing agreements to enterprises were slower than expected. Nonetheless, strong sales of consumer products and server software helped Microsoft post 6% revenue growth and a 4% increase in profits from a year ago.

(For an overview of Q1’04 financials and how they compare with previous quarters, see the chart “Microsoft Financials for the Last Five Quarters“. Note that previous quarterly numbers have been adjusted to account for stock options as an expense.)

Security Impacts Unearned Revenue

Unearned revenue, an important indicator of Microsoft’s success in selling to businesses, dropped US$768 million from the previous quarter, to a total of US$8.25 billion. Although Microsoft expected unearned revenue to drop this quarter, it expected the number to decrease by only US$300 million—less than half the actual decrease.

The majority (about 60%) of unearned revenue comes from companies signing multiyear licensing agreements, such as Enterprise Agreements. When companies sign such agreements, they generally pay Microsoft for the first year of the agreement; Microsoft books this revenue as unearned, then incrementally recognizes it over the course of the year. Thus, when unearned revenue drops, it’s usually because fewer companies are signing multiyear licensing agreements than in preceding quarters.