Coupons and Accounting Changes

Two days before its Q1’07 earnings call, Microsoft detailed the expected financial impact of offering discounted upgrades to customers who, in the few months before Windows Vista and Office 2007 are released, buy computers with Windows XP or Office 2003 preinstalled.

Under the Express Upgrade to Windows Vista program, customers who purchase Windows XP on a “Vista-capable” PC between Oct. 26, 2006, and Mar. 15, 2007, might receive a coupon for a free or discounted upgrade to Vista. The amount of the discount depends on the edition of XP purchased, and users pay shipping and handling costs. Larger PC makers will be responsible for administering the program and determining which models qualify for the program, while Microsoft will administer the program for smaller manufacturers (the System Builder channel). Microsoft expects to defer approximately US$1 billion of revenue in the Client business segment from Q2’07 to Q3’07 as a result of this program. This will cause Q2 revenue in the Client business segment to decline about 25% to 27% from the previous year, but will have no impact on full FY’07 figures.