Unearned Revenue: Historical Examples

Ignoring unearned revenue can give an inaccurate picture of Microsoft’s business. These two charts show how unearned revenue affects the analysis of two representative segments of Microsoft’s business.

The first chart shows a year-over-year comparison of quarterly results in the “Desktop Applications” category, which includes Office and other productivity applications, and Client Access Licenses for some of the .NET Enterprise Servers, such as Windows Server and Exchange. Based on reported revenue alone, year-over-year growth in this category was flat. However, Microsoft added much more unearned revenue to this category in Q4’02 than it added in Q4’01. This suggests that sales continued to grow in this category, but a larger mix of these sales were to corporate customers buying multiyear licensing agreements.

The second chart shows results from two consecutive quarters in the “Enterprise Software and Services” category, which includes Windows Server and the .NET Enterprise Servers, development tools, and other enterprise products and services. Based on reported revenue alone, sales were flat. But once unearned revenue is factored in, a different picture emerges: new sales of enterprise products dropped in this quarter, but Microsoft was able to recognize enough unearned revenue from previous quarters in this category to make up for the drop.