Microsoft posts surprisingly strong Q1

Better than expected adoption of Microsoft's new software licensing program propelled the software maker past Wall Street earnings targets Thursday.

For the first quarter of its 2003 fiscal year, which ended September 30, Microsoft reported US$7.75 billion in revenue, a 26 percent increase over revenue of $6.13 billion collected in the same quarter last year, the company said in a statement issued after the close of the market.

Net income was $2.73 billion, or $0.50 per share, after accounting for a $291 million charge related to investment losses, which knocked $0.05 per share off its earnings. In the first fiscal quarter last year, Microsoft had net income of $1.28 billion, or $0.23 per share, after accounting for investment charges.

Microsoft was expected to report earnings of $0.43 per share on revenue of $7.12 billion, according to a survey of analysts polled by First Call/Thomson Financial, which couldn't say whether the consensus estimate includes or excludes one-time charges.

One notable figure for the quarter has to do with unearned revenue, which is comprised of sales booked but not collected. Microsoft reported having a total of $9.13 billion in unearned revenue Thursday as of the last day of the first quarter, a figure that stood at US$5.85 billion at the end of last year's first quarter.

Financial analysts said this week that unearned revenue was positioned for a spike due to adoption of Microsoft's subscription-based licensing program, where business customers pay an up front fee for software in addition to annual fees that make them eligible for software upgrades during the life of the contract.

"During the quarter, we saw broader customer adoption of our licensing programs than we anticipated, as customers recognized the value of entering into long-term licensing agreements for our products" John Connors, chief financial officer at Microsoft, said in the statement.

The fourth fiscal quarter of 2002 was the first to benefit from new long-term contracts from customers who signed up for Microsoft's new licensing program. In that quarter, Microsoft's unearned revenue stood at $7.7 billion.

The company Thursday offered new guidance for the current quarter, which it said could be affected by an "uncertain" global economy. It expects revenue to be between $8.5 billion and $8.6 billion, ahead of analyst consensus estimates of $8.43 billion. Earnings per share will fall short of Wall Street targets of $0.50 per share, as the company said it expects earnings per share to be $0.45 or $0.46.

Shares of Microsoft (MSFT) gained $0.34 in trading on the Nasdaq to close at $50.75 on Thursday, before the earnings release.

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