January 28, 2004 2:30 PM PST

Microsoft sees sales hurdles ahead

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January 22, 2004
Microsoft sounded a cautionary note with financial analysts on Wednesday, warning that it faces challenges to keep growing its sales at the same rate it has in recent years.

In a presentation with financial analysts in New York, Microsoft Chief Financial Officer John Connors said that revenue growth in the next fiscal year will likely not match that of recent years. However, Connors said that an increased focus on costs should enable the company to increase its profits beyond the rate at which sales grow.

"We do see IT spending increasing somewhat. However, we don't expect it to be what it was in the '90s," Connors said.

The company also faces a further drop in its closely watched balance of "unearned revenue"--that is, money taken in for software provided over several years as part of a licensing agreement. Microsoft reported a higher-than-expected dip in such revenue--for the second quarter in a row--when it posted earnings last week.

The software giant is largely blaming the dip on the ending of one of its volume licensing programs, known as Upgrade Assurance. That program accounted for $1.1 billion of the $9 billion in unearned revenue that the company had on its books at the start of its current fiscal year. However, nearly all that amount will be booked as revenue over the current year.

"We have a $1.1 billion hole from Upgrade Advantage," Connors said, noting that while some of those customers will move to some other type of long-term licensing plan, it won't be the two-thirds to three-quarters of customers that typically renew their long-term deals.

"If it were 10 (percent) we'd be disappointed," Connors said. "If it were higher than 30 (percent) we'd be very surprised."

But without the dip, along with the impact of an accounting change, Connors said that Microsoft's licensing business is growing at a rate of about 7 percent a year.

Overall, Microsoft said it expects to continue to see a boost from rising PC sales as well as a rebound in overall technology spending.

"We're starting to see, I think, the early stages of improved IT spending," Connors said. However, he noted that spending is not increasing as quickly as overall corporate profits.

"There's a bit of a hesitation in terms of business spending generally and IT specifically," he said. "The profit improvement is better than the budget improvement."

However, Microsoft expects to continue to grab its share of tech spending. "We should perform well if unit sales go up in PCs and servers," Connors said. "There is nothing on the horizon that tells us we are going to lose share."

Although Microsoft is keeping a close eye on costs, the company has been growing its infrastructure in its government sales unit, as it tries to head off Linux. Connors said the company has hired 350 people to help sell to the public sector.

He also addressed concerns that Microsoft faces a challenge given that the next version of Windows, code-named Longhorn, is not due for several years.

"We've got a lot of product to sell between now and Longhorn," Connors said. "We feel like we've got a good product lineup. We've got to get out and sell that product lineup."

 

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