Ronna Abramson
Analysts have expressed concern that a dearth of new products in coming years and competition from Linux are discouraging business customers from renewing their subscriptions.
On the conference call, Connors suggested that fewer-than-expected small and mid-sized businesses are buying subscriptions, which entitles them upgrades at no extra cost over the life of the contract. Instead, they're buying with one-time traditional software license purchases, in which Microsoft recognizes the revenue upfront on its income statement. Principle's Sansoterra said Connors' explanation for the deferred revenue decline makes sense, though he suspects some companies are simply staying clear of buying any software, whether its as a subscription or traditional license. "It wouldn't surprise me if it's just fewer customers signing up for maintenance [subscriptions] in general," he said. "It's expensive." Microsoft expects unearned revenue to take another dip in the March quarter but then return to its current level by the end of the June quarter. On the other hand, Microsoft reported impressive growth in its Client, Information Worker and Server and Tools segments, which all posted growth in excess of 20%. Driven in part by a new release of its Office applications in the fall, Microsoft's Information Worker segment posted 27% growth year-over-year. Microsoft's Client segment, largely made up of Windows operating system sales, grew 20.7% year over year. And the company's server and tools business grew 21%, higher than some estimates. Microsoft's MSN division grew 19% over last year. The company's Business Solutions division targeting small- and medium-sized businesses posted sales growth of nearly 41%. Sales of Xbox, which generates the highest revenue in the December quarter, declined year over year, largely because of tough comparisons to strong PC game sales last year, according to Chief Xbox Officer Robbie Bach. Microsoft has sold more than 13.7 million consoles and said it is on track to meeting its goal of selling between 14.5 million and 16 million Xboxes by the end of its fiscal year in June. The company's gigantic cash horde reached $52.8 billion, with $4.6 billion in net cash generated from operations during the second quarter.
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