Questions Linger Despite Microsoft's Strong Results

Updated from 9:47 a.m. EST

Analysts remained upbeat about Microsoft Friday, saying stronger-than-expected 19% revenue growth in the fiscal second quarter should outweigh a disappointing decline in deferred revenue, as reported by the software behemoth after the close Thursday.

Similarly, after digesting the numbers a little more -- particularly the larger-than-expected $395 million drop in deferred revenue -- investors seemed to be more encouraged by the results. After declining in after-hours trading Thursday, Microsoft shares rebounded Friday, climbing recently 73 cents, or 2.5%, at $28.74.

"Taken collectively, the true picture of what is happening with Microsoft's unearned revenue is perhaps less troublesome than most think," Deutsche Bank analyst Brian Skiba wrote in a note Friday. A near- to mid-term drag on the stock should be a buying opportunity for long-term investors, said Skiba, who has a buy rating on Microsoft. (His firm has not done banking with Microsoft.)

Piper Jaffray analyst Gene Munster agreed investors should ignore any Street frustration with the decline in deferred revenue. By his calculations, Microsoft's sales bookings increased 18.4% year over year, only modestly shy of 19.5% growth needed to hit the general consensus estimate for deferred revenue.

Multi-year subscription sales to large enterprises remain robust, added Sanford C. Bernstein analyst Charlie Di Bona. Rather, it's in the small business market where they are weaker, resulting in the decline in deferred revenue. However, he believes that market is instead buying standard licenses. That would explain upside to the topline on the income statement. Di Bona has a buy rating on Microsoft and his firm's parent company, Alliance Capital, holds Microsoft shares.

"It's not because the [subscription] model stinks," Di Bona said. Rather, for various reasons, small businesses likely prefer to buy software as they needed it rather than as a multi-year subscription.

Di Bona's comments echoed the explanation offered by Microsoft management Thursday in a post-close conference call Thursday. "We are very pleased with our first $10 billion quarter," CFO John Connors said on the call. "We feel good about where we ended the quarter on unearned" revenue.

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