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Office Tardiness Won't Hurt Mister Softee Much

Microsoft's licensing system means Office's delay won't have a serious effect on revenue.

Microsoft

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on Tuesday announced that the next version of its core Office product will hit store shelves in October, months later than a previously planned summer launch.

But the delay should have little impact on the software behemoth's financials, because its new subscription-based licensing model means customers have already paid for such updates, according to one analyst.

In a press release Tuesday, Redmond, Wash.-based Microsoft said the products in the Microsoft Office System, including Word and Excel, will be broadly available to retail customers in the U.S. and Canada on Oct. 21. Some computer manufacturers are expected to begin shipping machines with Office 2003 by the end of September. And on Sept. 1, the products will be on the price list for so-called volume licensing customers, who are paying Microsoft a subscription fee to use its software and receive regular updates.

In fiscal year 2003, which ended in June, Microsoft reported that revenue from its Information Worker segment, which includes Office, totaled $9.23 billion, up 12% from the previous year. Information Worker revenue accounted for 28.7% of the company's sales in fiscal year 2003.

But a large portion of that revenue comes from customers who have paid a subscription to use Microsoft software and receive regular updates -- a payment system the company required customers to switch to last summer in order to receive new versions of software. Under that model, Microsoft records the sale as unearned revenue and then recognizes a portion of it each quarter over the course of the contract.

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Microsoft has said the model should make its revenue streams far more predictable. Critics, however, have charged the company switched to it because so many customers were using old versions of its software rather than opting to shell out more cash every time the company issued an update.

Because Microsoft is now using that payment model, the delay in the Office launch will not have a large impact on quarterly results, said Kim Caughey, a research analyst with Parker/Hunter in Pittsburgh. "We haven't been forecasting that this was going to do very much to revenues in any one quarter," she said. "The users of the software, quite frankly, are probably on some kind of license agreement."

Microsoft has to keep innovating to keep customers happy, she said, but its new licensing model takes the pressure off to meet deadlines.

"I'm not alarmed. I'm actually kind of glad to see this change," she said. "I think they're putting more emphasis on quality as opposed to hitting a target date." Caughey has a buy rating on the stock, and her firm doesn't do investment banking business.

Caughey acknowledged that some companies that are not paying Microsoft a license to receive updates under its new model will go and buy the software. But overall, she said, there are no swashbuckling new features that will make an IT manager wait in line overnight for it.

The one feature Caughey likes is the ability to connect Excel to a database to import financial information more easily, eliminating the need to manually enter it. In addition, Microsoft said it has redesigned Outlook to allow people to better organize their mountains of email and to help them filter out spam.

The new version of Office will cost the same as the prior version, Office XP. That means Microsoft Office for students and teachers will run $149; standard edition will cost $399; and the professional edition will cost $499. Prices for stand-alone programs also will remain unchanged, with Office, Excel and Access and PowerPoint each running $229 and Outlook costing $109.

Shares of Microsoft rose 90 cents, or 3.5%, to $26.60 in recent trading.