Microsoft’s Annuity Problem

Microsoft’s quarterly financial results tonight seemingly have many investors in a tizzy. It has nothing to do with the higher-than-expected equity compensation costs, however. Those are shuffling of costs from one period to another, and it isn’t all that important in the great scheme of things.

The bigger issue for Microsoft is the shrinkage in its deferred revenue balance sheet line. In essence, the number reflects revenues Microsoft has earned from selling its software as a large, ongoing license to Fortune 1000 organizations. But to smooth out its revenues it generally doesn’t recognize all that revenue at once, even though it often knows how long the license payments will run. Instead, it recognizes the revenue gradually over the course of the license deal.

There is nothing wrong with the preceding, of course. But you do need to watch the number closely as a sign of licensing health.

And, wouldn’t you know it? Deferred revenue declined about $395 million in the current quarter. It is the second quarter in a row that the deferred revenue figure has fallen more than people expected. While it’s no disaster, it doesn’t exactly give you a warm and fuzzy feeling about Microsoft’s current ability to close large, multiyear software licensing contracts.


  1. Wonder is this Licensing 6.0 coming back to bite them in the rear. Can’t imagine companies being told they will need to upgrade, whether they like it or not, going over very well.