Actually, the deferred earnings is a required bookkeeping method
for large software firms. The idea is that much of the expense
for software where there are large numbers sold is NOT in the R&D
but in the subsequent support. Since these expenses will appear
1-3 years AFTER the revenue is generated, it is reasonable to
defer part of this revenue or else to pre-expense the support
costs. MSFT does the former. If support costs are low, this
will eventually show up as revenue in future quarters. If the
revenues are growing quickly, then these revenues when they appear
later do not add a large portion to total revenues. When growth
slows down, these revenues will stabilize so that they are appearing
as the defer, with no net sum gain. If these revenues were not
deferred, and there were a reduction in revenue, then the company
could go bankrupt servicing existing customers (hence the practice).
Thus, while it is true that there is a better revenue stream than
reported revenues suggest, it is also true that most people overstate
their importance in valuation, since they also do not expense future
support costs. Hence, I don't feel these future revenues change
my analysis much, except that it allows MSFT to smooth out the
wrinkles quarter-to-quarter, SO LONG AS REVENUES CONTINUE TO GROW.
If they ever fall, they are not allowed to "undefer" or not defer
revenues by this accounting system, so that it will have a negative
short term affect on valuation.
Well, JMO, and I am not an accountant, just a physicist. |
