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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: miraje who wrote (5229)	2/24/1998 5:32:00 PM
From: X-Ray Man	Read Replies (1) \| Respond to of 74651

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.