24 October 2003 Microsoft reported a modest 6% rise in revenues in its fiscal first quarter, but saw deferred revenues fall — a sign of a dip in new sales that the company blamed on difficulties arising from its acquisition of Navision and well-publicised security flaws in the Windows operating system.

In the three months to the end of September, revenues weighed in at $8.22 billion compared to $7.75 billion achieved in the same period a year earlier. However, net income rose substantially, by 28% to $2.61 billion.

Division by division, the picture was mixed. Server operating system sales rose 15% to $1.87 billion, boosted by the spring launch of Windows Server 2003 and the Office applications group, the most lucrative part of the company, increased sales marginally from $2.27 billion to $2.29 billion.

And while losses at the Xbox games console division continue to mount, sales nevertheless increased from $485 million to $581 million.

However, those losses still did not dent Microsoft’s ever-expanding cash reserves, which grew from $49.05 billion to $51.6 billion during the first quarter.

The drop in deferred revenue was particularly mystifying. This figure fell by $768 million to $8.24 billion in the previous quarter. Deferred revenues reflect sales of new corporate licence agreements that are recognised over the life of the contracts.

Microsoft, which is normally very good at managing analysts’ expectations, had forecast a fall of between $200 million and $300 million in deferred revenues.

Chief financial officer John Connors attributed it to a number of factors.

These include the after-effects from its change in licensing policy introduced last year, which helped produce a one-off spike in sales that is now tailing off; disappointing sales of Navision enterprise software for small and medium sized businesses; and organisations deferring operating system upgrades following a series of security scares during the year.