Microsoft's decision to radically change the distribution and maintenance of Windows 10 put a $1.6 billion temporary dent in its revenue, the company said Thursday.
In a filing covering the March quarter, Microsoft pointed to the revenue deferral of Windows 10 -- a relatively new way of accounting for the Redmond, Wash. company -- as a reason for the 6% year-over-year decline in revenue.
"Revenue decreased $1.2 billion or 6%, primarily due to the impact of a net revenue deferral related to Windows 10 of $1.6 billion and an unfavorable foreign currency impact of approximately $838 million or 4%," Microsoft's 10-Q filing with the U.S. Securities & Exchange Commission (SEC) stated.
The $1.6 billion in Windows 10 revenue during the March quarter didn't actually vanish: It was instead deferred and will hit the bottom line over the next two to four years.
Last year, when Microsoft outlined and then released Windows 10, it announced that it had to change how it accounted for sales because of its promise that upgrades and updates for the new operating system would be free.
For accounting purposes, a free upgrade requires a company to set aside some revenue from the sale of the affected software -- in this case, Windows 10 -- then recognize that revenue only when the upgrade is released. All the revenue from the software sale is eventually recorded, but at staggered intervals.
In Windows 10's case, the interval varies between two and four years. Microsoft has never explicitly spelled out what Windows 10 sales are recognized in two years, which in three, and those in four. Instead, the company first said that deferral length would depend on the lifetime of the supported device, then added that "customer type" would determine the lifespan.
Microsoft does financial acrobatics to deal with the deferrals. It continues to record revenue as it has in the past, but then debits the "Corporate and Other" reporting segment by pro-rated amounts over the lifespan of the license. For $300 of revenue over a three-year stretch of Windows 10 Pro, for instance, Microsoft would recognize $100 in Year 1 -- that money returned to the balance sheet in the Corporate and Other group -- and defer the remaining for the second and third years, booking $100 in each. At the end of the three years, the full $300 will have been recognized.
If the deferral debits were eliminated, the company would have announced revenue of $22.1 billion for the quarter, not the $20.5 billion it did.
However, the deferred Windows 10 revenue didn't change the revenue and operating income numbers for the More Personal Computing (MPC) division -- a 2015 creation that includes Windows, Microsoft's Lumia and Surface devices, gaming, and search -- because sales immediately land under the group's line.
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