The company expects to lose the cash, as one third of businesses currently under Upgrade Advantage (UA) contracts, which are set to expire during the next three months, do not renew their contracts under the newer Software Assurance (SA) program.

Chief Financial Officer (CFO) John Connors said yesterday non-renewals are tracking towards the higher end of predictions he made earlier this year – in March, Connors predicted between 10% and 30% of UA customers would not renew their contracts.

Connors was updating Wall Street analysts on the state of license renewals, whilst announcing results from Microsoft’s fourth quarter and fiscal 2004.

Customers who renewed UA two years ago, as SA was phased in, appear to have done so simply to obtain a one-off upgrade rather than enter into a long-term relationship with Microsoft via SA – an unpopular program, which has proved more expensive for customers according to analyst Jupiter Research.

Connors expects defectors will stick to buying licensed versions of products instead of subscribing to upgrade-based programs. Most were license only purchasers – we expect them to buy this way in future, Connors told analysts. Business units at Microsoft likely to be most impacted are information worker and server and tools.

The failure of nearly a third to renew stands in stark contrast to Microsoft’s older Enterprise Agreement (EA) program, whose renewal rates run between 60% and 70%.

It was the black spot on an otherwise great fourth quarter and terrific year, according to Connors, that saw both revenue and income increase for the company. For the three months to June 30, income almost doubled by 81.3% to $2.6bn on revenue that increased 15% to $9.2bn. Income per diluted share was up $0.25 from $0.14.

For the year, income grew 8.4% to $8.1bn on revenue that grew 14.4% to $36.8bn with income per diluted share growing six cents to $0.75. Looking ahead, Microsoft set the bar high on performance during the new fiscal year, aiming for revenue between $38.4bn and $38.8bn. The company expects to achieve at last part of this through a $5bn reduction in costs.