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Will Windows 7 Boost Microsoft Earnings?

Microsoft may deliver a tardy but welcome holiday present when the company reports revenues and earnings for its second quarter of fiscal 2010 on Thursday.

A consensus survey of financial analysts by Thomson Financial found the average figures they believe Microsoft (NASDAQ: MSFT) will report will be earnings per share (EPS) of $0.59 for the quarter, a significant jump from a year ago, when the company brought in EPS of $0.47.

That figure is based on analysts' average revenue predictions of $17.8 billion for the quarter, up from $16.6 billion in the year-ago quarter.

Robust sales of Windows 7 are expected to underline the company's strength, but also sales of Office productivity applications, the company's server business, and healthy Xbox and associate games titles sales are all expected to contribute to Microsoft's bottom line.

This time last year, Microsoft missed analysts' expectations for the second fiscal quarter, leading the company to layoff some 5,000 workers, the first major layoffs in the company's 35-year history.

There is no word as to whether Microsoft will launch another round of layoffs, but there have been no rampant rumors of pending layoffs as there were in advance of last year's personnel cuts.

Several notable events happened since Microsoft last reported quarterly earnings. Chief Financial Officer (CFO) Chris Liddell left the software giant after four-and-a-half years to become CFO of General Motors.

Liddell was able to lop an extra $3 billion in expenses off Microsoft's balance sheet in fiscal 2009, which ended June 30 last year.

However, he also presided over the only period in Microsoft's history when the company's sales and earnings declined.

As of the new year, Liddell was replaced by eight-year company veteran Peter Klein, previously CFO of Microsoft's Business Division, which owns the Office productivity suite.

Besides strong holiday sales of new PCs with Windows 7 and an early uptick in sales to enterprise customers, who are typically slow to adopt new Microsoft systems, the company also had another reason for investors to be optimistic.

In mid-December, Microsoft settled most of its differences with the European Commission (EC) regarding what the EC termed illegal bundling of Internet Explorer with Windows going back to 1996, charges that could have resulted in billions of dollars in penalties for the company had the case not been amicably settled.

The Windows 7 impact

Then there's Windows 7's mojo.

Despite the fact that Windows 7 reached consumer store shelves on October 22, nearly a month after the beginning of the quarter, CEO Steve Ballmer told shareholders at Microsoft's annual meeting in mid-November that Windows sales were doing "fantastic."

Additionally, due at least partly to early availability of Windows 7 to corporate customers during the first fiscal quarter of 2010, which ended September 30, Microsoft announced that it had the highest sales of Windows ever during what is traditionally a slow quarter for the company.

Reports from retail analysts seem to reinforce the idea that Windows 7's momentum continued throughout the second quarter.

NPD Group recently said that boxed operating systems sales during the all important holiday sales season were up 159 percent in terms of revenue over the same quarter last year.

A pair of weak spots in Microsoft's balance sheet, however, continue to bleed red ink.

Despite much attention and billions in development and marketing, the Windows Phone -- previously called Windows Mobile -- is still seen as an "also ran" in competition with Apple's (NASDAQ: AAPL) iPhone and Google's (NASDAQ: GOOG) Android. That may change next month when Microsoft is expected to launch Windows Phone 7 at the Mobile World Congress in Barcelona, Spain.

In addition, Microsoft has said it will lose money for several years from its contract with Yahoo (NASDAQ: YHOO), also signed during the quarter, to supply Yahoo's sites with its Bing search infrastructure in return for part of the sites' advertising revenue. Company CEO Steve Ballmer has said he is willing to invest billions – as much as 5 percent to 10 percent of Microsoft’s operating income – to make its search initiatives successful.

Microsoft plans to announce its sales and earnings Thursday after the financial markets in New York close, followed by a conference call with financial analysts. The call will be webcast.

Stuart J. Johnston is a contributing writer at InternetNews.com, the news service of Internet.com, the network for technology professionals.