Analysts: Microsoft Profits Likely Down Again

Microsoft will announce third fiscal quarter for 2009 revenues and earnings after the close of trading on Thursday, and it goes without saying that many investors and other observers are watching those numbers anxiously.

Will Microsoft (NASDAQ: MSFT) demonstrate the same kind of weakness that some of its competitors and partners have, or will it join a handful of companies such as Intel (NASDAQ: INTC) by buoying the tech economy with signs of improvement?

The best indicator may be last quarter’s numbers, which left the company still profitable but with declining revenues in key areas.

Last quarter, Microsoft posted a two percent increase in revenues over the same quarter last year but an eight percent decline in net income. Whether there will be much, if any, improvement remains to be seen. Certainly, corporate IT capital budgets are still suffering from the continuing impact of the recession.

In fact, the decline in revenue and earning last quarter prompted Microsoft CFO Chris Liddell to not provide any financial guidance for the rest of the fiscal year during the conference call with financial analysts last quarter – something Microsoft does not usually do Whether he will be more open this time around remains to be seen.

Layoffs or Not?

One outstanding question officials will face is whether Microsoft will announce further layoffs above and beyond the 5,000 personnel cuts the company announced last quarter. Microsoft officials are expected to at least give an update on that process.

Among the other uncertainties likely on investors’ minds are Microsoft’s continued flirtations with Yahoo for some sort of search and advertising deal, Oracle’s plans to purchase Sun Microsystems and how that might affect Microsoft’s SQL Server business, as well as the European Commission’s (EC) pending antitrust actions against the company for bundling Internet Explorer with Windows. In fact, Microsoft will present its reply to the EC’s allegations next week on the 28th.

Indeed, Sid Parakh, analyst at Seattle-based McAdams, Wright, Ragen was quoted as saying multiple sources had told the firm there may be more layoffs.

“Over the last week, we have heard from multiple sources that Microsoft may engage in additional restructuring activities in the near-term,” Parakh was quoted to have said in a note to clients. The note was reported in a post on the TechFlash blog, a branch of the Seattle-based Puget Sound Business Journal. A call to Parakh was not returned by press time.

While it won’t yield any cost savings, revenue, or earnings to the fiscal year’s results, Windows 7 will also loom large in investors’ minds, if only in a psychological sense.

“I think Windows 7 is really going to work for them [Microsoft],” Roger Kay, president of Endpoint Technologies, told “I think people are going to be relieved to see it,” he added.

Although delivery of the new version is not expected until at least the very end of Microsoft’s fiscal year or, more likely, in the first or second quarters of fiscal 2010, which starts July 1, assurances that Windows 7 is near may help stabilize the tech sector.

Some observers even entertain the hope that Microsoft on Thursday will actually announce an early ship date for Windows 7, although the company has only said it will be available by the end of January 2010.

( reported last year that Microsoft was aiming for a June delivery to manufacturing.)

(Next page: Netbook love and hate.

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Netbook Love and Hate

Microsoft executives are also likely to discuss another topic on investors’ minds – the surging popularity of so-called netbooks, low-cost, stripped down mini-laptops for light duty computing, Web surfing, and e-mail. The good news is that the market, which Microsoft dominates in the operating system area with its expiring Windows XP, is rapidly expanding.

The bad news is that PC makers pay less than a third for XP on netbooks than they do for Windows Vista – and presumably, Windows 7 when it ships.

According to a recent Wall Street Journal story, Microsoft gets a mere $15 or less per unit of XP sold on netbooks, while it gets as much as $50 or $60 per unit for Vista. So, for example, last quarter saw an eight percent decline in net income for client operating systems. Officials said that lower royalties for XP contributed to the decline in client revenues in January.

Company spokespersons have said that, while all Windows 7 editions will run comfortably on netbooks, it is positioning Starter and Home Premium as the two it will market for use on them. Microsoft does not disclose the royalty rates it charges to customers.

Show Me the Money

Microsoft also recently delivered Internet Explorer 8 (IE8), which is free but is the first upgrade to its dominant browser since late 2006. Some analysts believe IE8 will help Microsoft regain some of the browsing market that it ceded, primarily to Firefox, in the meantime.

Expected to be in the “holding the bottom line” category, Microsoft Office and the company’s server business, including SQL Server and SharePoint – both billion dollar businesses in their own right — are likely to be bright spots on the quarter’s balance sheet.

Another outstanding question for investors will likely be how Microsoft’s “annuity” programs – long-term contracts like its Enterprise Agreements, that promise to deliver new releases of software to customers over a period of time. Corporate IT budgets have been hit hard by the recession and many have said they are cutting back on spending and making due with less.

Liddell is also likely to present information on how Microsoft’s Entertainment and Devices business unit is doing. Last quarter, it was up three percent, largely on the strength of Xbox 360 gaming consoles and games to run on them during the 2008 holiday sales season.

Microsoft’s numbers will be released following the close of trading on Thursday, with a conference call with financial analysts at 2:30 p.m PDT. That call will be webcast. Analysts are predicting Microsoft will announce $14.1 billion in revenues compared to $14.45 billion for the same quarter in 2008. Average earnings per share are predicted to be $0.39 versus $0.47 for this quarter last year.

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