MS aided by Windows, waits for business revival

CIOL Bureau
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SEATTLE, USA: Microsoft Corp is expected to report a strong jump in quarterly profit on Thursday, helped by the successful launch of Windows 7, but it may not be enough to satisfy demanding investors and push its stock higher.

IBM, Google Inc and Apple Inc have all beaten average Wall Street estimates this quarter, but saw their stocks fall or gain only slightly afterward as investors looked for more indications of strength.

For Microsoft, that could mean showing evidence that companies are starting to -- or getting ready to -- buy personal computers after holding off on technology spending in the turbulent economy.


"I think Microsoft probably did OK, but I want to hear the commentary looking forward on that area," said Kim Caughey, analyst at Fort Pitt Capital Group, which holds Microsoft shares.

The so-called "refresh cycle", where Microsoft's major customers get around to buying new hardware and upgrading software, is "at the very beginning," said Caughey. "The second half of this year -- that's when we'll see a meaningful uptick in businesses buying new hardware."

Wall Street is expecting Microsoft to report profit of 59 cents per share for its fiscal second quarter, up from 41 cents per share a year earlier, and revenue to rise 7 percent to $17.8 billion, according to Thomson Reuters I/B/E/S.


Sales will be boosted by the Windows 7 operating system, which was launched last October, and the one-time deferral of some Windows revenue from last quarter related to Microsoft's free upgrade program.

Data from Thomson Reuters StarMine, which places more weight on recent forecasts by top-rated analysts, is almost identical to the Wall Street average, suggesting a surprise is unlikely.

Except for last quarter, when Microsoft smashed the average EPS estimate by 8 cents, analysts have been quite accurate in predicting its results with average forecasts within 2 cents of the reported number for five of the last six quarters.



Signs of a turnaround in the PC industry are apparent. PC sales rose 15.2 percent in the last quarter of 2009, according to IDC, making up for declines earlier in the year.

Consumers powered the gains, rushing to buy new laptops and netbooks at bargain prices from the likes of Hewlett-Packard Co, Acer Inc and Dell Inc over the holiday season.


The question for Microsoft investors is when commercial PC buyers will follow suit.

"Business spending will take more time to take hold, as commercial entities wait for tangible signs of sustained economic growth before launching a new refresh cycle," IDC said in its cautious forecast earlier this month.

Microsoft is in a good position to capitalize on business spending, when it finally materializes, with a new version of its massively profitable Office suite of applications due out this year, along with new database and server software.


Hopes for that, along with optimism over Windows 7, new technology for the Xbox gaming system, and steady gains by its Bing search engine, have helped push Microsoft's stock up 66 percent in the last 12 months, outstripping the Nasdaq composite index's 48 percent gain.

The question now is how much more upside Microsoft has to deliver. Its stock is now trading around 16 times analysts' estimates for fiscal 2010 profit, compared to the Nasdaq composite index's 16.5 times.