Strong PC demand seen pushing Microsoft sales up

Reed Stevenson

SEATTLE: Strong personal computer shipments in the latest quarter are expected to fuel brisk revenue growth at Microsoft Corp. as the world's largest software maker heads into a year of big product launches.

After delays, Microsoft will release in early November a new version of its database software for corporations, followed by the launch of its next-generation Xbox 360 video game machine on Nov. 22. In the second half of next year, Microsoft has promised to launch new versions of Windows and Office, its main cash cows.

The main concern among investors, however, is whether Microsoft can turn its upcoming products into a growth story that helps its shares break out of a range between $24 and $30 in the past year.

Microsoft is currently trading at 19 times estimated fiscal 2006 earnings, while its peers in the Goldman Sachs software index, on average, trade at a price-earnings multiple of 26.

Despite some initial concern that demand could cool ahead of the launch of new products, analysts said the 17 percent growth in PC shipments reported by technology researcher IDC in the quarter ended September are a strong indication Microsoft's sales and profit will jump from a year earlier.

Sales of laptops, desktop computers and servers used for corporate networks were strong, defying initial expectations of cooling sales ahead of the launch of a new Windows version, which Microsoft is calling Windows Vista.

"Looking at server sales and continued strength in particular on the PC side, it should be a pretty solid quarter with that kind of backdrop," said Alan Davis, an analyst at McAdama Wright Ragen.

Analysts, on average, are expecting Microsoft to post a quarterly profit of 30 cents per share, up from 27 cents a year earlier, according to forecasts compiled by Reuters Estimates.

Quarterly revenue, on average, is expected to rise 6.6 percent to $9.8 billion.

Microsoft is expected to take a charge for its recent $761 million antitrust settlement with RealNetworks Inc., its longtime rival in the media software space, but analysts said an expected settlement had largely been factored into the Microsoft's earnings outlook.

The main issue concerning investors is Microsoft's dividend policy and whether the Redmond, Washington-based company can do anything to drive its share price higher.

"We expect some investors to look for clarity on what Microsoft's dividend plan looks like going forward," said Sanford C. Bernstein & Co. analyst Charles Di Bona.

Di Bona said, however, he does not expect Microsoft to say anything during the call, although the issue may be addressed at Microsoft's annual shareholder's meeting on Nov. 9.

Microsoft's stock closed at $25.11 on Wednesday, up 0.32 percent, but down 10 percent from a year earlier.