Microsoft looks to ease Yahoo, Windows concerns

SEATTLE (Reuters) - Microsoft Corp MSFT.O reports quarterly results this week, looking to ease the concerns of investors about slower growth at its Windows business and prove that its pursuit of Yahoo Inc YHOO.O is not a distraction.

Microsoft runs across a news ticker above a Yahoo sign in New York City May 19, 2008. REUTERS/Joshua Lott

The world’s largest software maker kicks off a crucial three-week period with earnings on Thursday, followed by an annual financial analysts meeting at its Redmond, Washington campus a week later.

Then, Yahoo holds its annual shareholders meeting on August 1, which could determine whether Microsoft will be able to buy all or part of the Internet pioneer.

First and foremost, investors will look for signs in Microsoft’s results that corporate customers and consumers are upgrading to its new Windows Vista operating system. A weak U.S. economy and a poor reception for Vista has raised fears adoption may be weak.

Analysts forecast Microsoft would report fiscal fourth- quarter earnings of 47 cents a share on a 17 percent rise in revenue to $15.6 billion, according to Reuters Estimates.

Last quarter, revenue at the Windows division, which accounts for more than half of the company’s profit, were lower than expected due to an inventory build-up of computers and a lack of progress in the battle against piracy.

“What happened last quarter in the (Windows) client division was something that might persist,” said Sid Parakh, an analyst at McAdams Wright Ragen. “That’s what everybody is still concerned about.”

Another concern is that large organizations will postpone upgrades to Vista, opting to wait for the next version of Windows code-named “Windows 7.” Microsoft is targeting a 2010 debut for “Windows 7.”

In a survey of chief investment officers conducted by Goldman Sachs, 43 percent said Vista deployment is likely to be delayed if technology budgets tighten in the second half of 2008. It was the highest percentage of all software projects.

Investors will also be probing Microsoft’s updated forecasts for fiscal 2009 and estimates for its current quarter as an indicator of technology spending.

In late April, the company forecast fiscal 2009 earnings in a range between $2.13 and $2.19 per share on revenue of $66.9 billion to $68 billion. Analysts expect the results to be in the middle of the range, with EPS of $2.16 on revenue of $67.3 billion.

For the current quarter, analysts on average forecast the company will earn 49 cents per share on revenue of $15.1 billion, according to Reuters Estimates.


Analysts are expected to grill Microsoft executives about the company’s on-again, off-again pursuit of Yahoo and alternative options to turn around its online service business, which has posted seven straight quarters of losses.

The negotiations between the two companies have turned ugly and Microsoft is now teaming up with investor Carl Icahn, who wants to oust Yahoo Chief Executive Jerry Yang and replace the Web company’s board with a group of directors more open to a deal with Microsoft.

“These things can be distracting. I just worry that Microsoft’s taking its eye off the ball to try to replicate what Google has put together on the Internet search side and its Web advertising model,” said Todd Lowenstein, co-portfolio manager at HighMark Capital Management’s Value Momentum Fund.

“I can’t say we’re all that crazy about it buying into Yahoo. It’s not our favorite use of capital.”

Microsoft shares have fallen about 20 percent since it went public with its unsolicited offer to buy Yahoo. By comparison, the S&P 500 has declined about 12 percent and the Nasdaq is down about 8 percent during that period.

The pullback on Microsoft shares is overdone, said Lowenstein, who manages 444,000 Microsoft shares in his fund, if you consider the amount of cash generated by the company, its debt-free balance sheet and competitive businesses.

“There’s a lot at the company that people don’t give them enough credit for,” said Lowenstein.

The stock is now trading at 13 times estimated 2008 earnings compared with an average price-to-earnings ratio of around 20 for software companies.

Microsoft’s other businesses continue to hum along.

The Office division is attracting customers to its SharePoint collaboration software, while rolling out new products that allow companies to pay a monthly subscription to have Microsoft run its e-mail and other software programs.

The server and tools division rolled out a new version of Windows for computer servers with a new Hyper-V virtualization feature that allows customers to save money by running powerful computers more efficiently. It is an area where Microsoft has lagged behind VMware Inc VMW.N.

The entertainment and device division announced a price cut to its Xbox 360 game console and introduced a new model with a larger hard drive ahead of this week’s E3 video game industry trade show.

Editing by Andre Grenon