January 22, 2008 / 8:01 PM / 12 years ago

Microsoft expected to post sharp profit rise

SEATTLE (Reuters) - Microsoft is expected to report a sharp rise in quarterly profit this week, boosted by surging revenue as strong computer sales drive demand for its Windows operating system and Office software.

Microsoft Chairman Bill Gates speaks at a keynote address at the Consumer Electronics Show (CES) in Las Vegas, Nevada, January 6, 2008. REUTERS/Rick Wilking

Investors will also look at its full-year outlook to see if the world’s largest software maker can maintain momentum from a strong first quarter in the face of growing concerns over the U.S. economy. Microsoft reports fiscal second-quarter results on Thursday.

Economic concerns and stock market declines have erased the share price gains that followed its first-quarter results, but analysts said personal computer sales figures last week suggest any economic softness did not weigh on year-end demand.

“We’re looking for Microsoft to continue to have positive results. Last quarter was one of the best we’ve seen from it in a very long time and we think the company is certainly headed in the right direction,” said Andy Miedler, technology analyst at Edward Jones.

Analysts, on average, forecast Microsoft to post a 66 percent rise in quarterly net profit to $4.35 billion, or 46 cents per share, on a 27 percent increase in revenue to $15.93 billion, according to Reuters Estimates.

Those growth rates are exaggerated by the results in the year-ago period, when Microsoft deferred more than $1 billion in net income due to delays in releasing Windows Vista and Office 2007, which hit stores in early 2007.

Last week, research firm IDC said global PC sales rose 15.5 percent in the October-to-December period, while rival firm Gartner put worldwide computer sales growth at 13.1 percent.

“We believe that the strength of PC shipments this quarter portends well for Microsoft’s (Windows) Client division and should give at least some boost to the results,” Bernstein Research analyst Charles Di Bona wrote in a note to clients.

Windows, which sits on more than 90 percent of the world’s PCs, was the main catalyst behind Microsoft exceeding 20 percent in revenue and profit growth in its first quarter. It was aided by strong PC sales, but the company also sold pricier versions of Windows and made progress in reducing piracy.

Office 2007 sales are also expected to rise in the strong PC market, while growing demand from corporate customers for products like its SharePoint collaboration software should spur revenue growth at its business division.


Investors will also watch Microsoft’s results as an indication of the outlook for technology. So far, results from tech bellwethers have painted a mixed picture.

Chip maker Intel Corp spooked investors with a disappointing forecast last week, while International Business Machines Corp provided some reassurance with a 2008 outlook that blew past Wall Street’s expectations.

Microsoft has long argued its products are less sensitive to swings in technology spending because they account for a small, but essential, portion of overall technology spending by corporate customers.

Goldman Sachs added Microsoft to its Americas “Conviction Buy” list last week with analyst Sarah Friar writing that Microsoft is a good defensive stock in a tough economy.

She noted Microsoft should benefit from new server software releases in February and the upcoming availability of Vista’s first major update, Service Pack 1. Historically large organizations have waited for the release of SP1 to upgrade operating systems.

Wall Street will also look for signs of improvement from Microsoft’s online services arm. The just-ended quarter was the first since the company absorbed digital advertising firm aQuantive after last year’s $6 billion acquisition.

Microsoft has clinched several Web ad syndication deals in recent months such as a five-year deal with media conglomerate Viacom Inc. Yet it has failed to take Web search market share from Google Inc and Yahoo Inc.

Microsoft’s entertainment and devices division has already said it had a strong quarter. The company said it sold 4.3 million Xbox 360 consoles in the last three months of 2007, while sales of “Halo 3,” a popular shooting game exclusive to the Xbox released in late September, hit 8.1 million units.

Editing by Braden Reddall

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