SEATTLE (Reuters) - A year ago, Microsoft Corp blew away Wall Street’s earnings forecasts with blistering sales of its new Windows 7 operating system and trumpeted optimism about the recovery in tech spending.
This week, with its stock trading slightly lower than a year ago, the world’s largest software company is set to report lower profit as PC sales growth fizzles, and it struggles to convince investors that it can grab a foothold in the fast-moving mobile and tablet markets.
“Microsoft is still a juggernaut in the PC business, Windows-based machines are still selling over 300 million a year,” said Tim Bajarin, president of tech research firm Creative Strategies.
“But they missed the smartphone revolution, and even though they were the first to really push the tablet, Apple basically redesigned it and left Microsoft in the dust.”
Most investors expect a solid quarter for the company, but are more focused on fears that Microsoft’s new Windows phone software isn’t selling well. And while approving of a recent decision to make a version of Windows for ARM chips, the market realizes that means there won’t be a Windows-based challenger to Apple Inc’s iPad for at least two years.
“I wish they did this (the switch to ARM) two years ago, it’s something they should have thought of,” said Sid Parakh, analyst at McAdams Wright Ragen. “But it is a long game. The question becomes: Is the iPad a cannibalization of Microsoft’s existing products, or an added component of consumer electronics spending? I’m sure it’s a mix of both.”
PC sales, the surest guide to Microsoft’s overall health, rose only 3.1 percent in the last three months of last year, according to research firm Gartner. The year as a whole didn’t match early optimism, with PC sales rising 13.8 percent, well below Gartner’s summer forecast of 19.2 percent.
The good news for Microsoft is that business customers — the core market for its software — are buying new computers more readily than cash-strapped consumers, who are holding off on purchases or buying iPads instead.
The resilience of business customers helped tech bellwethers IBM and Intel Corp post positive results and outlooks over the past two weeks, helping their stocks higher.
But the market likely will demand more from Microsoft.
“We’re investors, we have short memories,” said Kim Caughey Forrest, senior analyst at Fort Pitt Capital. “We need a lot of reassurance.”
Microsoft is expected to report profit of 68 cents per share, according to Thomson Reuters I/B/E/S, lower than the 74 cents it reported a year ago.
Sales of Windows 7 are still going strong, but likely won’t match the year-ago figure, which was boosted by a one-time deferral of revenue from pre-sales of the operating system.
Overall sales are expected to inch up to $19.2 billion from $19 billion a year ago, helped by the unexpectedly strong sales of the Kinect hands-free gaming system, which sold 8 million units over the holiday shopping season, above Microsoft’s own target of 5 million.
However, given the generally lower profit margins on hardware as opposed to software, the Kinect sales are not expected to trigger a spike in profit.
One uncomfortable fact for Microsoft: unless it posts blowout numbers, it will have lower quarterly profit than Apple for the first time in recent memory. The last time Apple produced more profit in a year than Microsoft was 1990.
Last week, Apple announced a record $6 billion quarterly profit on strong-selling iPhones and iPads over the holiday shopping season. Analysts expect Microsoft to post profit of $5.93 billion for the same quarter. Two years ago, Microsoft’s profit was almost double Apple’s.
It could be a painful moment for Microsoft, which effectively saved Apple from extinction with a $150 million investment in 1997.
“It’s psychological,” said Parakh. “There’s no doubt Apple has momentum, they’ve built great products that people want to buy. It’s another indication of the challenges facing Microsoft.”
Apple roared past Microsoft in market value last May, and overtook it in terms of revenue in the quarter ended last September. Apple now has a market value of $311 billion — second only to oil giant Exxon Mobil Corp in the Standard & Poor’s 500 index — and well ahead of Microsoft’s $243 billion.
If the company does not impress Wall Street this quarter, or show it has a realistic plan for growth, questions will be asked about the leadership of Steve Ballmer, now in his 12th year as chief executive.
A string of high-level departures has raised concerns about his efforts to revitalize the company.
Ballmer “is always on thin ice,” said Forrest at Fort Pitt Capital. “Microsoft is a results-driven company.”
Reporting by Bill Rigby; Editing by Bernard Orr