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Can Microsoft Do It Again?

Thursday, 24 Apr 2008 | 1:25 PM ET
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The last couple of quarters have been remarkably strong for Microsoft, and there's every indication that the company will post an equally strong third quarter earnings report after the bell on Thursday.

Market research from both Gartner and IDC suggest that personal computer sales globally have come in far stronger than expected during the first calendar quarter of 2008. Couple that with good news from Intel last week and you get the idea.

Trouble is, despite Microsoft shares off 20 percent during the first quarter -- along with the rest of the market -- its stock has been on a tear these last three weeks, as investors get very optimistic about where this company is headed.

Look at that! Two straight paragraphs and not a mention yet of Yahoo! Well, here it is: Microsoft's deadline to go totally hostile in its $42 billion offer for Yahoo is Saturday. Microsoft CEO Steve Ballmer earlier this week was on the wires saying he wouldn't budge on his $31 price; today the New York Post reports that Ballmer might raise the price after all, if Yahoo is willing to negotiate.

(Not sure Microsoft needs to raise its price, already a 62 percent premium, but I suppose we'll see. It's certainly a topic that will come up on the conference call.)

Let's get to specifics: first of all, there was lots of speculation that Yahoo would window-dress itself to look all the more attractive, and worth even more when it reported earnings the other day, to encourage Microsoft to raise its bid. There's some thinking on the Street that Microsoft may do the same thing, to boost its share price with a good earnings report of its own -- which would raise its offer for Yahoo, since half the deal is made up of Microsoft shares.

Analysts expect 44 cents on about $14.49 billion in revenue for its third fiscal quarter. For the company's fourth quarter, the Street is looking for 48 cents on $15.5 billion.

Brendan Barnicle at Pacific Crest Securities thinks the company will do a little better, anticipating guidance of 50 cents on just shy of $16 billion. For the full year, the Street's at $2.10 and $66.5 billion, with Barnicle expecting $2.17 and $67.6 billion.

The experts will also be looking carefully at the company's business segment revenue: Client revenue should be flat with the December quarter's $4.3 billion; same with Server and Tools at $3.28 billion. Online services and gaming should reach about $900 million; Microsoft's Business Division should see a slight quarter-to-quarter increase to $4.88 billion; while the Entertainment and Devices Division should post $1.24 billion.

That last category should be down markedly from the last quarter, but that's because holiday shopping was huge for Xbox 360. Still, that $1.24 billion is substantially higher than earlier projections that hovered around $900 million or so, despite news that the device was in short supply during the company's fiscal third quarter.

Ballmer has been making headlines all week, and not just with Yahoo.

On Thursday, there are reports that Microsoft would consider keeping its older Windows XP operating system in its product mix, even though it was destined for the scrap heap come June 30 as the company continues to try to move the market to Vista.

But with so much criticism, and so many enterprise customers trying to keep XP, there's been a movement on line to try to save XP. Ballmer says all the company's market research suggests customers want to migrate to Vista, but if the company senses a change in that trend, it would consider keeping XP. Talk about a mea culpa.

Meantime, Microsoft has blown through expectations in each of the last two straight quarters. There's every indication that the company should beat expectations this time around. It will all come down to guidance, and the macro-economic conditions the company is tracking.

That, along with commentary on Yahoo, should make the conference call some very good theater indeed.

Questions? Comments? TechCheck@cnbc.com

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