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Microsoft Has Its Work Cut Out for It

Microsoft

Microsoft Sign
Robert Scoble
Microsoft Sign

has a tough job ahead of it today as the company prepares to report its fiscal third quarter: On the one hand, the stodgy Titanic of American enterprise is sickeningly predictable, which is good in economic times like these; but it's also bad news for investors hoping for some kind of break-out nugget of news that actually ignites these shares again.

Wall Street is looking for 39 cents a share on $14.1 billion in revenue. On a business segment basis, analysts expect Microsoft to report $3.45 billion in revenue for its Client business; the same for the company's Server unit; the Online Services division should post $832 million; the Business Division should come in at $4.7 billion; and Entertainment and Devices should report $1.47 billion.

Microsoft has already indicated that it won't be offering any guidance, which is a constant source of frustration for analysts I'm talking to this morning. Investors are forced to read the tea leaves from the likes of Gartner and IDC, both of which released PC sales figures last week that appeared to be better than expected, and Microsoft shares popped a bit on the optimism. Not to mention the ongoing, and increasing popularity of so-called netbooks, that carry lower average selling prices, or ASP's, but make up for that with soaring volume.

Investors also have been using IBM's earnings as a kind of proxy for Microsoft's Server division performance. IBM suffered a 32 percent decline in its x86 Server business in the December quarter when Microsoft's Server unit jumped 14 percent; in the current quarter, IBM's Server business declined 27 percent but Pacific Crest Securities analyst Brendan Barnicle anticipates a 4 percent increase in Microsoft's Server unit.

There are a few wildcards in today's report with analysts expecting an update on Microsoft's ambitious cost-cutting moves, which included the company's first-ever layoffs of 5,000 full-time, and another 5,000 contract, workers, cutbacks in overtime spending, travel costs, a reduction in foreign worker hiring and the postponement of a $500 million data center construction in Iowa. An update on those cost-reductions and what they've contributed to the company's margins and bottom line will come up on the call. Also, Microsoft announced plans to embark on a new retail store strategy, ala Apple Inc. , hiring a former Walmart executive to shepherd the project. Any update there would be useful, too.

And while CEO Steve Ballmer typically isn't on the company's conference call, that doesn't mean Microsoft won't be asked about any new developments associated with its ongoing talks with Yahoo ,though I'm not anticipating anything material on that front tonight.

So that brings us to any developments and release schedule of the Windows 7 operating system. Various reports now have the finished OS going to manufacturers by July, which would be sooner than expected, with Collins Stewart telling clients that the software could add $3 billion to the company's top line over the next year to 18 months.

Pacific Crest's Barnicle tells me that Microsoft is a constant source of frustration as far as stock price performance is concerned: "I'm still buying. But I've had my head in a vice for a decade recommending this thing. It's just been such a thankless stock. It's been so frustrating."

He tells me that expectations are "relatively low,"that they "creeped up a little with Gartner and IDC, but sentiment is super negative. People just think they can't get anything right."Which might be a good sign. "Whenever sentiment is that negative, I have to pop my head up and take a look,"says Barnicle. But of course, he's been thinking that way for a decade.

It's just not clear that Microsoft is in a position now to offer any catalyst to move these shares. Still, its numbers will be closely followed and we'll have complete coverage when they hit the tape.

Questions? Comments? TechCheck@cnbc.com

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