What to look for in Microsoft's Thursday earnings report

This story ran in the print edition of The Seattle Times on April 27, 2011. -Sharon Pian Chan

For Microsoft's third-quarter earnings report Thursday, Wall Street is expecting more of the same.

The company is expected to report that it had $16 billion in sales over the past three months. Analysts think it made a higher profit than predicted.

And then the stock price will likely drop, if it follows the pattern set by recent Microsoft financial reports. This drop will be followed by bitter shareholder complaints that Microsoft stock has moved little over the past 10 years while Apple's stock has skyrocketed.

"I am expecting them to put up a strong quarter," said Yun Kim, research analyst at Gleacher and Co. in New York. "Just remember they've been putting up five straight quarters of strong beat, but the stock has not reacted positively."

Kim has a "buy" rating on Microsoft stock. "At this point it's more of a sentiment story than anything else," he said.

Analysts are expecting earnings per share of 56 cents and $16.2 billion in sales for third quarter of fiscal 2011 third, which ended March 31.

"There are two sizable overhangs on the stock," Kim said. "One is the overall negative trend happening on the consumer PC side. Their Windows business is heavily driven by the PC market. And the other is their lack of traction in the mobile and smartphone area."

Sid Parakh, analyst at McAdams Wright Ragen, said the Apple iPad is depressing PC sales in mature markets like the U.S. He will be watching to see how the company performs with selling Windows to consumers.

"If you look at where the weaknesses in the PC market are, a lot of it is consumer-driven weakness in mature markets or developed markets and those are exactly the same markets where the iPad has done well," he said. "You cannot simply extrapolate that and say iPad is taking a lot of share away from the PC. There is a lot of weaker mix in consumer electronics. For instance, TV sales have been down. But there's clearly some cannibalization going on" with the iPad.

Parakh has a "buy" rating on Microsoft stock.

Gleacher's Kim is optimistic about Microsoft's ability to come back in the tablet market. The company is building the next version of Windows to run on chip sets designed by ARM, a designer known for making chips for mobile devices. He thinks Microsoft could come out with the first such mobile device by the holidays this year.

Microsoft has not disclosed when the next version of Windows will be ready. At Microsoft MIX in Las Vegas earlier this month, Windows President Steven Sinofsky said the company would share more news with developers at a conference in September.

Neither analyst thinks the pay raises Microsoft announced last week would have any impact on third-quarter earnings. The raises are not expected to take effect until fiscal 2012, which begins July 1, 2011.

Microsoft, which declined to say how much it would spend on the across-the-board raises, said it is paying employees more to attract and retain the best talent.

Analyst Mike Cherry at independent research firm Directions on Microsoft in Kirkland wondered whether the pay raise will be enough to keep employees courted by Google and Facebook.

"Are you being hired to maintain a product that's 20 years old or are you being hired to work on a new, exciting technology that's potentially industry changing?" he said. "For a lot of technology people that's more important than anything else."

Asked whether Microsoft should have spent its money instead on increasing shareholder dividend -- as some investors have demanded -- both said they think the quarterly dividend is fine where it is, at 16 cents per share.

"It's not an awfully low number but it's not awfully high either," Parakh said. "It's in line with peers."

Microsoft stock rose 58 cents, or 2.26 percent, on Tuesday and closed at $26.19 per share.

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