October 26, 2010 / 6:16 PM / 7 years ago

Microsoft profit seen higher, iPad looms

SEATTLE (Reuters) - Microsoft Corp is expected to report a big jump in earnings on Thursday, helped by the newest versions of its lucrative Office software and the blockbuster Halo game; but short- and long-term issues with its core Windows franchise nag at investors.

The world’s largest software company has sold a record-breaking 240 million Windows 7 operating system licenses in the year since launch. But lower-than-expected personal computer sales are restricting growth, and some worry that its flagship product is under threat from Apple Inc’s iPad and a longer-term shift to mobile computing.

“The supply-chain vendors and the hardware side are seeing continued weakness in the PC business,” said Sid Parakh, an analyst at brokerage firm McAdams Wright Ragen. “What everyone is still not clear about is how much of it is driven by real consumer softness and how much of it is driven by the iPad.”

PC shipments -- which generally dictate sales of Windows and the health of the overall tech sector -- rose only 11 percent to 89.7 million units in the July-September period, according to industry tracker IDC, below its forecast of 13.5 percent. For the current quarter, IDC expects only 7.4 percent growth.

Business spending is still relatively strong, research firms say, but consumers are holding off on PC purchases, or may be buying iPads instead, although it is too early to tell if Apple’s new device is really eating away at the low end of the PC market.

Whether the threat is real or not, Microsoft has been roundly criticized for being slow to react, as Apple’s iPad heads toward 8 million sales since its launch in April.

Only one Windows-powered tablet, made by Hewlett-Packard Co, has been launched since then, and the best iPad competitors are expected on the market only next year.

Several analysts have downgraded Microsoft recently, most notably from Goldman Sachs in October, citing a lack of focus on the burgeoning consumer electronics sector.

Microsoft shares are down 16 percent this year, compared to a 10 percent rise in the Nasdaq composite index. The stock is trading around 2002 levels, at a historically low price-to-earnings ratio.

UP FROM LAST YEAR

On the upside, Microsoft is expected to report a sharply higher profit this quarter than a year ago, when the world was just emerging from the grip of a severe downturn.

The bottom line is likely to show a boost from the new Office 2010, the popular suite of word processing, e-mail and presentation programs, which was launched in May, and the new Halo: Reach video game, which racked up more than $200 million in sales on its first day alone in September.

Wall Street is expecting earnings of 55 cents per share, up from 40 cents a year ago, according to Thomson Reuters I/B/E/S data. Analysts expect sales of $15.8 billion, up 22 pct from $12.92 billion a year ago.

For the current quarter, there is some optimism that its new phone software, which will run handsets hitting U.S. stores next month, will claw the company back into the mobile market, while its new motion-sensing Kinect device, to be launched next week, will boost Xbox sales.

However, the sluggishness to match rivals such as Apple and to some extent Google Inc in the mobile computing arena is a recurring problem for Microsoft.

This issue, commonly raised by company outsiders, was pointed out this week by an insider, Microsoft’s chief software architect, in a blog post.

“Their (competitors’) execution has surpassed our own in mobile experiences, in the seamless fusion of hardware and software and services,” wrote Ray Ozzie, a visionary who is set to retire from Microsoft in several months.

In what amounts to a farewell memo, Ozzie points to a “post-PC” world, where portable devices are connected to the Internet at all times, continuously feeding data back and forth.

“Today’s PCs, phones and pads are just the very beginning,” wrote Ozzie. “We’ll see decades to come of incredible innovation from which will emerge all sorts of ‘connected companions’ that we’ll wear, we’ll carry, we’ll use on our desks and walls and the environment all around us.”

Implicit in Ozzie’s forecast of the future is a gradual lessening in importance of the Windows operating system, which remains Microsoft’s financial core.

“I don’t think he’s saying we’re going to be an operating system-less world,” said Parakh at McAdams Wright Ragen. “But the importance will be much lower than it is today.”

Reporting by Bill Rigby; Editing by Richard Chang

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