/ 21 July 2011

PC doubts lead as Microsoft profit looks set to rise

Microsoft is expected to post a 9% increase in fiscal fourth-quarter profit on Thursday, helped by solid sales of its Windows and Office mainstays, but investors may be distracted by evidence of flickering computer sales, which are key to its success.

The world’s largest software maker is set to follow Google, Apple, and IBM in reporting surprisingly good results as technology spending holds up relatively well in an uncertain economy.

But the latest signs from chipmaker Intel on Wednesday — that PC growth will not be as strong as it expected this year — cast doubt on how long Microsoft’s strong performance can continue.

“The mature market consumer segment is still soft,” Intel chief executive Paul Otellini told analysts on a conference call on Wednesday, after the company cut its 2011 PC growth projection to a range of 8% to 10% from earlier estimates in the low double digits.

Even that could be optimistic. PC sales grew only 2.3% last quarter, according to research firm Gartner, as cash-strapped consumers held off buying or opted for an iPad instead.

The number of PCs sold — 90% of which come pre-loaded with Windows — directly affects Microsoft’s top and bottom line.

There are already signs that sales of its popular Windows 7 operating system are levelling off. Microsoft said last week it has now sold more than 400-million Windows 7 licenses since launch in October 2009, up from 350-million three months ago. That suggests 50-million Windows sales in the quarter — about the number it sold the quarter before that.

Windows 7 has already become old news for investors eyeing Windows 8 — the provisional name for the next tablet-friendly operating system expected late next year.

Long-term moderation
Wall Street analysts expect Microsoft to post a profit of 58 cents per share for the quarter, up from 51 cents a year ago, while sales are expected to rise 7% to $17.23-billion, according to Thomson Reuters I/B/E/S.

Microsoft’s revenue and profit have recently slipped behind archrival Apple, which had more than $28-billion of sales last quarter, helped by its explosively popular iPhone and iPad.

Microsoft has seen its growth moderate since it rose to dominance in the 1990s. Its sales grew 12-fold between 1991 and 2000, whereas they grew by only two and a half times between 2001 and 2010.

“There’s just not enough growth there to make people interested,” said Michael Yoshikami, chief executive of fund manager YCMNET Advisors, earlier this week. “It’s the Johnson & Johnson of technology. A large, cash flow-oriented company, but explosive growth has probably passed it by the wayside.”

Microsoft shares have outpaced the tech-heavy Nasdaq over the past month, but still are perched around $27 — a level they have circled since 1998 — adjusted for splits.