Microsoft Q4 Results Will Highlight Need for Windows 7

Microsoft's earnings call on July 23 may not be the happiest for investors, as the company continues to battle considerable economic headwinds and increased competition, but it could highlight more than ever the need for its upcoming operating system, Windows 7, to be a considerable hit.

While Microsoft's earnings are forecast to either meet or exceed several analysts' predictions, they are also widely expected to be lower than the revenues the company reported a year ago, before the PC market entered a major slump amidst a global recession. Over the course of the quarter, Microsoft's stock has risen 30 percent.

Earnings for the current quarter have been estimated at 36 cents per share on revenues of 14.37 billion. In the same quarter in 2008, Microsoft reported income of 47 cents per share on $15.84 billion in revenue—representing a year-to-year drop of 9.3 percent.

"[Microsoft] is likely to report tepid June quarter revenue," Katherine Egbert, an analyst with Jefferies & Co., wrote in a July 21 research note. Despite that dim forecast, though, she also saw "some green shoots in consumer demand, upcoming 2H seasonality, Win 7 on tap and expense management now part of the culture."

In April, Microsoft posted its first-ever quarterly revenue decline, with its business units showing mixed results. Its Client division, which includes Windows, saw revenue drop by 16 percent and income by 19 percent year-over-year, driven downward by a decline in worldwide PC shipments. Its Business division dropped about 5 percent in revenue and 8 percent in operating income during the same period. 

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Microsoft is facing some challenges as it heads into the second half of 2009 and beyond.

Earlier in July, Google announced that it in the second half of 2010 it would release Google Chrome OS, a stripped-down operating system initially intended for mininotebooks, aka netbooks. The media cycle immediately leapt on the story as a possible harbinger of Microsoft's demise, even as most analysts adopted a more rational wait-and-see attitude.

During his July 14 keynote address at Microsoft's Worldwide Partner Conference in New Orleans, CEO Steve Ballmer dismissed Chrome OS as "highly interesting" but ultimately unable to meet users' needs.

"There's good data that says 50 percent of the time that someone's on their PC, they're not doing something with the Web browser," said Ballmer, implying that Chrome OS, as a browser-based operating system, would lack the combination of full offline and online capability needed by users.

However, the emergence of Chrome OS highlights a larger paradigm shift that is also forcing Microsoft to adjust. In a radical change from its traditional focus on desktop-centered applications, Microsoft plans to offer its Office 2010 productivity suite as a free online service for subscribers of Microsoft Live. The online versions of Microsoft Word, Excel OneNote and PowerPoint will lack the features available in the full versions, but the cloud-based version will still allow Microsoft to compete in that particular arena against Google Apps.

Perhaps most vital to Microsoft's financial health for the rest of 2009 and into 2010, though, is the launch of Windows 7, due to roll out on Oct. 22. Microsoft no doubt hopes that it will reverse the negative feelings associated with Windows Vista.

Ballmer is betting that, despite the recession, there will be need among both the enterprise and consumers for a tech refresh.

"Even if you take the assumption that [the economy] won't turn around for a long period of time, every minute of every day we're building a pent-up demand for IT," Ballmer said during a Q&A session following his WPC keynote.

A hint of a dark cloud on the horizon, however, may have come with a recent survey by ScriptLogic, which suggested that six out of 10 companies would avoid purchasing Windows 7 at the time of its debut, citing concerns over cost and interoperability. About 34 percent of the 1,000 companies surveyed said they would be on board with the operating system by December 2010.

Microsoft, however, wants Windows 7 disseminated rapidly worldwide, and plans an aggressive campaign targeting consumers and the enterprise with massive price cuts and promotional offers. Roughly a third of the company's revenue comes from its operating systems.