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July 20, 2006

Waiting for the Microsoft earnings report

Posted by David Hunter at 12:27 PM ET.

To pass the time until Microsoft reports earnings today after the market close, Bill Snyder at offers Microsoft Goes on the Clock:

The last time Microsoft reported earnings, the software giant threw its stock into a tailspin, announcing weaker-than-expected income and much heavier-than-expected spending.

When the company reports fourth-quarter results late Thursday, investors will be waiting to see if the other shoe — a delay in the already very late next version of Windows — will drop.

If it does, batten down the hatches: The stock will take another hit.

At least one high-profile analyst, Rick Sherlund of Goldman Sachs, has repeatedly speculated that Vista, as the new operating system is called, will miss its January ship date. But he figures that an announcement of a delay now actually would be a plus because it will get the bad news out of the way and clear the decks for a better 2007.

That would certainly spice up what promises to be a fairly ho-hum report, but it seems a little early to be announcing another slip unless it is a little adjustment to line up with the more freshly delayed Office 2007. Moreover, the earnings report would seem to be an odd venue when as Snyder reports,

There are expectations that the company will make a number of major announcements next week during its annual analyst day on the Redmond, Wash., campus; another pushback of the Vista launch could be one of them.

While we are on the subject of earnings, we can also pass the time looking at what some of Microsoft’s competitors are reporting:

- IBM met profit estimates on lower revenue, but software was a bright spot led by WebSphere and SOA offerings which in a deep pockets way parallels Microsoft’s perennial strong showing in Servers and Tools. I guess that boring old middleware business still brings in the dollars even it doesn’t get the buzz.

- Apple wowed the crowd with a 48% jump in net income, 32% more iPods sold, and a 12% jump in Mac sales. The latter doesn’t seem like a lot given the overall market, but there was a 61% increase in notebook sales which made Macs 12% of the market. This seemed even rosier since they are still in transition to Intel processors and in view of a reported survey that had 50% of Mac customers as “new to the Mac.” Apple also teased the crowd on the announcement call with visions of an iPod phone.

- Yahoo met expectations, but the shares tanked on the admission that their Project Panama upgrade to their search advertising program was slipping. Some of the analysts were even doubting the growth of the whole Web search business.

And last, but certainly not least in the eyes of the market, is Google which, like Microsoft, will also be reporting their results tonight. Expectations are high and the share price penalties for any disappointment equally high:

Analysts are expecting the Mountain View, Calif., company to make $2.21 a share, up from $1.36 last year, according to a Thomson Financial survey. Revenue is expected to surge to $1.64 billion from $890 million a year earlier.

Those are obviously gaudy numbers, and Google’s rapid growth goes a long way toward explaining the stock’s continuing appeal despite its sky-high valuation.

“You can’t argue that it’s cheap,” says Jerry Jordan, whose $25 million Jordan Opportunity Fund holds Google. Instead, Jordan says, Google is “one of the great secular growth stories of which there are very, very few.”

Still, any perceived shortfall will surely punish Google’s stock, which has been flat in 2006 after more than doubling in each of the last two years. One area of particular concern is how much Google is spending to maintain its much-discussed air of technological superiority.

Microsoft had a little problem with that last quarter too, but another question is what will Google do when it owns the whole Web search market? That’s not an unfamiliar type of problem for Microsoft either.

Followup: Per the speculation above, Microsoft merely confirmed the current Vista dates. As for Google, it beat the Street.

Filed under Apple, Coopetition, Financial, General Business, Google, IBM, Investor Relations, Microsoft, OS - Client, Office, Office 2007, Windows Vista, Yahoo

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