Technology: Tablet worries loom over Microsoft's fiscal 3Q

REDMOND, Wash. (AP) -- Microsoft Corp. is scheduled to report its fiscal third-quarter earnings after the stock market closes Thursday.

WHAT TO WATCH FOR: Investors will focus on how much the growing popularity of Apple Inc.'s iPad and other computer tablets seems to be threatening Microsoft's golden goose -- licensing software for personal computers.

It's a concern likely to loom over Microsoft until the software maker proves it has overcome its late start in tablet computers. Most of the tablets sold so far run on software made by Apple or Google Inc.

Tablets dented first-quarter PC shipments, which fell by 1 percent to 3 percent from the same last year, based on separate reports from two research firms, Gartner Inc. and IDC. Both reports traced the decreases to more people buying tablet computers instead of laptops and other lower-priced computers.

The declines are expected to steepen. Goldman Sachs estimates about 47 million fewer notebook computers could be sold this year and next year as more people embrace tablet computers.

The rise of tablet computers is one of the reasons Microsoft's stock has fallen 6 percent so far this year while the bellwether Dow Jones industrial average has climbed 9 percent. Microsoft is one of the 30 companies that make up the index. The software maker's shares closed Tuesday at $26.19.

Fortunately, for Microsoft, corporate America is likely to stick with PCs for many more years. Those companies' reliance on PCs running on Microsoft's Windows operating system and licensing Microsoft's Office products should buy the software maker more time to adapt to the tablet market. The business market accounts for about three-fourths of Microsoft's revenue.

The latest quarter should also get a lift from the hot-selling Kinect, a motion-sensing controller that Microsoft introduced late last year for its Xbox 360 video game system. Microsoft last month said it had sold more than 10 million Kinects. Gleacher & Co. analyst Yun Kim estimates at least 2 million of the units sold in the most recent quarter.

Microsoft's weak link, as usual, is expected to be its online division, where the company has been losing money as it tries to build a better search engine and advertising network to counter Google.

As part of that push, Microsoft began delivering Yahoo Inc.'s search results last year. The partnership stumbled in the first quarter when Yahoo said Microsoft's technology didn't produce as much ad revenue per search as had been promised.

Analysts may press Microsoft's managements for further details about the glitches in its Yahoo partnership. Other likely topics include Microsoft CEO Steve Ballmer's decision to pay more employees their full bonuses each year and pour more cash into compensation packages instead of company stock. Ballmer hailed the changes as the "most significant investment in overall compensation" in Microsoft's history when he notified workers about the plan last week.

WHY IT MATTERS: Microsoft needs to prove its main software businesses are still growing at a healthy rate to counter concerns about the iPad.

If Microsoft's PC-driven operations start losing steam, the company might not be able to afford spending as much as it has been on its Internet search engine, Bing. Now that Bing also powers Yahoo's search results, its technology represents the only major alternative to Google Inc.'s dominant search engine.

WHAT'S EXPECTED: Analysts surveyed by FactSet forecast earnings of 55 cents per share on revenue of $16.2 billion.

LAST YEAR'S QUARTER: Microsoft earned $4 billion, or 45 cents per share, on revenue of $14.5 billion at the same time last year.

Published: Thu, Apr 28, 2011


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