Windows 7 Sales Likely to Drive Microsoft Earnings

Microsoft is expected to turn in another strong quarter fueled by its new operating system, but will almost predictable record earnings -- again -- please or disappoint investors?

Microsoft is preparing to announce its year-end and fourth fiscal quarter financial results on Thursday, and once again Windows 7 is expected to help provide the software giant with record sales and earnings.

However, whether that will be enough to encourage investors to drive up Microsoft's (NASDAQ: MSFT) stock price, which has long languished, is another question altogether.

Average estimates by financial analysts polled by Thomson Reuters predict that the company will post fiscal 2010 sales of $61.7 billion and $15.27 billion for the fourth fiscal quarter, which ended June 30.

Meanwhile, analysts are projecting average earnings per share (EPS) of $2.05 for the fiscal year, and $0.46 for the fourth quarter.

A year ago, Microsoft had revenues of $58.44 billion for the year, and fourth quarter numbers of $13.1 billion. In comparison, EPS for fiscal 2009 came in at $1.70, and $0.36 for the quarter.

That might suggest a return to the glory days of Microsoft's stock when it seemed to double in value every year or so -- but it's likely that it will not. The reasons lie in analysts' predictions for fiscal 2011, which began on July 1, and what Microsoft tells them Thursday when it releases its results and whether it hits or misses their expectations.

For fiscal 2011, for instance, analysts are forecasting revenues of $67.3 billion, a big jump from fiscal 2010's expectations -- while EPS for 2011 are currently estimated to be $2.32.

Microsoft likely will credit its three core businesses -- Windows client, Office and Server and Tools -- as keeping the firm growing at an ever higher pace. For example, Microsoft announced recently that it has sold more than 150 million licenses for Windows 7 since the commercial debut of the new operating system in October. It also credited the strong performance of Windows 7 for helping bring in record sales and earnings for the second and third fiscal 2010 quarters.

Additionally, Microsoft officials and technology analysts have predicted that Windows 7 sales to large enterprise IT customers have just started to take off, so the company is likely to repeat earlier prognostications that the new system's sales cycle will hit its stride during the next few quarters, helping Microsoft's bottom line in fiscal 2011 and beyond.

A recent arrival, Office 2010, just began shipping to corporate customers in May, meaning it's likely too late to provide much more than foam on CEO Steve Ballmer's latte Thursday, but still a promising big-money producer in coming months.

Of course, other high-profile investments such as Windows Phone 7 and the Kinect controller-less game controller, which are not due to hit store shelves until the holiday sales season, hold some promise of future revenues, though both are currently unknowns.

In the meantime, sales of Microsoft games are expected to be another bright spot for both 2010 and 2011, but the same can't be said for Microsoft's Bing search engine and the 10-year revenue sharing deal the company signed last July with Yahoo (NASDAQ: YHOO). Ballmer, in fact, has said he's willing to spend billions on Bing in order to make it successful, although it may be years before that investment really begins to pay off.

However, the Yahoo deal is just beginning to move into execution now, so financial payback is still a ways off.

Finally, while parts of Microsoft's cloud computing platform -- particularly its Business Productivity Online Suite (BPOS) and its Dynamics CRM and ERP applications -- are doing well, its massive investments in datacenters globally to support bold cloud computing initiatives will take years to break even.

Stuart J. Johnston is a contributing writer at, the news service of, the network for technology professionals. Follow him on Twitter @stuartj1000.

Tags: Windows, Microsoft, earnings, Windows 7

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