Microsoft Earnings Report: Bright Expectations, Big Questions

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When Microsoft announces revenues and earnings for the second quarter of its fiscal 2011 on Thursday, the company appears primed to turn in a record performance — as usual.

The question, however, is how financial analysts that follow Microsoft (NASDAQ: MSFT) will view the stock’s value once the results are in. Microsoft’s stock has been stuck in the doldrums for the past decade while competitors like Apple (NASDAQ: APPL) have soared. That, while Microsoft turned in record quarter after record quarter.

In fact, since it emerged from the recession Microsoft has reported record revenues for the past four quarters and, from public statements made by the company and partners regarding the popularity of some of its products, it appears likely that will happen again.

Meanwhile, analysts polled by Thomson Reutersare expecting Microsoft to report revenues of $19.14 billion and earnings per share (EPS) of $0.68 for the quarter that ended December 31.For the same quarter last year, Microsoft turned in revenues of $19.02 billion and $0.74 EPS. Analysts’ consensus estimates missed the mark, however, predicting in advance of last January’s announcement that EPS would be only $0.59 — they were off by $0.15.

Microsoft officials may have something to gloat over this time around as well.

Particularly for what’s called the Christmas quarter, sales of game consoles and games — not to mention a surprising 8 million Kinect controller-less game controllers — were up dramatically according to anecdotal reports.

However, also as usual, Microsoft’s financial ship will be anchored by its cash cows.

Most of that strength on the company’s balance sheet comes from Microsoft’s traditionally strong business sectors like Windows desktop clients, Office productivity applications suites, and servers that stretch from Windows Server, Exchange, and SharePoint, to SQL Server, Communications Server, and Dynamics CRM.

Microsoft is also likely to credit continued strong sales of Windows 7 to both consumers and to corporations. Additionally, Sales of Office 2010 began in May and, by most accounts the update has been selling like hotcakes.

In the area of cloud computing, Microsoft is also likely to credit its 40-plus million paying cloud computing users as helping to drive revenue. At the same time, though, the company is in the midst of the biggest building spree in its history as it rolls out datacenters worldwide to deliver services in the cloud to perhaps billions of users. Those construction and operations expenses make it more of a cash drain for now.

Against that backdrop, there is still plenty for investors to find fault with.

For instance, after a year of talking it up and spending hundreds of millions of dollars, Microsoft experienced relatively slow sales of Windows Phone 7handsets — the first of which went on sale during the quarter.

In late December, the company said it sold 1.5 million Windows Phone 7 systems to handset makers and carriers in the first six weeksof sale, although it could not document how many actually got sold to users.

Also, despite saying last summer that Windows 7-driven slate computers are Microsoft’s “job one,” CEO Steve Ballmer has apparently been unable to get the company’s hardware partners to follow through so far.

True, HP has shipped a bona fide Windows 7 slatecomputer but that has been targeted towards enterprise users with a price to match.

Two quarters after his “job one” statement, Ballmer still has barely made a dent on the mobile marketplace and the company is seen as a late entry into the tablet arena as well. Both are perceived to be rapidly replacing many PCs and laptops as the Internet clients of choice, which could threaten the software giant’s longer-term survival.

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