Final Earnings Preview Data on Microsoft (MSFT) Q3-07

Microsoft (MSFT-NASDAQ) reports after the close today.  Street estimates for the software beast are $0.46 EPS & $13.89 Billion in revenues.

The truth is that we can talk about guidance, we can talk about Zune, EU/Antitrust, Xbox360, the upcoming Halo 3, MSN, Linux, Google, Mac’s, the massive cash balance, and a host of other issues.  This really boils down to WINDOWS VISTA.  That is the crux of everything else and all forward numbers will be drastically changed if the company officially back-pedals. 

The company got off to a strong start according to some, but critics keep after the "weakness" and low demand.  After Dell (DELL-NASDAQ) announced it will be selling Windows XP systems, it is hard to argue with the critics (despite personal opinions).  Vista is a bulkier and more robust system, and the lower-end machines just can’t handle it as well.  Without a Dual-Core processor and without 2 GB RAM you might still be able to operate on Windows Vista, but the performance gains may not be seen and may even be worse if your system only meets the basic suggestion on system requirements.

We don’t have the revered Rick Sherlund to rely on at Goldman Sachs anymore, so now the analyst crowd is on more of a level playing field.  Back in March there were reports that Vista sold more than 20 million units (more than XP in the same launch timeframe)

Ballmer already noted that Vista projections were "overly aggressive," which sure sounds like a reigning in of guidance.  We’ll get to hopefully find out how many Vista orders the company got last quarter, and a bit more than 20 million may be a fair estimate based on the March data from the industry.  Maybe Ballmer was saying that was too high, maybe he wasn’t.  We’ll know in about 5 hours.  Vista may not spill over to the entire market, but if thye Vista projections are bad it could derail some of the hopes for forward PC sales and more importantly it could knock down some of the chip sector hopes.  Take a look at the recent DRAMexchange article on the "1 GB RAM" sales being the hope for the industry in the second half.

Estimates for the June quarter (also year-end) are $0.40 EPS and $13.3 Billion revenues; Fiscal JUN-2008 estimates (less exact) are $1.69 EPS and $56 Billion revenues.  Based on today’s options pricing, it doesn’t look like options traders are expecting more than a $0.60 price change for the stock in either direction.  At $29.23, the stock is still toward the higher-end of the $21.46 to $31.48 trading range over the last year.    Shares are down roughly 6% since the Vista launch at the end of January, and are up more than 6% from the recent lows in March.

Jon C. Ogg
April 26, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.