Microsoft is expected to report earnings of 42 cents per share on revenues of $5.6 billion, according to a consensus of analysts polled by First Call/Thomson Financial. The software maker predicted lackluster growth in its last earnings call. In addition, unusually high sales reported one year ago will be hard to top, analysts said.
The Redmond, Wash.-based company will also provide a clearer picture of sales of its much-vaunted Windows 2000 operating system. Sales of the operating system, which was launched in February amid much fanfare, will be scrutinized as a key indicator of the health of not only Microsoft, but the PC industry as a whole.
Analysts will also be looking at sales of Windows and Office software to PC makers. Those sales were "sluggish" last quarter, according to David Readerman from Thomas Weisel Partners.
Last month at PC Expo, the company reported it had sold roughly 3 million copies of Windows 2000, with the majority going to companies looking to upgrade laptops and desktops. It is unclear at this point how the more lucrative server version of Windows 2000 is faring in the corporate market. Windows 2000 Server faces competition from Linux- and Unix-based operating systems.
Windows 2000 is selling at four times the volume that Windows NT 4 saw during its first quarter of sales, according to John Frederiksen, general manager of Microsoft's PC Experience group. "The server version gets deployed less rapidly" than the desktop version, Frederiksen said at PC Expo, noting that more organizations first take advantage of Windows 2000's improved hardware and power management support for notebooks.
The first service pack, or collection of bug fixes, for Windows 2000 is due sometime this week, according to sources. Many analysts expect sales of the OS to improve after the release of the service pack. However, the Data Center and higher-end versions of the server OS are targeted at e-commerce and dot-com companies, many of which have seen their valuations and cash reserves plummet in the past few months.
"We all knew there would be consolidation," Frederiksen said. "But there's lots of momentum among hosters. Applications are a huge opportunity which continues to be pretty healthy."
Still, analysts believe that Windows 2000 is too new to make much of an impact on Microsoft's bottom line.
"The transition to Windows 2000 is still early in its cycle and probably more of a challenge to desktop OS growth than an upside opportunity," Don Young, an analyst with PaineWebber, said in a research note concerning Microsoft's earnings. Young expects the server OS group to report "modest to down performance."
Retail sales of Microsoft's consumer OS, Windows 98, are typically slow during the summer, according to Lehman Brothers analyst Michael Stanek, but are "showing some signs of life." The company is set to release its next OS for home users, Windows Me, in September.
Microsoft lowered the bar for this quarter's performance in last quarter's earnings conference call, when CFO John Connors warned that slow growth in the PC industry lingering from Y2K lockdowns and component shortages would hamper the software maker's sales.
Last month, Frederiksen said that softness is over. PC sales have rebounded as component issues have been dealt with, he said. "There's a pickup in PC sales overall," he said. Connors echoed these comments in June, when he predicted that PC sales would grow at 12 to 15 percent in the next fiscal year.
Microsoft must compete against its unusually high performance last year, which was boosted by the redemption of coupons for Office 2000, according to PaineWebber's Young.
"Microsoft had its back up against the wall on several fronts in the June quarter," he said, pointing to the applications group specifically. "We are expecting this business to contract by 11 percent against this very tough compare."
Worldwide, U.S. and European markets are expected to see continued growth, according to Lehman's Stanek, while Japan "continues to be strong."