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Sign of the times: Microsoft sales drop?

If projections hold, Microsoft will report the first year-over-year drop in its sales as a public company. The company's report Thursday will offer a sense of whether things are going from bad to worse.

How bad is the tech slump?

Even sales at Microsoft appear to be headed downward. If projections hold, Microsoft on Thursday will report a year-over-year drop in quarterly revenue, a first for the software maker.

The company has come close to flat-lining before, most notably in mid-2000 as the dot-com boom came to an end. Even then, though, it managed to post a slight increase in revenue.

Microsoft is forecast to report quarterly revenue of $14.15 billion for its fiscal third quarter, according to Reuters Estimates, down from $14.45 billion in the same quarter a year earlier. Per-share earnings are pegged to come in at 39 cents, down from 47 cents a year ago.

In addition to paying attention to Microsoft's overall numbers, folks will be closely watching what Microsoft has to say about the PC market. While Intel surprised some last week by suggesting the PC market had hit bottom, AMD's chief executive said Tuesday that such a prediction is premature.

"I don't know how anybody can say we've hit bottom, considering the macroeconomic outlook," CEO Dirk Meyer said during the AMD earnings conference call Tuesday afternoon.

Even when the economy does bottom out, Microsoft has said it is not expecting sales will quickly return to where they were in recent years. CEO Steve Ballmer has repeatedly characterized the current woes as a "reset" of the economy, rather than a temporary dip. When things do pick up, Microsoft said in January, expect slow growth.

There will be other items to watch for during Microsoft's earnings report.

Some think Microsoft might also finally bite the bullet and admit that it is trying to get Windows 7 out this year, as opposed to just by January. The software maker has had a largely positive response to the beta version and is expected to come out with a near-final "release candidate" version in the coming weeks.

In general, new operating systems aren't necessarily the biggest driver of new PC sales, but computer makers are holding out some hope that an early release of Windows 7, combined with continued good reviews, could help the holiday season perhaps be somewhat better than it might otherwise have been. For Microsoft, the release of Windows 7 offers the opportunity to move past Windows Vista, a product that has had a decidedly mixed reputation in the marketplace.

The earnings call will also provide an opportunity to hear not just what Microsoft says about its quarterly results, but also a chance to learn if it is seeing any signs of weakness among customers renewing long-term corporate licensing deals.

Also of note will be what, if anything, Microsoft says about discussions with Yahoo on a search deal. The two sides have reportedly been having some face-to-face talks in recent days and weeks. However, the two sides have done plenty of talking without reaching an accord.

On Yahoo's earnings conference call on Tuesday, CEO Carol Bartz also pointed to search as an important core area for Yahoo, but she wouldn't rule out the possibility of relying on another company's search technology plugged into Yahoo's infrastructure. Microsoft, meanwhile, has been testing the next version of its search product, code-named Kumo.

Further job cuts are also a possibility. One analyst said this week that he anticipates Microsoft will go beyond its previously announced cuts. However, I'd note that Microsoft's January plans called for up to 5,000 jobs to be cut over an 18-month period and it made only about a third of those cuts right away.