By Daisuke Wakabayashi
SAN FRANCISCO (Reuters) - MICROSOFT(MSFT.NQ)Corp
Microsoft is slated to report its fiscal third-quarter results on Thursday with Wall Street analysts expecting a fall in profit from a year earlier, when the company booked $1.6 billion in revenue deferred from a quarter earlier because of delays to its Windows and Office upgrades.
It will also provide an outlook for its coming fiscal year starting in July, offering investors clues on how concerned the world's largest software maker is about an economic downturn sapping technology spending.
"I would expect that Microsoft will factor in some (economic) weakness into their numbers," said Sid Parakh, analyst at McAdams Wright Ragen. The company has said it expects revenue to grow more than 10 percent next year.
Analysts, on average, are forecasting Microsoft's fiscal 2009 earnings to grow an estimated 12 percent to $2.10 a share on revenue of $66.46 billion, a projected increase of 10 percent, according to Reuters Estimates.
The caveat to any projections made by Microsoft is that an acquisition of Yahoo would make previous forecasts obsolete.
The two are in a stand-off over Microsoft's unsolicited $43 billion offer to buy Yahoo. Microsoft has refused to lift its stock-and-cash price, even as Yahoo's board of directors has said the offer undervalues the Web pioneer. So Microsoft's results should play second fiddle to the takeover battle.
"There isn't going to be a lot of things that pop out of the blue so the focus is going to be on Yahoo and the online business especially given the magnitude of the deal," said Parakh, who has a "buy" rating on Microsoft with a 12-month price target of $40.
This week could bring some progress in breaking the deadlock between the two companies. Yahoo reports quarterly results on Tuesday and the Microsoft-imposed deadline on Yahoo to negotiate or face a proxy fight expires on Saturday.
Microsoft Chief Executive Steve Ballmer, speaking earlier on Tuesday in Morocco, said Yahoo's results will not affect the company's view that its offer remains "full and fair."
Fundamentals surrounding Microsoft's core businesses remain strong. Worldwide shipments of personal computers in the March quarter rose between 12 percent and 15 percent, according to research firms IDC and Gartner, boosted by strong growth in emerging markets.
Its Windows operating system, which runs on more than 90 percent of the world's PCs, has been helped by strong sales in emerging markets like Brazil, Russia and China. Since 60 percent of sales come from overseas, Microsoft has said it is partially shielded from a weak economy is North America.
"The installed base of PCs continues to grow especially in emerging markets and Microsoft is in a position to benefit huge," said Todd Lowenstein, co-portfolio manager at HighMark Capital Management's Value Momentum Fund.
Robust computer sales should also lift revenue at Microsoft's Office business. However, sales growth at the Windows and Office division could look less impressive when compared with last year's inflated figures, which factored in coupons issued to consumers affected by development delays.
For the quarter ended in March, analysts expect fiscal third-quarter earnings of 44 cents per share, on average, down from 50 cents a year earlier, on revenue of $14.5 billion, according to Reuters Estimates.
The results follow strong earnings from rivals Google Inc
Aside from its two main businesses, Microsoft is expected to post a profit gain in its server and tools division as well as its entertainment and devices division, which is home to its Xbox 360 game console business.
Microsoft's online services business is likely to post another quarter of losses, reinforcing its argument that an acquisition of Yahoo may accelerate its efforts to improve the division's performance.
Lowenstein, whose fund owns 456,000 Microsoft shares, said the core software business is on solid footing but its move to acquire Yahoo could prove to be a distraction.
"We're worried about Microsoft (making matters worse by diversifying away from its core business) and doubling down on a tough business where Google is so strong," Lowenstein said.
(Editing by Braden Reddall)