REDMOND, Wash. (AP) — Microsoft Corp. is expected to provide insights into the personal computer market on Thursday, when it reports its results for the final three months of last year.
WHAT TO WATCH FOR: The results, due out after the stock market closes, are expected to show another quarter of lethargy in Microsoft's most profitable division, the software franchise built around the Windows operating system that runs most PCs.
Windows already was facing a challenge from sophisticated mobile devices running on other operating systems when massive floods in October in Thailand created a new problem by disrupting the manufacture of hard-disk drives, a key PC component. Factories in Thailand account for about one-fourth of the world's production of hard drives. When fewer PCs are made, fewer copies of Windows are sold.
But the damage didn't appear too severe in October to December, based on preliminary estimates from the research firms Gartner Inc. and IDC. By Gartner's estimates, worldwide PC shipments fell 1.4 percent from the prior year while IDC pegged the decline at just 0.2 percent.
Some analysts are worried that Microsoft may report a slightly larger drop in its Windows division for the period, which is its fiscal second quarter. Rick Sherlund of Nomura Equity Research thinks the decline for Windows could be as much as 7 percent from a year earlier, based on cautionary remarks from a Microsoft executive on Jan. 10 at the International Consumer Electronics Show in Las Vegas.
If Windows revenue fell last fall, it will be the fourth decline in the past five quarters.
And Microsoft could forecast worse deterioration in the current quarter, which ends in March, because that's when the disk drive shortages are expected to peak and because building anticipation for a radical overhaul of Windows also is dampening sales of the current version.
The next version, Windows 8, is being designed so it can run on devices with longer battery lives and be controlled by touch, as well as keyboards and computer mice. That versatility is expected to spur the development of lightweight laptop computers, called "ultrabooks," that will be a combine elements of tablet computers and traditional PCs.
Microsoft hasn't specified when Windows 8 will hit the market, but most analysts expect it to come in the late summer or early autumn. A beta version is scheduled for release late next month.
While Windows has been struggling to revive its growth, Microsoft's data center and entertainment divisions have been thriving. Those operations, though, have lower profit margins than Windows, so investors tend not to get as enthused about growth there.
The entertainment division, anchored by the Xbox 360 video game console and the Kinect motion controller, has been doing particularly well. Its revenue in Microsoft's last fiscal year ending in June surged by 45 percent.
The company is now using the Xbox's online access to deliver a wide array of services, including voice-controlled search and video, to television sets. Kinect will expand to the Windows platform beginning Feb. 1 in a move that Microsoft hopes will open new moneymaking opportunities.
Microsoft CEO Steve Ballmer recently said 66 million Xboxes and 18 million Kinect units have been sold far.
This will be the first quarter that the entertainment division's results include the video-chat service Skype, which Microsoft acquired for $8.5 billion in October.
Microsoft's Bing search engine also has been gaining ground in its market, although it remains far behind Google Inc. In December, Bing moved past Yahoo Inc. into second place in U.S. search activity, based on data compiled by comScore Inc. With 15.1 percent of the search market, it's still far behind Google, which processes two of every three U.S. search requests. Bing and the rest of Microsoft's online division remain unprofitable, although its losses are narrowing.
WHY IT MATTERS: Microsoft needs to prove it's changing with the times quickly enough to compete against Apple Inc. and Google, which has expanded beyond its dominance in Internet search to develop the widely used Android software for mobile devices.
Investors have their doubts, leaving Microsoft's stock price below its level of a decade ago, when it traded in the low $30s. The shares closed last week at $28.25.
WHAT'S EXPECTED: Analysts surveyed by FactSet forecast earnings of 77 cents per share on revenue of $20.97 billion.
LAST YEAR'S QUARTER: Microsoft earned $6.6 billion, or 77 cents per share, on revenue of nearly $20 billion.
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