Microsoft Profit Expected to Fall in Pre-Vista Lull

SEATTLE—Microsoft Corp. is expected to post its second decline in net profit in the last three quarters this week in the lull before a profit boost from new Windows and Office software debuting this month.

Investors will be on the lookout for signs of higher expectations for the year based on the software upgrades or signs of improvement from the company's Internet division.

The world's largest software maker will debut Windows Vista—the first major upgrade to its flagship computer operating system in more than five years—and Office 2007 to consumers on January 30.

The two products account for more than half of revenue and most of Microsoft's profit, and analysts expect Windows Vista and Office 2007 to boost the company's sales in the coming quarters.

But the company has said it will defer $1.5 billion in revenue and accompanying profit to the March-ending quarter from the December-ended fiscal second quarter reporting on Thursday, due to how it accounts for upgrade coupons for those products.

Another strong quarter from Microsoft's server software business, better-than-expected sales of the Xbox 360 game console and healthy demand for the "Gears of War" video game will not likely be enough to make up the revenue shortfall from the deferral, which will not affect the company's full-year outlook.

Analysts polled by Reuters Estimates forecast a profit of 24 cents a share on revenue of $12.08 billion for the December quarter. A year earlier, Microsoft reported profit of 34 cents a share on sales of $11.84 billion.

"Investors have been waiting several years for this, when Windows Vista and Office 2007 is about to be released," said Toan Tran, analyst at Morningstar. "That should help to drive sales and profits for the next couple of years."

The latest version of Windows, the software that runs on more than 90 percent of the world's computers, got a make-over

and Microsoft says it is more secure and better equipped to handle digital media than its predecessor, Windows XP.

The upgrade to Office, Microsoft's suite of productivity software, also has a new look with a ribbon strip at the top of the window that replaces the menu and toolbars to make it easier for users to find functions and commands.

Investors have pushed Microsoft shares up more 35 percent since June, due in part to optimism that Vista and Office 2007, along with other new products like Exchange Server 2007, will ignite a new growth phase at the $44 billion software giant.

"It's going to be a gradual uptick," said Kim Caughey, an analyst at Fort Pitt Capital, which manages more than $1 billion, including shares of Microsoft.

"We don't expect anything out of this quarter and not so much next quarter, but by the end of Microsoft's fiscal year (in June), it should be reporting some meaningful numbers."

Some analysts are looking for any signs of improvement from Microsoft's Internet division, which continues to lose market share in Web search to Google Inc.

Microsoft's online services group saw revenue fall for the last four quarters and posted a loss in the past three quarters while it shifted to a new Internet advertising platform and overhauled the company's Web properties.