Preston Gralla

Four reasons Microsoft's quarterly earnings could spell trouble

January 26, 2011 6:39 PM EST
On Thursday Microsoft reports its fiscal second quarter earnings, and it's one of the company's most important earnings report in recent memory. If certain numbers aren't hit, it could mean the company is headed for trouble. Here are four things to look for.

How are Windows 7 sales?

Last year, Microsoft had record fiscal second-quarter earnings, driven in large part by blowout Windows 7 sales. How will this quarter's sales stack up compared to a year ago?

Most likely, not well at all. Gartner reports that worldwide PC shipments in the fourth quarter were up an anemic 3.1 percent over the fourth quarter of 2009. Given that, don't expect Windows 7 sales to be spectacular.

How are Windows Phone 7 sales?

Given that Windows Phone 7 was launched in the second week of November in the U.S. and Canada (and in Europe in late October), don't expect there to be definitive numbers about Windows Phone 7 sales. Microsoft has already said that it sold more than 1.5 million Windows Phone 7 phones to service providers in its first six weeks, although no numbers have been provided about how many of those were sold to actual users.

At least one manufacturer has been unhappy with Windows Phone 7 sales. LG has said that its sales numbers so far have been disappointing. Will Microsoft release any more information about Windows Phone 7 sales? And if so, will it show an uptick? Microsoft desperately needs Windows Phone 7 to succeed, so look to see how it's been selling.

What will Microsoft execs say about plans to fight the iPad?

I don't expect that Microsoft will say much about the iPad and tablets during its formal presentation. But you can expect a lot of pointed questions about the iPad aimed Microsoft's way when it comes time for analysts to ask questions.

Some people have cited booming iPad sales as one reason for lagging PC shipments because people may be foregoing notebooks and netbooks and instead buying iPads. So what will Microsoft say about its own plans for tablets?

Microsoft has been saying that Windows, not Windows Phone 7, will power tablets. But Windows, as currently constructed, really isn't suitable for tablets because, among other reasons, it requires too much overhead and hardware. Windows 8 will supposedly be better for tablets, but it's still a long time away from release.

If Microsoft continues to say Windows 7 will power its tablets, that's bad news. It's unlikely Windows 7-powered tablets can make inroads against the iPad or compete against the coming Android tablet onslaught.

How has the Kinect done?

The Kinect will likely be a bright spot during the earning call. As Reuters notes, Microsoft "sold 8 million units over the holiday shopping season, above Microsoft's own target of 5 million."

Big sales of Kinect could mean that Microsoft can finally start getting more sizable profits from its gaming division, which a year ago, according to SeattlePI "was barely running in the black."

Even though gaming isn't Microsoft's core business, and will never come close to the profits generated by the company's other divisions, any diversification can help. So Microsoft needs the Kinect to do well.