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Originally published April 17, 2013 at 3:59 PM | Page modified April 18, 2013 at 1:30 PM

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Microsoft earnings bound to feel effects of decline in PC sales

Microsoft will report its third-quarter results on Thursday as the decline in PC sales hovers over its bottom line.

Seattle Times technology reporter

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Recent reports of plunging PC sales have battered Microsoft stock. On Thursday, when the company reports its latest quarterly financial results, investors should be able to gauge how big an effect that’s having on the company’s bottom line.

The earnings report from Microsoft’s fiscal third quarter, which ended March 31, is significant because it marks the first full quarter of sales of Windows 8.

Windows 8 is Microsoft’s huge revamp of its flagship operating system and one the company is betting on to carry it into a world where mobile devices are overtaking desktop and laptop PC sales.

But research firms IDC and Gartner recently reported that PC sales saw their steepest drop in years when they plunged 11 to 14 percent in the first three months of 2013, compared with the same quarter last year.

Wall Street analysts have been revising downward their estimates for Microsoft’s quarterly earnings. The consensus estimate stands at earnings per share of 68 cents on revenue of $20.66 billion.

Last year, the company posted earnings per share of 60 cents on revenue of $17.41 billion.

“Clearly, the challenge is the Windows client business,” said Sid Parakh, analyst with McAdams Wright Ragen. “The general anticipation is Windows numbers would be weaker than they were going into the quarter.”

He expects Windows and PC numbers to pick up later this year, as more touch-enabled devices featuring Windows 8 debut and at lower price points — a sentiment Intel officials expressed as well during their earnings conference call Tuesday.

Analyst Todd Lowenstein, of asset-management firm HighMark Capital, agrees that “the sentiment is quite negative going into the quarter. Expectations are pretty low.”

That said, Lowenstein thinks too much focus has been placed on the consumer side of Microsoft’s business and not nearly enough on the company’s bread and butter: its business customers.

For instance, he said, not enough attention has been paid to how Microsoft is migrating its business customers to cloud platforms and “software as a service” offerings — such as Office 365.

“The trends we’re seeing are pretty good,” he said. “They’re trying to nudge people along, offer incentives to move people over.”

Microsoft’s fast-growing cloud-platforms division — its Server and Tools business — has become the company’s third-highest revenue generating division. Analysts expect to see growth in the low teens for the division in the third quarter.

Its second-highest revenue generator in the second quarter, the Business division (which includes Office), is expected to see an increase in the high single digits.

“That’s pretty decent growth,” Lowenstein said.

That said, some analysts are not so optimistic.

Trip Chowdhry, with Global Equities Research, says what Microsoft lacks most is a singular vision, rather than its current range of offerings in which newer additions are “retrofit or an add-on,” he said.

“What is the new thing they have that no one else has heard of,” he said. “I don’t think the [third-quarter financial earnings] report will show anything about Microsoft’s direction. The financial report is historical — it’s last quarter. We are interested in knowing what Microsoft’s strategy is in a data centric world.”

Janet I. Tu: 206-464-2272 or jtu@seattletimes.com.

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