Microsoft forecast to shed light on Windows

Microsoft will tell the world Thursday just how much impact it expects new versions of its flagship products to have on the bottom line in the upcoming business year.

In what is practically a rite of spring in Redmond, the company releases a preliminary forecast of revenue and profit for the next fiscal year along with its third-quarter report in late April.

Microsoft's 2008 fiscal year begins July 1 and will be the first full year that flagship products Windows Vista and Office 2007 are available.

"Everybody is looking for more updates on the Vista front as well as what they have to say for fiscal '08," said Sid Parakh, analyst with McAdams Wright Ragen.

With Windows contributing more than 60 percent of the company's profit, the two issues are closely linked.

Thursday's report will also test Microsoft's new efforts to improve communications with financial analysts and investors.

A year ago, Microsoft surprised Wall Street during its third-quarter report with plans to increase spending in the 2007 fiscal year by $2.7 billion across several areas, including its long-term Internet-services strategy.

A historic sell-off the following day lopped $32 billion off Microsoft's market value as investors reacted to forgone short-term profits.

In an e-mail to employees, Chief Executive Steve Ballmer said the reaction was "a lesson that the entire leadership team at Microsoft will learn from."

"Strategic guidance"

Last summer, Chief Financial Officer Chris Liddell pledged to provide "strategic guidance" in late winter, around the time financial analysts prepare their own forecasts for the coming year.

Microsoft made good on that promise in February, when Liddell and Ballmer addressed analysts in New York.

They delivered two main points: Some analysts were expecting too much bang from Vista in fiscal 2008. And expenses would grow in the coming fiscal year, but not by more than the $2.7 billion shocker of fiscal 2007.

That was not enough to quiet everyone's concerns, however.

"Investors remain fearful of further commentary regarding spending intentions and, with the aforementioned [Vista and Office] product cycles still in early stages, still see little growth to get excited about," Goldman Sachs analyst Sarah Friar wrote in a research note this month.

Walk-down strategy

Some observers saw Microsoft's comments on Vista in February as a classic "walk-down" of analyst expectations — the practice among public companies of lowering expectations to make it easier to meet them.

There's good reason to do so, said Dawn Matsumoto, a University of Washington accounting professor who researches the communication between company management and analysts.

"Research shows that when companies miss expectations, [their stock] gets penalized," she said.

"Microsoft historically is known to be pretty conservative with their guidance. They try to make sure that expectations don't get overblown so they won't miss," she said.

The Thursday report will center on Microsoft's results of its third quarter, which ended March 31 and included the broad consumer launch of Vista and Office 2007.

Analysts polled by Thomson Financial expect Microsoft to post profit of 46 cents a share for the quarter.

In January, the company had said it expected earnings for the quarter to be 45 to 46 cents a share.

That would be a dramatic jump from both the previous quarter and year, but those bottom-line figures represent a one-time credit of 12 cents a share resulting from an accounting practice that shifts $1.68 billion in revenue to the third quarter.

The revenue is from Vista upgrade coupons Microsoft issued to stoke PC sales over the holidays, before Vista was released, and other programs.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com