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Originally published July 19, 2007 at 12:00 AM | Page modified July 19, 2007 at 2:05 PM

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All eyes look to Vista as Microsoft reports

While the Xbox 360 has been getting all the attention lately, financial analysts are more interested in the performance of Windows Vista...

Seattle Times technology reporter

While the Xbox 360 has been getting all the attention lately, financial analysts are more interested in the performance of Windows Vista, which will be reflected in Microsoft's fourth-quarter and full-year financial report today.

The company said it expects earnings for the quarter of $5.0 billion to $5.2 billion, before a charge of up to $1.15 billion related to problems with Xbox 360 hardware.

That would translate to earnings per share of 37 to 39 cents — the average of analyst predictions is 39 cents — before the impact of the Xbox charge.

The charge, from a warranty extension on the game consoles, could trim up to 8 cents a share from earnings.

The three months ended June 30 marked the first full quarter of availability for Windows Vista and Office 2007. They went into broad release Jan. 30 and sold well during Microsoft's third quarter.

In addition to a full quarter's worth of sales results, the numbers should not be clouded by any abnormal accounting changes.

In the third quarter, Microsoft recognized $1.67 billion in deferred revenue related to programs meant to boost demand for PCs before Vista and Office were broadly released.

No such accounting changes are expected this quarter, giving analysts better insight into the performance of these two key products, which together account for more than 60 percent of Microsoft's sales.

"They did indicate in their third-quarter earnings that Vista seemed a little stronger than they expected," said Bob Toomey, chief equity strategist at EK Riley Investments in Seattle.

"And we're also hearing some buzz around the street from some other companies that PC demand is holding up pretty well, so we want to see if that's translating into better-than-expected growth for Vista," Toomey said.

He's expecting 15 percent revenue growth in both the Windows and Server and Tools business segments.

Sid Parakh, technology analyst at McAdams Wright Ragen in Seattle, will be tracking the pace at which businesses are adopting the new Windows operating system, and whether they are continuing to renew their three-year enterprise license agreements.


The performance of the Entertainment and Devices Division will also be under scrutiny.

In announcing the Xbox 360 warranty extension early this month, Microsoft disclosed it had shipped 11.6 million units as of June 30, below the company's goal of 12 million. That's more important than the one-time warranty charge, Parakh said.

"We are all looking for unit sales numbers, because that is really what is going to drive that division," he said. Executives have set a goal of reaching profitability in the division during Microsoft's 2008 fiscal year, which starts July 1.

Parakh will also look for more details of the impact the acquisition of aQuantive will have on Microsoft.

In one of its bigger moves of the quarter, Microsoft announced plans to buy the Seattle digital-advertising pioneer for $6 billion.

Parakh said he expects executives to cover strategic issues such as this at the company's annual financial-analyst meeting next Thursday in Redmond, rather than during today's earnings report.

Microsoft is also expected to give detailed guidance on its 2008 fiscal year at the meeting next week.

Its preliminary estimate for the year is sales of $56.5 billion to $57.5 billion and operating profit of $22 billion to $22.5 billion.

Benjamin J. Romano: 206-464-2149 or

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