PC sales ticked up in the quarter, but likely not enough to bolster Microsoft’s results

Earnings Preview: PC weakness to hurt Microsoft

SEATTLE — Microsoft Corp. reports its earnings for the fiscal first quarter on Friday before the opening bell. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: Redmond, Wash.-based Microsoft finally locked up a search and advertising deal with Yahoo Inc., which the software maker tried but failed to acquire last year. Under the terms of the agreement, which must still pass regulatory muster in the U.S. and Europe, both companies would use Microsoft’s Bing search engine and its system for booking online ads, though Yahoo sites may not prominently advertise the fact.

Microsoft wrapped up work on Windows 7 and shipped the bits off to be pressed onto discs. The operating system goes on sale Thursday. The software maker is also set to open the first of the retail stores it announced during the quarter, with a ribbon cutting taking place Thursday morning at an upscale Scottsdale, Ariz., mall.

In other product news, Microsoft launched an updated Zune music player, made progress on the next version of Office 2010 and cut the price of its Xbox 360 Elite video game console.

During the July-through-September period, Microsoft tried to appease antitrust regulators in the EU, who have decided selling Internet Explorer as part of Windows is illegal. Microsoft offered to ship a version of Windows 7 without any browser installed, but the EU pointed out that gave consumers less choice, not more. Microsoft later proposed to show EU users a prominent screen from which they can pick several browsers — listed in alphabetical order — to install along with or instead of Internet Explorer.

Also during the quarter, Microsoft agreed to sell Razorfish, the digital advertising agency it acquired when it paid $6 billion for online advertising company Aquantive in 2007, to France’s Publicis Groupe SA. The cash and stock deal was valued at $530 million.

A federal judge decided Microsoft need not pay $358 million to Alcatel-Lucent in long-running patent dispute.

And finally, a cougar was spotted wandering near the software maker’s suburban headquarters.

BY THE NUMBERS: Analysts polled by Thomson Reuters expect Microsoft to post a profit of 32 cents per share on $12.37 billion in sales.

ANALYST TAKE: PC shipments edged up in the quarter, which will be a big help for Microsoft’s biggest businesses, Windows and Office, but not enough to keep sales from declining from year-ago levels, wrote Collins Stewart analyst Sandeep Aggarwal in a recent note to investors.

The analyst predicted Microsoft will deliver better-than-expected cost-cutting measures, and noted that Microsoft’s Bing snagged a slightly bigger share of U.S. Web searches in the quarter.

“We can’t tell yet if this market share gain in search queries is sustainable in the long run,” the analyst wrote.

STOCK PERFORMANCE: Microsoft shares finished the quarter ahead 9 percent, closing at $25.72 on Sept. 30.