Microsoft Tests Its Mettle

SAN FRANCISCO -- Conservative expectations surround Microsoft(MSFT Quote) for its first fiscal quarter, making it possible for the company to narrowly beat the Street when it reports earnings Thursday.

But with tech stocks seemingly headed toward another multi-year low, the optimism might end there.

Fort Pitt Capital analyst Kim Caughey expects the company to meet or beat analysts' profit estimates of 47 cents a share by one or two cents. Fort Pitt owns 407,000 shares, and Caughey holds Microsoft shares personally.

But she'll be looking even more closely at Microsoft's comments about its server and tools group, which "is a great indicator of whether a wide swath of businesses are still buying software," she says.

Because many customers pay for server software on a subscription basis, Caughey wants to make sure "they're still paying subscriptions and re-upping [contracts] at the same rate they have in the past."

In July, Microsoft projected year-over-year revenue growth of 19% to 20% for its server group, implying first-quarter revenue of $3.45 billion. The group generated 16% revenue growth during the same period last year.

Its Vista and Office client software business is projected to grow 6% to 7% in the first quarter -- tepid compared with 25% growth for that business in the same quarter of last year.

But even that conservative projection might be optimistic. Dell(DELL Quote) has since said its PC sales have slowed. And "channel checks" indicate that notebook shipments were much weaker in early September, according to American Technology Research analysts. Donovan Gow cut his client software growth prediction Tuesday by a point to 6%. "Microsoft has set the bar very low for itself, particularly on client," he wrote.