Microsoft Needs to Be Mouthy on Mobile

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NEW YORK ( TheStreet) -- Despite the two gloomy factors that dominate investor conversations about Microsoft ( MSFT) -- declining PC sales and the company's inability to gain traction in the mobile device market -- analysts generally expect the software giant to post solid second-quarter results after the bell Thursday.

This quarter's reports of increasing corporate IT spending from Intel ( INTC), IBM ( IBM) and other big, back-end tech firms bode well for Microsoft, which should continue to show evidence of an uptake of Windows 7 and a robust server business.

"If the economic recovery continues -- in which the numbers I'm hearing projected for corporate spending are anywhere from 2% to 5% over last year -- a big portion of that will go into new desktops for employees," says Charles King, principal analyst at tech research shop Pund-IT. "That's going to be very good news for Microsoft."

Analysts are expecting the company to post a profit of 68 cents per share, down from the year-ago period when Microsoft reported 74 cents EPS. Sales are expected to hit $19.14 billion, up from $19 billion last year.

The sales boost will likely come from blockbuster sales of Kinect for Xbox 360, the $150 hands-free gaming console of which about 8 million were sold over the holiday shopping season, besting Microsoft's own estimate of 5 million.

"Microsoft's bright spot is the Kinect, which had to be the runner-up to the iPad for product of the year," says Laura DiDio, principal analyst at tech consulting firm ITIC. "And for the Xbox itself, sales there are very robust -- that's going to be very important for Microsoft moving forward, given what's going on with the company's mobile initiative ."

And while analyst firm Stifel Nicolaus estimates that Microsoft's entertainment and devices revenue, which today makes up 11% of overall sales, will grow up to 28% for the upcoming quarter, the prospects for Windows Phone 7 and the company's future in tablets are, right now, much more ominous.

Investors will be looking for sales numbers on Windows Phone 7, which Microsoft has been somewhat cagey about. On Wednesday, Microsoft told All Things Digital that through December, it shipped 2 million Windows smartphones -- to retailers, which means the phones could be sitting on shelves. The company refuses to say how many phones consumers have bought. In comparison, OS market leaders Apple ( AAPL) and Google ( GOOG) estimate that around 300,000 phones running their software are activated daily.

Then there's Microsoft's tablet strategy, which instead of materializing as flashy prototypes during the Consumer Electronics Show, remains a down-the-road promise bolstered by a new, Windows-version chip from ARM Holdings ( ARMH), the U.K. firm whose chip designs power the majority of today's tablets and smartphones.

"We believe Microsoft's recent decision to support ARM is a necessary but not sufficient step in responding to the rapid emergence of the tablet category," wrote Atlantic Equities analyst Christopher Hickey in a recent research note. "We still see risk to sentiment and estimates as forecasts for the tablet market increase and PC estimates decline."

Analysts say that tablets running Windows aren't likely to ship until 2012, when second and possibly even third iterations of Apple's iPad and other Android tablets will have found their way into consumers' hands.

However, in a landscape where less than a handful of tablet devices has actually made it to market, Pund-IT's King says there's still hope for Microsoft. "In my mind, this market is anything but fixed right now. If Microsoft comes up with a great idea and executes it well with good partners -- Windows OS and apps on ARM could be potentially revolutionary for the company -- I don't see why they can't have a place there."

Microsoft shares were trading up 12 cents to $28.90 in pre-market trading Thursday.

--Written by Maggie Overfelt in New York.

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