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should beat its second-quarter earnings estimates later this month thanks to heavier-than-expected tech spending, brisk

Halo 2

sales, and continued strength in the server and business applications markets, an analyst said Tuesday as he raised estimates.

J.P. Morgan analyst Adam Holt raised his second-quarter revenue expectations on the company to $10.65 billion from $10.5 billion -- higher than the company's guidance of $10.3 billion to $10.5 billion. In addition, Holt upped his second-quarter earnings by a penny to 34 cents a share -- also higher than the company's guidance of 28 cents a share.

(Microsoft's earnings target includes $715 million in stock-based compensation, while analysts typically exclude that charge from their estimates).

The consensus estimate on Wall Street gathered by Thomson First Call projects Microsoft to earn 33 cents a share on $10.53 billion in revenue in the second quarter, which ended Dec. 31, Microsoft will report its results on Jan. 27.

"We continue to believe that Microsoft should meet or beat Q2 expectations," Holt wrote. He noted the stock is one of his top picks for calendar year 2005 heading into Microsoft's fiscal 2006, which begins this July. Microsoft is slated to deliver

more major new products in fiscal 2006 compared with fiscal 2005, including the next version of the Xbox video game console and Office 12.

(Holt has an overweight rating on Microsoft; his firm has done investment banking with Microsoft; Holt, a research associate or member of their household holds Microsoft shares).

On the enterprise side of Microsoft's business, Holt noted that conversations with chief information officers and the company's software conference pointed to improving software spending in the December quarter, which should benefit Microsoft's Server and Tools division and Office sales as Microsoft benefits from the releases of Sever and Office 2003.

Holt concluded Microsoft's estimate of 14% to 15% server growth may prove too low in the wake of hardware bellwether



recently reported, 19% year-over-year jump in server shipments and J.P. Morgan's own hardware analyst's estimate of 18% growth during the quarter.

In Microsoft's Home and Entertainment division, Holt projected sales of

Halo 2

, Microsoft's blockbuster video game that

hit store shelves Nov. 9, could reach 7.5 million to 8 million units in the December quarter, given that the company said it sold more than 5 million copies worldwide in November alone. That could translate to $300 million to $320 million in

Halo 2

revenue, which prompted Holt to raise his overall estimate for the Home and Entertainment division by $75 million for the quarter to $1.39 billion.

Holt noted his estimate represents 10% growth for the Home and Entertainment division -- far more than the company's more modest target of 1% to 3% growth. Given easy comparisons from last year and a trailing 12-month average growth rate of 6%, Holt called Microsoft's guidance conservative.




recent strong showing in its previously weak applications business, combined with other checks, prompted Holt to take a more bullish stance on Microsoft's underperforming Business Solutions segment. The Business Solutions segment, one of Microsoft's unprofitable

"emerging" business segments, focuses on selling applications to small- and medium-sized businesses.

Meanwhile, Microsoft's MSN Internet division -- which just recently became profitable -- could show upside in the second quarter thanks to stronger holiday advertising demand, Holt said. That could boost MSN ad revenue beyond the $300 million generated in the first quarter.

Shares of Microsoft gained 17 cents, or 0.6%, to $26.91 in recent trading.