Microsoft's fiscal third-quarter earnings announcement, scheduled for Thursday after the market closes, is unlikely to be a bright spot in this season's technology news.
The longtime source of Microsoft's ( MSFT - news - people ) steady growth and profits is ailing in a weak economy. Consumers and businesses globally have trimmed spending on computers. Research firm IDC figures PC shipments were down 7.1% in the first quarter of this year, compared to 2008 sales.
Nearly a quarter of Microsoft's revenues, and half of its operating income, came from its Windows operating system division at the end of 2008. That doesn't include sales of its Office desktop software, which are lumped into the Business Division along with enterprise software, and swing with Windows.
Wall Street analysts are estimating $14.1 billion in sales for the quarter, a 2.5% increase from a year ago. GAAP earnings are expected to come in at $0.39 per share, a 17% decrease from last year's $0.47, according to Thomson Reuters.
Instead of dwelling on the past, Microsoft will surely turn investors' attention to its upcoming operating system, Windows 7.
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The company hasn't yet given an official release date, but Endpoint Technologies analyst Roger Kay figures the new software will be out this summer, in time for the crucial back-to-school season.
Kay believes this could mark a real turning point for Microsoft. He's been running a trial version of Windows 7 and gives it high marks. "It will be Microsoft's saving grace. They could not afford a miss on this one. It feels like the powerful back-end of Vista without all the front-end annoyances," he says.
There's likely to be pent up demand for a new operating system. While consumers upgrading computers have had little choice but Vista, corporations have delayed purchases.
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Citigroup ( C - news - people ) analyst Brent Thill points out in a recent research report that Microsoft's stock does best around big product releases like Windows 7. The stock rallied 40% from June 2006 to January 2007 as Vista made its (much delayed) debut.
Microsoft Chief Executive Steve Ballmer also might clarify the company's approach to the quickly growing netbook category of PC sales. In the last year, these smaller notebook computers have increasingly run on Windows instead of Linux. That's good news for Microsoft, but it comes at a price. Windows on netbooks sells at a lower price than PC versions, by some estimates just $15, compared to an average $55 for PCs.
Netbooks running Windows have so far been limited to Microsoft's older operating system, XP, and not the newer Vista. Investors want to know how Windows 7 will run on netbooks and at what price point.
A slump in the most recent quarter won't surprise anyone. Ballmer acknowledged as much in a February update with investors and analysts.
He said then: "I have a basic theory that says, in the consumer market the things that get hit most in this economy are going to be big-ticket items that are viewed as discretionary. The car replacement, the extra PC and the PC replacement, the flat panel TV, all of that will be affected."
What would be a surprise: hints about a deal with Yahoo! ( YHOO - news - people ).