From Microsoft's lofty perch, no sign of a slowdown

January 25, 2008: 5:00 AM ET

Hoping that Microsoft would clarify how a spending slowdown might hurt the tech industry? Then you were out of luck Thursday.

When the software giant offered its strong earnings numbers, it had nothing but happy news to offer. Thanks largely to stronger-than-expected global PC sales, Microsoft (MSFT) reported $6.48 billion in profit for the holiday quarter on sales of $16.37 billion, beating analyst estimates.

Windows Vista
Better-than-expected PC sales and lower piracy rates meant Microsoft sold lots of copies of Windows Vista, and turned in strong earnings for the holiday quarter. Courtesy: Microsoft
Microsoft 6 months
Though it's typically a sleepy stock, Microsoft has made some moves over the last six months.

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Even better, Chief Financial Officer Chris Liddell raised the company's sales and profit targets for the next two quarters -- a sign that unlike Wall Street, Microsoft expects a comfortable start to 2008, despite signs that U.S. businesses might slow their spending. "We've just gone through our mid-year reviews where we go country by country and segment by segment, across the world," Liddell said. "The next six months we feel very good about." Those good feelings were contagious, as appreciative investors bid the stock up more than 4 percent after hours.

Microsoft's earnings report was significant because the tech industry's most valuable company is also best suited to seeing trouble on the horizon. Microsoft's Windows operating system ships on more than 90 percent of the world's PCs, while products such as Office productivity software and the Xbox 360 gaming console give it an up-close look at the spending patterns of everyone from the largest corporations to individual consumers.

That's why jittery analysts, who have weathered a volatile week in the markets, hoped to get some answers from Microsoft on the earnings call. How are consumers holding up? Are businesses slowing their spending on any products? Why were Microsoft sales so strong? "Certainly if there's a substantial economic slowdown you could see PC growth rates come down," Liddell allowed, but Microsoft isn't taking a skittish approach to planning for the year. "We actually feel very optimistic."

It takes more than optimism to make a stock rise, however. In recent days Apple (AAPL) and Intel (INTC) also expressed optimism in their earnings calls. But unlike Microsoft, their stocks tanked after hours.

If that seems like a travesty of financial justice, some context is in order. Microsoft stock has mostly traded between $25 and $35 per share since a year ago -- it is one of those boring, dividend-producing stocks from a company that's so big it can't grow too fast. Apple and Intel, by contrast, were coming off of a barn-burner 2007 in which investors snapped their shares hoping for plenty of growth. At times, Intel stock rose as much as 40 percent in 2007, and Apple stock more than doubled.

But 2008 is a different story. In the face of global economic challenges, investors may be settling into the reality that Microsoft's plodding growth rate is more realistic for the tech industry as a whole. That would explain why Microsoft stock jumped after hours on its guidance, while Intel and Apple's sank.

Another trend worth noting: Microsoft's report marked just one more time that a global enterprise software company has expressed confidence about the coming year. IBM (IBM) sounded positive notes when it pre-announced good earnings numbers last week, as did Oracle (ORCL) when it reported last month. Trip Chowdrhy, analyst with Global Equities Research, said he believes it's no coincidence. "Customers are buying software from companies that can deliver many pieces of technology across the globe," Chowdhry said. "The small companies don't have the product line or the scale to deliver that."

What this means for the rest of techland is anyone's guess. Next week brings another wave of reports from important companies including VMWare (VMW), Yahoo (YHOO), Amazon (AMZN), SAP (SAP) and Google (GOOG).

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