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Microsoft Q3 Profit Decline Expected

Microsoft earnings will be watched closely for signs of how Windows is faring against competition from tablets and smartphones.

Microsoft is expected to report a modest sales increase for its fiscal third quarter when it posts earnings after the bell Thursday, despite a challenging environment in which many consumers are opting for Apple or Google-powered tablets instead of Windows PCs for their computing needs. Profits, however, are expected to be down as compared to the previous year.

Analysts surveyed by Thomson Financial, on average, expect Microsoft to report revenue of $17.18 billion, up 4.6% from a year ago. Earnings are expected to come in at 58 cents per share, down slightly from 61 cents in fiscal Q3, 2011.

While Microsoft is seeing a decline in sales of Windows and other software products to consumers, the enterprise spending environment remains relatively healthy as the industry goes through an equipment refresh cycle, analysts say.

"Microsoft remains the market leader in its Windows and Office product categories and is benefitting from the corporate PC refresh cycle underway," said Wells Fargo analyst Jason Maynard, in a note to clients. Maynard, however, added that he doesn't see much upside to Microsoft's stock, which was priced at $31.16 at one point in afternoon trading, "in light of competitive challenges in the Internet services and mobile device markets."

[ Will Windows 8 reverse Microsoft's fortunes? See: Microsoft Windows 8 Unification Plan: Grand, But Risky. ]

Microsoft's results are expected to closely mirror those of partner Intel, which earlier in the week reported a quarterly revenue gain of just .5%. Intel CEO Paul Otellini said in a conference call that PC sales in the quarter experienced "ongoing strong demand in emerging markets and in the enterprise…offset by continuing softness in the mature market consumer segments."

Microsoft is hoping that the launch of the touch-centric Windows 8 OS, expected later this year, will give it a lift in the consumer market.

Analysts will also be watching Microsoft's earnings closely for clues about how well its Windows Phone operating system fared during the quarter. Launched in late 2010, the OS has found little traction to date. According to the latest numbers from Comscore, Windows Phone holds less than 4% of the U.S. smartphone OS market, compared to 30.2% for Apple, and 50.1% for Google Android.

Microsoft is counting on the Nokia Lumia 900, which debuted earlier this month amid considerable fanfare, to boost Windows Phone's market share--but the device was launched too late for its sales to be counted in Microsoft's Q3 report.

Microsoft's revenues should get a lift from its Skype operations. Skype was generating annual sales of about $1 billion before the company was acquired by Microsoft last year. But costs from integrating and marketing Skype likely placed a slight drag on earnings.

Microsoft is scheduled to hold a conference call to discuss its third-quarter earnings at 2:30 PT.

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