Goldman: Microsoft Vista Should Ship On Time

| About: Microsoft Corporation (MSFT)

Rick Sherlund, the software analyst at Goldman Sachs, lifted his price target on Microsoft (NASDAQ:MSFT) to $33 from $30, noting among other things that the company’s long-awaited Windows Vista software might actually meet its planned January release date.

Sherlund says that while his financial models since May have anticipated that Vista would actually be delayed until March, he now says that “a second delay is looking less likely.” Feedback on Vista RC1, the current pre-release version of the software, “has been positive overall,” he says. “It might be closer to February or even late January if all were to go well over the next two and a half months. A delay is possible in Europe depending largely on the EC, but this is not likely material to our estimates. Office 2007 is due at about the same time.”

If Vista releases on time, it would have implications in Sherlund’s financial model:

First, Microsoft would likely begin to offer new PC buyers free Vista upgrade coupons around the November Release-To-Manufacturing (NYSEARCA:RTM) date, meaning some of the revenue associated with PC sales will have to be deferred until the March quarter. We currently have $300 million of these revenues being deferred out of the March quarter and reversing as revenue recognition in the June quarter. Alternatively, a November RTM would push maybe $100 million out of December and into the March quarter. The precise timing of the coupon program will impact the allocation of revenue across the two quarters, with no net effect on the full year numbers. Our revenue estimate (which is about $100 million above the high end of revenue guidance of $50.7 billion) does not reflect the benefit of Vista revenues until the June quarter. We estimate that an earlier shipment could add about $200 million in upgrade revenues in addition to an increase in PC OEM demand which could add another $100 - $200 million (or a total of about $0.03 in EPS). The prices of upgrades and OEM royalties are also higher for a number of the premium versions of Vista, so our model will likely also need to be fine tuned to build in higher average unit price assumptions.

As for the Zune media player, unveiled officially on Thursday, Sherlund says he views Microsoft’s strategy of encompassing community and social networks as “appealing,” but notes that “Apple’s dominant market position and the stickiness of its iTunes service is likely a market share constraint.” But he says “Xbox still looks like a winner versus Sony’s PS3,” with losses narrowing rapidly and operations expected to be profitable a year from now.

Microsoft shares closed Thursday at $26.33, up 35 cents.