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Software giant Microsoft (MSFTFree Microsoft Stock Report) has reported revenue and earnings of $19.95 billion and $0.77 a share, respectively, for the December period, easily exceeding our estimates of $19.0 billion and $0.69. The popularity of the Kinect sensor for the Xbox gaming console and the rapid adoption of Office 2010 were important factors in the company's financial results. In addition, Windows 7 continued to make headway with corporate customers, as businesses are migrating to the new operating system. Finally, spending on information systems is up, and Microsoft is benefiting nicely, as evidenced by the performance of the Servers and Tools group and customer interest in its cloud computing products and services.

It is clear that Microsoft is doing well in its traditional markets, which it has long dominated. Indeed, its latest products are performing exceedingly well. But it seems that investors, while not taking success in these arenas for granted, want to see more progress in what are now seen as high-growth consumer markets. Although the Xbox console and the new Kinect sensor are hits, the company's record elsewhere is less stellar. That is not to say that Microsoft will not have success in the newer hot markets, it is just that its name does not have the cache with retail consumers that some of its competitors have been able to establish.

Nonetheless, we were pleased to see that Microsoft has broadened the spectrum of consumer devices on which Windows will operate in the future, including system on chip architectures. This move is clearly in its core competency, making the potential for success more probable. These are fast moving and competitive markets, though, requiring the software giant to be fleet of foot.

Adding it all up, our sense is that Microsoft is set to post a good financial performance in fiscal 2011 (ends June 30th), with much of the growth coming from its traditional markets. We have raised our earnings estimate for the year by a dime, to $2.55 a share.

About The Company: Microsoft Corp. is the largest independent maker of software. It develops and sells products for a wide range of computing devices. The company also sells the Xbox video game console. Revenue sources in fiscal 2010 were as follows: Microsoft Business, 29.8% of total; Windows & Windows Live, 29.6%; Server and Tools, 23.8%; Entertainment & Devices, 12.9%; Online Services, 3.5%; Other, 0.4%. Research & development spending as a percent of 2010 sales was 13.9%.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.