Software giant and Dow-30 component Microsoft's (MSFT - Free Microsoft Stock Report) has reported revenues and earnings of $21.5 billion and $0.76 a share for its second fiscal quarter (ended December 31st). Our revenues and earnings estimates, which dated from mid-November, were $21.5 billion and $0.81 a share. Investors' expectations had become less optimistic as the final quarter of 2012 came to a close and, though the earnings report was greeted with little fanfare, there were no particular surprises, and the price of MSFT shares opened modestly higher in the morning following the release.
Microsoft's operations continue to generate copious cash flow, with profits from the Windows and Windows Live and Server & Tools segments posting nice advances in profits. The Windows division benefited from the release of Windows 8 and the continuing adoption of Windows 7 by corporations. The company's entrant in the tablet market, Surface, was also a positive factor, but the release was held to specific targeted markets, so the effect was not broad. Meanwhile, Server & Tools continued to push further in data centers, with products such as Windows Server 2012 and Windows Azure making headway. Corporations' adoption of cloud computing technology was also a positive here. Elsewhere, the Microsoft Business Division was held back some, as customers awaited the latest release of Office. Nonetheless, productivity applications Exchange, SharePoint, and Lync grew at a fast pace.
Moving down the stack, the Entertainment & Devices division saw its top line decline and its loss increase. The game console business fell off this holiday season, though there appears to be increasing interest in Windows Phone. Finally, revenues grew nicely and the loss narrowed at the Online Services Division, as advertising revenues remained on the advance, helped by the positive trend in rate improvement in search; Bing also continued to gain share in the United States.
At this writing, our revenue estimate for fiscal 2013 (ends June 30th) is unchanged at $80 billion. However, we have cut a dime from our earnings call, which is now $2.85 a share. The transition to Windows 8 in the marketplace is going to take some time, as the new operating system finds its place on a broad range of new devices and the ecosystem around the product evolves. Moreover, Microsoft, like many technology companies with a large presence in the retail arena, is finding that price is an important factor in the purchase of the latest handheld gadget. Thus, product lines with differentiated price points will be an important factor in the marketplace for Windows 8, and Microsoft is working with its partners to ensure this requirement is met.
In terms of the stock, we note that MSFT shares have had trouble moving past the mid-thirties for some time now, so this point is one to keep in mind when considering new commitments. On the other hand, the good-yielding stock seems to have a market floor in the low- to mid-twenties, thus establishing a trading range. At this issue's recent price, patient investors may find some interest here for well-defined total returns.
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 2012 were as follows: Microsoft Business, 32.6% of total; Windows & Windows Live, 24.9%; Server and Tools, 25.3%; Entertainment & Devices, 13.0%; Online Services, 3.9%; Other, 0.3%. Research & development spending as a percent of 2012 sales was 13.3%.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.