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Software giant Microsoft Corp. (MSFT - Free Microsoft Stock Report) reported revenue and earnings for its fiscal fourth quarter (ended June 30th) of $19.934 billion and $0.66 a share, respectively, when adjusted for a $900 million inventory writedown associated with price reductions on Surface. These figures fell well short of what most investors had in mind. On point, our estimates had been $21.0 billion and $0.74 a share. As a result, MSFT stock traded sharply lower following the announcement.

The performance of the Windows and Window Live division was particularly soft, reflecting the continuing decline in demand from the consumer PC market. Moreover, Windows 8 has gotten a slow start, and has not been able to catch consumers' attention in a meaningful way. True, new devices are coming to market that utilize the new operating system's touch capabilities, but Microsoft's competitors have a large lead that will be very difficult to overcome. That said, Windows 7 continues to be rapidly deployed in the enterprise arena, but the number of corporations remaining to do so is fast declining, suggesting that the benefit from the software upgrade cycle may start to diminish in the coming quarters.

Meanwhile, the Microsoft Business Division advanced nicely in terms of revenue and operating income, though it was also affected by the decline in PC demand. Nonetheless, business revenue continued to show good growth, and productivity applications Exchange, SharePoint, and Lync remained on an upward trajectory.

Elsewhere, the Server & Tools group remained a bright spot, with Microsoft's product offerings showing strength in the datacenter. In addition, the company continues to build out its cloud services, leveraging its Windows Azure platform.

Finally, the Online Services Division reported respectable revenue growth, reflecting better revenue per search. However, this group continues to operate at a steep loss. There was little of note from the Entertainment & Devices Division, where results are highly seasonal, due to the holiday demand for Xbox.

At this juncture, it appears that the rapidly changing dynamics in the consumer PC arena are going to continue challenging Microsoft and its Windows and Window Live division, at least in the near term. Indeed, most personal users find tablets and smartphones more than sufficient for daily needs. Whether the new release of Windows 8 (8.1) has a meaningful impact here, is an open question at this point. That said, our sense is the Microsoft Business Division and the Server & Tools group are likely to continue performing well in coming quarters. Nonetheless, we have decided to reduce our estimates for fiscal 2014. We are now looking for revenues and earnings of around $83.0 billion and $2.90 a share, compared with our previous targets of $84.5 billion and $3.05.

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.