Software giant and Dow-30 component Microsoft Corporation (MSFTFree Microsoft Stock Report) reported revenue and earnings for the final quarter of its fiscal year (ended June 30th) of $17.4 billion and $0.69 a share, respectively, versus our estimates of $17.3 billion and $0.60 a share. The company continued to run well, with the bottom line benefiting from astute tax management and the advantages it accrues from the geographic breadth of its operations. Demand from large corporations was brisk, led by the Windows and Window Live Division, Server & Tools, and the Microsoft Business Division. Nonetheless, MSFT shares initially fell off slightly following the earnings release, but recovered by midday.

The business PC refresh cycle is alive and well, and will likely remain in place another year. Indeed, there is broad acceptance of Windows 7, with most corporations either in the process of upgrading or having plans to do so. (More on the Windows group and PC demand below.) In addition, business activity at the Server & Tools segment is healthy, as corporations remain focused on improving the effectiveness of their IT systems. As we have mentioned before, Microsoft is well positioned in this regard and is finding good success in selling Windows Server, System Center, and SQL Server. Its offerings aimed at the cloud and cloud services (e.g., Azure) are also doing nicely. Meanwhile, the Microsoft Business Division posted very strong results, owing to the popularity of Office 2010 and the uptake by large corporations.

Elsewhere, the Xbox/Kinect duo remains very popular and powered the Entertainment and Devices Division to another good showing on the top line, while higher operating expenses (product costs, etc.) weighed on operating profits. Nonetheless, Xbox, Kinect, and Xbox LIVE seem set to continue driving this group's performance. Finally, revenues at the Online Services Division grew nicely, largely benefiting from increases in search revenue. Indeed, although Google (GOOG) remains dominant in Internet search, Bing is picking up market share in the United States. Nonetheless, the division continues to lose money, reflecting the fixed-cost nature of the search business. Microsoft remains very committed here, though, and believes that it will be able to generate respectable revenue growth in coming quarters, reflecting the general health in Internet ad placements and improving revenue-per-search from the Yahoo! (YHOO) partnership.

Last but not least, the changing dynamics in the PC market seem to have stabilized, at least for the time being. As mentioned, demand from businesses is good, reflecting the current refresh cycle. However, consumers continue to reach for new form factors, as is evident of the success of tablets and smartphones. Meanwhile, PC demand from emerging markets is strong, though Windows is sold at a lower average selling price in this arena and distribution is more difficult to control (more piracy). In sum, it seems that the scenario briefly outlined above is likely to remain in play for the year ahead, suggesting the performance of the Windows and Windows Live division may not excite until the release of Windows 8, which will support a wide range of platforms and give Microsoft entree into the broader personal computing world.

At this writing, our take on Microsoft shares is unchanged. On point, our revenue and earnings estimates for fiscal 2012 remain $74.5 billion and $2.80 a share. Operationally, the company is running well and should continue to generate tremendous cash flow, facilitating further share buybacks and dividend increases. Moreover, Microsoft is deeply involved in extending the demand for the products and services, by expanding their ecosystem. Indeed, the recent release of Office 365 is an example in this regard, as is a range of relatively new connectivity products and services. Still, challenges in the mobile computing and communications arenas remain. Adding it all up, these timely shares may be of more interest to investors with a two- to three-year time horizon.

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.