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Software giant and Dow-30 component Microsoft (MSFT Free Microsoft Stock Report) has reported revenues and earnings of $20.5 billion and $0.72 a share for its fiscal third quarter, compared with our estimates of $21.0 billion and $0.77 a share. (Years end June 30th.) The primary difference between the two earnings figures relates to a $733 million fine ($0.09 a share) that was imposed by the European Commission during the quarter. That said, the financial report generally made for good reading, and investors are greeting the results warmly. Microsoft shares were bid sharply higher in early market trading, in response.

Despite the adverse trends in the PC business, the Windows and Windows Live Division is making headway with Windows 8. Indeed, the ecosystem for the new operating system is continuing to take shape, with Microsoft and its partners clearly focused on the multiple-dimensional product marketing requirements to commercialize Windows 8 at the consumer level. Meantime, Windows 7 continues to be a success, particularly in the business arena, with two-thirds of enterprise desktops now on this system.

Server & Tools continued to find the wind at its back. Indeed, the group had another good quarter, with strength in demand coming from datacenters (virtualization and database) and strong interest in Windows Azure (cloud platform). Our sense is the established trend here is likely to remain for some time yet, given corporate customers' interest in improving the overall efficiency of their computer systems and networks.

The launch of the new Office productivity suite and general demand from businesses for the range of products offered by the Microsoft Business Division moved this group nicely forward for the March period. Moreover, the momentum for Office 365 continues to build, attracting small- and medium-sized businesses. In addition, the subscription-based revenue model for the new Office suite is interesting, since it should eventually provide a hefty annuity stream and smooth future product transitions. As it stands now, the prospects for MBD look good.

Meanwhile, the losses at the Online Services Division continued to narrow. Ad revenue moved forward at a good clip, benefiting from further improvement in revenue per search. And despite the strength of its competitor (Google search), Bing continues to pick up market share. Finally, the Entertainment & Devices Division is benefiting from higher transactional revenues and growing membership at Xbox Live and expanding interest in Windows Phone.

Adding it all up, we think the prospects for Microsoft  are good, and we continue to recommend these high-quality shares to those with a longer-term perspective, say in the two to three year range. Our revenues and earnings estimates for fiscal 2013 are now $79.0 billion and $2.75 a share (including the $733 million fine from the European Commission). At this juncture, our sense is revenues and earnings should move nicely higher in fiscal 2014, to around $85 billion and $3.00 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 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.