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Software giant and Dow Jones Industrial Average component Microsoft (MSFT Free Microsoft Stock Report) has reported revenue and earnings for its fiscal 2015 fourth quarter (ended June 30th) of $22.18 billion and $0.62 a share, respectively (earnings are net of a writedown of goodwill associated with its phone business and previously announced restructuring charges). Our estimates were $22.96 billion and $0.58 a share. Although the company produced a respectable financial performance for the June period, investors seemed to want more, and MSFT shares have taken a step back in early trading.

Despite pressure from foreign exchange and weak markets in Brazil, China, Russia, and Japan (where the consumer business was particularly slack), the Commercial segment continued to show strength. On point, Microsoft is making headway in the cloud-computing arena, with its annual revenue run rate currently at greater than $8 billion. Office 365, Dynmanics CRM, and its cloud platform Azure are finding vigorous demand from its enterprise customers. In addition, the service orientation of the cloud, and in particular Office 365, has opened up the small and medium-sized business market to Microsoft, a segment that was difficult for the software vendor to address. Meanwhile, a new generation of servers will keep its enterprise offerings fresh, and provide its sales force an opportunity to expand its already significant position in this arena.

As had been announced, the Devices and Consumer segment saw the $7.5 billion writedown of the phone business. From our perspective, the action was not particularly unexpected, given the extreme competition in the smartphone business. That said, Xbox and Surface turned in a good showing in the quarter, adding a bit of luster to the hardware side. Meanwhile, revenue from licensing was down year over year, as expected, as the company and its OEMs prepare for the general release of Windows 10. In this regard, much is at stake for the new operating system. Early releases have generally found good reviews, and hardware vendors appear set to offer a wide range of new products incorporating the new system. Nonetheless, the proof will be in the pudding, with the financial benefits most likely to start accruing in the company's second half (the March and June quarters of 2016).

As it stands now, we estimate Microsoft's revenue and earnings for fiscal 2016 at $94 billion and $2.65 a share. We would expect currency translation to weigh in more in the first half, with some relief being realized in the second (assuming the dollar does not strengthen further). Meanwhile, the software giant remains committed to its share buyback program and to a growing dividend payout. In brief, those subscribers already holding MSFT shares should continue to do so, in our view.

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 2014 were as follows: Devices and Consumer, 43.4%; Commercial, 57.1%; Corporate and Other, -0.6%. Research & development spending as a percent of 2014 sales was 13.1%.

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