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Software giant Microsoft (MSFT – Free Microsoft Stock Report) recently reported revenues and earnings of $20.9 billion and $0.78 a share for the December quarter, versus our targets of $21.0 billion and $0.81. Nonetheless, MSFT shares traded nicely higher in early market action the morning after the report was released, suggesting investors are taking a positive view of the company's prospects.

The PC business is likely to remain a challenge in the near term, though, acting as a limit on the growth of the Windows and Windows Live division, for now. Indeed, retail customers' tastes have veered away from traditional PCs and netbooks, as they continue reaching for new form factors (tablets, etc.). Still, businesses continue to migrate their systems to Windows 7, and demand from emerging markets is healthy. In the meantime, the Windows 8 operating system looks like it may turn out to be another major release, given its support for a broad range of computing platforms and the new Metro style user interface. In addition, the accompanying Windows Store (for applications) should spur interest from developers and, thus, work to enhance the value of the system to the retail market.

Elsewhere, Office 2010, the growth of business applications (Lync, SharePoint, and Exchange), and Office 365 continued to propel the Microsoft Business Division forward in the December quarter. Moreover, it looks like there is still more room for expansion here, as customers benefit from the advantages the productivity suites offer. The Server & Tools group, meantime, is experiencing broadbased demand for its products and services (Windows Server, SQL Server, System Center, etc.), as corporations take advantage of system virtualization and adopt cloud computing—a process that will take some time yet to complete. Finally, although the Xbox/Kinect duo played an important role in the Entertainment and Devices group's fortunes over the holiday season, the current outlook for the game console market is a bit soft. We mention here that a number of cellphone handsets (Nokia (NOK)) that incorporate the new Windows Phone system have been recently released with generally good reviews. This is still a steep hill to climb, given the market positions of competitors Apple (AAPL) and Google (GOOG), but Windows Phone is a very credible offering in this arena, in our view. Last, but not least, the Online Services Division saw revenues advance and its loss decline in the December period, reflecting improved revenue per search (RPS) and the group's ability to leverage its cost structure. We look for the performance at Online Services to continue improving in coming quarters.

Adding it all up, although we have adjusted our revenue and earnings call for fiscal 2012 (ends June 30th) down a bit, to $74.5 billion and $2.75 a share, we continue to recommend MSFT shares. In addition, despite the recent market support, investors with an intermediate-time horizon should still find interest in this stock, which is now up near a 52-week high following the quarterly release.


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 2011 were as follows: Microsoft Business, 31.7% of total; Windows & Windows Live, 27.2%; Server and Tools, 24.4%; Entertainment & Devices, 12.7%; Online Services, 3.6%; Other, 0.4%. Research & development spending as a percent of 2011 sales was 12.9%.

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