Don't Bury Microsoft Just Yet

It's fashionable to bash Microsoft (Nasdaq: MSFT  ) these days, but now it's time to let the world's largest software company sashay down the runway.

Mr. Softy did post better than expected results last night. Revenue climbed 25% to $16.2 million, with earnings per share soaring 55% to $0.62 a share. These are eye-rubbing tallies, but keep in mind that last year's fiscal first quarter was sandbagged. Include the revenue and net income deferrals related to Windows 7 upgrade and sales in anticipation of its debut last October, and revenue and earnings per share would have only grown by 13% and 19%, respectively.

Then again, the way folks have been hating on Microsoft these days -- Pacific Crest's Brendan Barnicle became the latest to downgrade the tech giant earlier this week -- one may be surprised to find Microsoft growing at all!

With or without the deferrals, analysts were still low-balling Microsoft's potential. Wall Street was looking for a profit of $0.55 a share on $15.8 billion in revenue.

Revenue grew in all five of Microsoft's divisions, but it's not perfect.

  • Bing is growing market share -- and its deal to handle Yahoo!'s (Nasdaq: YHOO  ) search can only help -- but Microsoft is still losing money in cyberspace. In fact, the division's operating loss actually widened.
  • Microsoft claims that its Xbox 360 is gaining share, outselling Sony (NYSE: SNE  ) and Nintendo (OTC BB: NTDOY.PK) to be the top console in each of the past four months. However, it's selling more consoles at lower prices. The industry in general has been declining for nearly two years.
  • This is still a software company, as its Xbox-fueled entertainment division accounted for just 11% of the quarter's revenue and a mere 5% of the operating income.

Thankfully, its bread-and-butter software business is booming with the release of Windows 7 and Office 2010 over the past year. Microsoft also sees a "healthy and sustaining" refresh cycle for business PCs, despite fears that the cloud computing revolution will make corporate computer upgrades less necessary as the action moves to the server farms.

Windows Phone 7 remains a longshot to dent the established smartphone operating system space cornered by Apple (Nasdaq: AAPL  ) , Google (Nasdaq: GOOG  ) , and Research In Motion (Nasdaq: RIMM  ) , but it's not as if Microsoft has to hit a homer there right away. As long as mobile platforms don't become the operating systems of choice in the future of computing, Microsoft's foot in the smartphone door is enough for now.

In short, Microsoft's health is better than worrywarts think, but it's going to take a few more catalysts to awaken the shares from its lost decade.

What did you think about Microsoft's quarter? Share your tips in the comment box below.

Google and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Apple and Nintendo are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz admits to being one of Microsoft's vocal critics, though he was impressed with the company's quarter. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2010, at 2:01 PM, prime99 wrote:

    In September, Microsoft (MSFT) finally broke from PC sales. Microsoft’s Q3 earning report shows that even though PC sales continued to decline, the company’s profits increased. If you are worried about the impact of PC sales on MSFT breathe easy, Microsoft should be just fine. After all it has long established itself as the business standard of PC software.

    Notice how MSFT breaks from PC sales in September

    Microsoft bounces back from weak PC sales- http://www.hiddenlevers.com/hl/u?dcMqKt

    Improving retail sales figures indicate MSFT should be on the ups as well.

    Consumer wants Microsoft Products- http://www.hiddenlevers.com/hl/u?amXJD5

  • Report this Comment On October 29, 2010, at 2:54 PM, RookieFool2010 wrote:

    "These are eye-rubbing tallies, but keep in mind that last year's fiscal first quarter was sandbagged. Include the revenue and net income deferrals related to Windows 7 upgrade and sales in anticipation of its debut last October, and revenue and earnings per share would have only grown by 13% and 19%, respectively."

    That is true that revenue was deferred. But shouldn't it be counted? Its not as if it was double-counted!

  • Report this Comment On October 30, 2010, at 12:29 PM, aleax wrote:

    @InfoThatHelps, you say "Email should cease to exist within enterprises within 3 years" -- right: just after the much-older system known as "fax" ceases to exist there, I'm sure... you DO realize that still today it's impossible to do business effectively without convenient fax access (maybe indirectly by way of... email!-), right?

  • Report this Comment On November 03, 2010, at 9:51 PM, penchy1 wrote:

    ...and we don't use paper any longer! Also, I understand COBOL is dead, legacy systems are gone, etc.

    Kidding aside, I like your points, it's just that long established, deep-rooted business technologies live long.

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