Microsoft (MSFT) reported decent fiscal fourth-quarter results Thursday that showed strong sales of its Server and Tools products, Microsoft Office 2010, and its Xbox 360 entertainment platform. Revenue advanced 8% from the same period a year ago, while net income jumped 30% thanks in part to a lower tax rate. Overall, we were pleased with the quarter, despite the ongoing earnings weakness at its online business and declining growth at Windows, and we are maintaining our $35 fair value estimate of Microsoft’s shares.
The firm’s Business Division had a strong showing, with quarterly revenue up 7% during the period, and the firm indicated that Office 2010 continues to be the fastest selling version of Office in history. The firm’s Server & Tools segment grew 12% in the quarter, with Windows Service, System Center, and SQL Server leading the charge. Revenue in the firm’s Windows division fell 1% in its fiscal fourth quarter, though we think the next version of Windows (codenamed Windows 8) will help bolster growth in this segment going forward. Management indicated that sales of PCs to businesses grew about 8% in the quarter, while sales of PCs to consumers declined about 2% due to significant weakness in netbooks (down 41%). The firm thinks the total PC market expanded about 1% to 3% during its fiscal fourth quarter.
Sales in the firm’s Online Services division jumped 17% thanks to increased search revenue at Bing, which increased its U.S. search share to 14.4% in the quarter, up 340 basis points. However, losses in its online services division continue to swell, holding back even stronger earnings growth company-wide (in fact, operating losses in the division are greater than the segment’s revenue). Kinect and Xbox Live and 360 led the charge behind a 30% increase in revenue in Microsoft’s entertainment and devices segment. The firm shipped 1.7 million Xbox 360 consoles in the fourth quarter compared to 1.5 million in the same period a year ago, which was enough to push the segment into profitability this quarter from a loss in the same period a year ago.
Overall, we’re favorable on Microsoft’s fundamentals and think its move to cloud services with the release of Office 365 and growth in Windows Azure will propel further expansion at the firm in coming periods. Though slow PC industry growth, the path toward turning around its online business, and its future in mobile devices remain apparent concerns, we would consider adding the firm to our Best Ideas List upon technical improvement.
