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Microsoft Financial Report: Is the Worst Over for Redmond?

When Microsoft reported earnings that slightly missed revenue forecasts but beat profit projections yesterday, investors reacted by trading down the company's stock 2 percent in after-hours trading. However, after sleeping on it, Wall Street seems to be seeing the glass half-full.

Microsoft stock was trading up about 1 percent midday today, following several analyst upgrades. While the jury on Windows 8 is still out and Microsoft certainly didn't hit it out of the park, the 60 million licenses sold -- albeit much from deferred revenues -- was enough to convince analysts that it's not a dud.

"We remain positive on the Windows 8 strategy around client, mobile, server, and cloud," Raymond James analyst Michael Turits noted, according to Barrons. "While W8 has not deflected the downward course of PC shipments thus far we expect the acid test to come in C2H13 with improved OEM hardware and distribution, and increasing value of both the enterprise and home ecosystem."

Citigroup analyst Walter Pritchard also was upbeat and raised his estimates for Microsoft's moribund stock to $35, which was trading at just under $28 midday Friday, Barron's Tiernan Ray reported. "We'd note that while PC market declines in CYQ4 continued, there are signs that the worst may be behind the company," according to Pritchard. "Looking forward, with 10" iPad sales plateauing, touch coming to more PCs, price points coming down, a lower-power Intel SOC architecture [Haswell] launching CYQ2/Q3 and a likely update to Win8 in the fall, Q4 may be the bottom for MSFT's consumer PC business. We look to see further confirmation of this trend."

Indeed Microsoft CFO Peter Klein indicated on yesterday's earnings call that he believes lower cost systems are in the OEM pipeline. "We are working very closely with our chip partners as well as the OEMs to bring the right mix of devices which means the right set of touch devices at the right price points depending in the unique needs of the individual," Klein said on the call. "I think we've learned a lot from that and one of the things you'll see is a greater variety of devices at a bigger variety of price points that meet the differentiated needs of our consumers."

The performance of Windows overshadowed the best performing part of Microsoft's business: Server and Tools. Revenues of $5.19 billion were up 9 percent, suggesting a healthy lift for Windows Server, SQL Server and System Center.

It remains to be seen whether indeed the worst is over for Microsoft but yesterday's report could have been a lot more alarming.

Posted by Jeffrey Schwartz on 01/25/2013 at 1:14 PM


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