Microsoft (MSFT), one of the larger holdings in the portfolio of our Dividend Growth Newsletter, reported solid fiscal second-quarter results Thursday on the heels of strong corporate demand and holiday sales. We continue to be pleased with Microsoft’s performance and maintain our view that the shares continue to have valuation upside potential.
The firm’s revenue advanced 5% from the prior-year period thanks primarily to expansion in its Server/Tools and Entertainment/Devices segments, which advanced 11% and 14.5%, respectively. The Business Division, its largest segment, increased 3% from the prior-year period, and the firm noted that it has sold nearly 200 million licenses of Office 2010 (in the 18 months since launch). Revenue in the firm’s Windows division fell 6%, and management attributed this to the soft PC market (due to the well-documented flooding in
Though operating income, pre-tax income and net income all fell for the period, diluted earnings per share nudged up slightly thanks to share buybacks. The company continues to bleed red in its Online Services division, though the loss narrowed in the segment versus the prior-year period, and only its Server/Tools segment and Business Division showed operating-income improvement on a year-over-year basis. Microsoft’s consolidated operating margin fell to 38.3%, from 40.9% in the prior-year period.
Looking ahead, we think the software giant has finally turned the corner, and we maintain a high level of conviction that the firm’s share price will converge to our above-market fair value. Despite the dip in PC shipments, we’re pretty excited about Microsoft’s new devices, from Windows 7 Ultrabooks to new Windows phones and, of course, Windows 8, which will be able to run on tablets. Our excitement for these products is also matched with increased enthusiasm that Microsoft is doing a better job at controlling costs. In its quarterly press release, the firm revised its operating expense guidance downward for its fiscal full year (now $28.5 billion – $28.9 billion, was $38.6 billion – $29.2 billion). And with the company ending the quarter with $51 billion in cash (over $6 per share in cash), its valuation and future prospects for significant dividend increases remain best-in-breed.