Microsoft () reported fiscal-year 2012 third-quarter results Thursday that support our thesis on the company and the broader economy. Revenue was up 6% compared to the same quarter last year, and operating income grew by 12%. Though 6% revenue growth may not sound impressive, it was not only better than expected, but it was also driven by upside surprises in unexpected segments.
The business division saw revenue increase 9% from the same period last year, which isn’t typical for the unit so far into the Microsoft Office release cycle. Additionally, Windows revenue was up 4%, even in the face of the well-documented global hard drive support shortage. Windows 7 enterprise penetration reached 40% globally, which is far more impressive than the adoption of Vista.
Servers and tools also performed well, with revenue up 14% from the same period a year ago. We think business investments in SQL and system centers suggest that companies are making technology infrastructure investments that will boost productivity. This could mean that businesses are feeling more optimistic about workloads and activity in the near- and intermediate-term.
Further, Microsoft continues to throw off plenty of cash. Cash flow from operations came in at over $9 billion in the third quarter, and the company has now generated nearly $24 billion in operating cash flow for the year. This is precisely why the acquisition of Skype last year seems miniscule to us, and why we aren’t too worried about its acquisition of a patent portfolio from AOL (AOL).
Going forward, we think Ultrabooks, Windows 8, and strong demand from enterprises will fuel growth in fiscal year 2013. We think Windows 8, and its integration as a mobile, desktop, and tablet operating system, could help take back some the consumer mindshare the company has lost in recent years to Apple (AAPL) and Google (GOOG).
We think Microsoft’s dividend will expand in coming years as long as its cash generating prowess remains robust. The firm continues to be the largest holding in the portfolio of our Dividend Growth Newsletter. And the shares still look undervalued, in our view.