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Microsoft (NASDAQ:MSFT) earnings disappointed many investors who had expected a much stronger quarter, particularly in the Windows division. As a result, the stock is taking a pummeling this morning dropping 10% in early trade. The quarter and full year are worth reviewing.

MICROSOFT CORPORATION

SEGMENT REVENUE AND OPERATING INCOME (LOSS)

(In millions)(Unaudited)

Three Months Ended June 30,

Twelve Months Ended June 30,

2013

2012

2013

2012

Revenue

Windows Division

$ 4,411

$ 4,152

$ 19,239

$18,400

Server and Tools

5,502

5,050

20,281

18,534

Online Services Division

804

735

3,201

2,867

Microsoft Business Division

7,213

6,324

24,724

24,111

Entertainment and Devices Division

1,915

1,781

10,165

9,599

Unallocated and other

51

17

239

212

Consolidated

$ 19,896

$18,059

$ 77,849

$73,723

Operating income (loss)

Windows Division

$ 1,099

$ 2,422

$ 9,504

$11,555

Server and Tools

2,325

2,040

8,164

7,235

Online Services Division

(372)

(6,672)

(1,281)

(8,125)

Microsoft Business Division

4,873

4,128

16,194

15,832

Entertainment and Devices Division

(110)

(252)

848

380

Corporate-level activity

(1,742)

(1,474)

(6,665)

(5,114)

Consolidated

$ 6,073

$ 192

$ 26,764

$21,763

First, and most striking, there was growth in revenue in every division with annual sales of $78 billion up from $74 billion in 2012. Net income at $26.7 billion lagged investors hoped but was still respectable GAAP earnings per share were up to $2.68 from $2.00 in 2012. Online services continues to be a drag with a loss of $1.3 billion for the year.

The big disappointment was the crossfire of weaker than hoped for sales of traditional PCs, a lacklustre launch of Windows 8 and the poor reception of Surface RT leading to the $900 million write down. With Surface RT bill of materials in the $284 per unit range the write-off amounted to some 3 million units, more if they were written down to something other than zero.

Detractors have panned the RT device since its launch but I have one and it is a joy to use. I am sure that at some price there is a market for these devices and Microsoft is likely to enjoy a small recovery during fiscal 2014.

The question is where to from here? In my view, the investment thesis that supports a bullish case for Microsoft is intact. Microsoft's enterprise and cloud offerings continue to grow profitably. Windows remains highly profitable and its revenue is still growing despite the softness in markets for personal computers. And, the introduction of Windows tablets in that fast growing segment is in its infancy. I note that Intel (NASDAQ:INTC) now shows 171 variants of Windows-based tablets with "Intel Inside" on the Products section of its website. Some of these will find customers.


(Click to enlarge)

The upgrade of Windows 8 to Windows 8.1 later this year could also prompt better demand. Many pre-touch screen computers found Windows 8 of little value for its touch features and absent the "Start" button found navigating the Operating System more of a chore than a delight. The "Start" button is among the revisions to Windows included in Windows 8.1 and I, for one, will then upgrade my desktop since I like many of the features of Windows 8 (in particular its powerful Search charm, the live tiles which keep me abreast of stock market news and prices, news, weather and sporting events.

Microsoft's cloud based services continue to win customers with Dynamics CRM, Dynamics ERP and Dynamics AX providing powerful tools to business together with Dynamics Manufacturing making it easier to manage the shop floor and supply chain. The scalable and user friendly cloud services available under Microsoft Windows Azure similarly enhance businesses ability to manage their online presence and communications. These areas of Microsoft should continue to grow nicely for many years.

Microsoft Office remains the mainstay of corporate day-to-day activities and has no serious challengers today. Office 365 has been a very well-received subscription model which, while it is a drag on short term sales and profits where users sign up for a yearly subscription at a fraction of the price they would have paid for a stand-alone version of Office, over time the subscription revenue will more than replace the outright sales and Office will become an even more exciting segment of Microsoft. Microsoft's integration of Office into cloud-based computing has made it a virtual essential for many users.

For my money, the sell-off in Microsoft presents a buying opportunity. When to step in? That is harder to call but I would be a buyer anywhere below $30.

I hold no Microsoft shares today but may buy at any time.

Source: Rays Of Hope In Microsoft's Disappointing Earnings Release Make Me Remain Bullish