Microsoft Knocks "Financial Cover" Off The Ball


Microsoft --the world's largest software maker--got a whole lot larger at the end of 2007; the company blowing past Wall Street expectations, and offering up optimistic guidance that could go a long way toward buoying beleaguered equity markets around the world.

The company reported 50 cents in earnings per share for its fiscal second quarter, 4 pennies ahead of consensus estimates. Microsoft also reported $16.37 billion in revenue, soundly beating Street estimates of $15.95 billion.

More importantly for investors, guidance for the company's third quarter and full year were far ahead of the rosiest projections on Wall Street. Microsoft now sees 43 to 45 cents in third quarter EPS on $14.3 billion to $14.6 billion in revenue. The Street expected 44 cents on $14.44 billion. Likewise, for the full year, Microsoft raised EPS guidance to a range of $1.85 to $1.89 and revenue of between $59.9 billion and $60.5 billion. Analysts predicted $1.81 and $59.42 billion.

Microsoft saw significant strength across all its major business units, most notably the closely watched "Client" business, racking up $4.335 billion in revenue, or $100 million better than analyst estimates. The company's online business also surpassed expectations, coming in at $863 million versus the $839 million anticipated. Business software also surged; $4.811 billion against the $4.64 billion expected.

The company's entertainment and device division, home to Xbox and Zune and historically a non-performer for Microsoft's bottom line, kicked into high gear, mostly on the back of strong Xbox 360 sales during the holiday shopping season. After posting its first profitable quarter last quarter, entertainment and devices doubled that green to $357 million on $3.06 billion in revenue.

Many on the Street were expecting $2.89 billion in revenue for that division, and Brendan Barnicle at Pacific Crest Securities was at $3 billion, though he told me earlier today that his figure might be too aggressive. Turns out he wasn't aggressive enough.

This is the second straight quarter that Microsoft knocked the financial cover off the ball, and shares are reflecting a simultaneous collective sigh of relief and optimism that the downtrodden tech sector might indeed be oversold. Microsoft's blockbuster numbers cut across so many key sectors, not just in tech, but broader, global economic lines. Shares rallied heavily into the earnings report and that rally is extending with the news.

All of this will make for a fascinating trading day on the markets on Friday.

Questions? Comments?