Microsoft Sets Sites on Office 2010

Microsoft shares are selling off a bit in after-market, despite a strong quarter, and when you've got a product like Office 2010 waiting in the wings, this might be the best case yet for the company to offer guidance.

Microsoft Earnings
Microsoft Earnings

Office 2010 will be a significant catalyst.

The company reported 45 cents a share on $14.5 billion in revenue, both numbers ahead of Wall Street consensus of 42 cents and $14.4 billion.

Microsoft is also deferring $305 million in revenue connected to Office 2010, and that was in line, if slightly lighter than expected, with Brendan Barnicle at Pacific Crest Securities.

But beyond that, Microsoft's share sell-off on this news seems to be a pretty dramatic over-reaction. Look at what the company posted in its Windows unit: $4.415 billion in revenue, or $200 million better than estimates.

The Windows 7 upgrade cycle is on fire. Server and Tools was a little lighter than expected at $3.57 billion; Online Services continues to under-perform at $566 million; the Business Division was essentially in line at $4.24 billion and the same goes for the Entertainment and Devices unit with $1.7 billion.

But Barnicle tells me the cash flow at this company during the quarter was blockbuster. Microsoft generated well over $7 billion in cash during the quarter versus the $5.6 billion expected. And Microsoft now sits atop a stunning $43.7 billion in cash. (Wasn't this the company that had a bond offering last year? Yeah, just what Microsoft needs: More capital.)

As I posted earlier today, Microsoft is on the cusp of what promises to be a significant upgrade cycle for both consumers and the enterprise. Even better for investors, that upgrade cycle and the revenue and profits it'll generate are pretty well-known, and fairly predictable. The sell-off tonight doesn't make much sense.

We'll see what the company has to say on its conference call, but this is a company, like Intel, in the sweet spot of major market forces certainly moving in Microsoft's favor. This report should do little to offset the longer term thesis that Microsoft is still grabbing its share of the enormous opportunity still ahead.

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