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Microsoft Down but Not Out

Stocks in this article: MSFT DELL AAPL HPQ AMZN

NEW YORK ( TheStreet) -- After what is considered to have been disappointing second-quarter earnings results from Microsoft (MSFT), the street seems annoyed that the software giant has now expressed interest in Dell (DELL). What possible advantage could there be with two tech "has-beens" coming together?

Although it's true that neither Dell nor Microsoft have produced growth in sufficient quantities, there is an angle here that seems to be overlooked by many observers. For that matter, Microsoft's recent earnings report, though uninspiring to some, was actually pretty good. It suggests that Microsoft's interest in Dell is not the head-scratcher that it appears to be on the surface.

Microsoft had a lot to prove in the second quarter, after a brutal first quarter that missed both top and bottom line estimates. And with analysts filled with pessimism following Apple's (AAPL) revenue miss, Microsoft surprised the street -- earning 76 cents per share on a GAAP basis -- beating EPS estimates by a penny. Revenue was also solid -- arriving to $21.46 billion, 3% higher year over year.

Granted 3% revenue growth is far from breathtaking. But it reverses an 8% decline in Q1. Likewise, profitability was weak -- shedding almost 4% year-over year. But relative to the 22% drop in Q1, Microsoft deserves credit for this improvement.

Then again, this is far from the performance that investors wanted to see from a dominant tech company -- an issue that has long been a source of aggravation among analysts. However, that Microsoft saw 34% sequential improvement suggest that Windows and Surface are beginning to gain traction, which brings us to the company's interest in Dell.

For instance, the 24% growth of the Windows division was a welcomed surprise -- especially since it followed a 33% plunge in Q1. As a result, Microsoft was able to grow its operating income by 14%. The company said that this was attributed to the better-than-expected performance of Windows 8, which was launched in October.

All of this means that although Microsoft's PC dependency is seen as a dark tunnel, at least a light has now been sparked. And Microsoft just realized a way for Dell to make this light brighter. It's no secret that Microsoft wants to adopt Apple's ecosystem model.

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