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Microsoft: My PC Crashed

NEW YORK (TheStreet) -- The technology barbell is the growing reality of companies being pulled in two directions, with the cloud on the high end and devices on the low end.

The center of the barbell -- the PCs and servers where Microsoft (MSFT - Get Report) made its name and living for over three decades -- is being made virtually obsolete by all this. PCs crash, while clouds can be made as resilient as the Internet and devices can be replaced.

For the quarter ended in December, Microsoft reported revenue of $24.5 billion with $6.6 billion in net income, or 78 cents per share. The stock is at about $37, up almost one-third over the last year.

The device that really made this quarter for Microsoft is the XBox, its game console. The company sold 7.4 million combined units of the XBox 360 and XBox One during the quarter. The company also said it gained in tablets, but Surface sales came to just $893 million.

Microsoft also did better than expected on the business side of the barbell. Cloud revenue more than doubled, the company said, and its SQL Server gained market share.

All of this gives CEO Steve Ballmer's successor, due to be announced next month, a clear direction. Co-founder Bill Gates seems resigned to becoming the Microsoft version of the late Colonel Harland Sanders of Yum! Brands (YUM), or Charles Schwab (SCHW), a symbol in good times and a nudge in bad ones.

Microsoft needs to work both ends of the barbell. Devices are doing well right now, at some cost in margins. Windows is doing a slow fade, with original equipment manufacturer revenue down 3% for the quarter. Office can still be milked for more profits through the cloud. Things aren't nearly as dire as they are at IBM (IBM).

But things aren't great, either. Microsoft managed a 9% gross profit margin on its hardware, which is wonderful if you're a car company, but terrible next to the 83% margins it is accustomed to earning on commercial software.

In the past, Microsoft could be relied upon for fat profits from its Windows operating system and Office suite. Those days are ending, with Windows XP due to sunset this year, and with Office no longer being sold on disks, but as empty boxes with download keys.

This may be why, of 36 analysts who currently following the stock, 21 have it rated as just a hold against 12 who call it buy or overweight, with one calling it an outright sell.

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