After waiting for good news from Microsoft ( MSFT) for months, investors got it when the company announced a stronger-than-expected fourth quarter and up to $40 billion in buybacks. But Dell's ( DELL)
warning on Friday morning slowed what had been a strong spike in Microsoft's shares and highlighted the software giant's vulnerability to the maturing PC industry. In recent trading, shares of the Redmond, Wash, company were up 98 cents, or 4.3%, to $23.83, a fairly modest move in light of Microsoft's strongest quarter in about two years. Even so, there was a lot of positive comment on Wall Street. American Fund Advisers has been out of the stock for years, but on Friday senior analyst Jane Snorek was thinking buy. "The buybacks put a floor under the stock, Vista is on time and it appears from the growth in deferred revenue that there's interest in the new products," she said in an interview. Indeed, deferred revenue jumped 19% during the fourth quarter, a likely sign that existing customers plan to stick around and buy the new version of Windows and other new products, Snorek says. The quarter was generally strong, with revenue growing by 16% over last year, although net income slumped as Microsoft upped spending to handle ongoing antitrust problems and to compete with rivals, such as Google. And despite predictions that Vista will be late, CFO Chris Liddell reiterated the company's position that the first new version of Windows in five years will be available to businesses in November and to the consumer market in January. Vista, of course, is not just another new product. Analysts who are bullish on the stock believe the new software will drive significant revenue and earnings growth next year. Why will Vista help earnings? The Client division, which sells Windows, is very high margin. In the fourth quarter, it returned an operating profit of $2.5 billion on sales of $3.38 billion, roughly an operating margin of 74%.
It's worth noting that the company's seriously profitable divisions are based on mature businesses: Windows, Office and SQL Server, the company's database product. The divisions focused on the Web, or on enterprise sales, are either big money losers or barely profitable. Case in point: MSN. Despite enormous investments over the years, MSN lost $190 million dollars in the quarter, as sales actually declined 3% to $580 million. Home and Entertainment grew feverishly on the top line, but since the company loses money on every Xbox 360 sold, it too was in the red -- to the tune of $414 million on sales of $1.1 billion. The company said it has not sold 5 million of the game consoles and expects to sell a total of 13 million to 15 million by the end of the year. Analyst Jason Maynard of Credit Suisse cast a cold eye on those figures, saying: "We believe the stock will continue to experience multiple compression until there are signs that the company can generate an adequate return on its emerging businesses." His company has or is seeking an investment banking relationship with Microsoft.