Microsoft: Oppenheimer Sees Steady Cash Flow

Oppenheimer & Co.’s Brad Reback this morning reiterates an Outperform rating on shares of Microsoft (MSFT) and a $32 price target, after meeting with the company’s CFO of its online business, Mindy Mount, and the company’s investor relations rep Lisa Nelson.

Reback writes that the company can maintain its�free cash flow indefinitely�given lower losses from its online services unit and the coming product upgrade cycle, such as the forthcoming Windows 8 introduction.

“The company should be able to sustain well north of $20B of FCF/year for the foreseeable future.”

The online division, including Microsoft’s “Bing” search engine, is ratcheting back on marketing expenses as it becomes more focused on its strengths and weaknesses. That can improve cash flow, he writes:

With MSFT confident it has closed the relevancy gap with Google on the search front, the company has sharpened its sights on improving its operational performance within the OSD division. On one side of the equation is the increased fiscal accountability that OSD CFO Mindy Mount has brought to the group (she had similar success as CFO of E&D when that division was losing billions of dollars annually). We have seen the early signs of this with the recently reduced operating losses (1Q12 operating losses of $494M were an 11% improvement year-over-year and a 32% improvement sequentially) from the division, and we expect this to continue for the foreseeable future.

And investors are too skeptical about Windows, thinks Reback. Business users are a “sticky” audience, and Win 8 will probably be received well:

At the heart of the bear thesis on MSFT is the belief that in a post-PC centric world, the company’s core Windows franchise is likely to wither away in coming years. While there is little question the company will continue to lose share in the compute market (we define this as smartphones, PCs and tablets), we believe the market is expanding at such a rapid pace that MSFT’s ability to sustain at least mid-teens billions of annual revenue and low double-digit billions of dollars of FCF generation is very strong. [�] a healthy majority of the Windows division’s revenue comes from enterprise customers, which we view as extremely sticky [�] Based on current reviews of the product [Windows 8], we expect it to be well received when it launches (we estimate middle of CY12) and should enable MSFT to eat into at least some of the iPad’s market share in the Tablet market.

Microsoft shares today are down two cents at $26.78.