Office, Server & Xbox Propel Microsoft’s Revenue Growth

Microsoft (NASDAQ:MSFT) announced its earnings for Q1 FY12. ^[1] The results were largely in line with our expectations. It reported revenue of $17.4 billion, up 7% YOY. Though all its businesses reported an increase in revenue, the growth in revenue was primarily due to growth in its Office, Server and Xbox businesses. ^[2] Windows sales have slowed significantly as it has been more than 2 years since Microsoft launched Windows 7 and due to the increased popularity of tablets driven by Apple‘s (NASDAQ:AAPL) iPad. Bing, which competes with Google (NASDAQ:GOOG), has been successful in increasing its search market share, but still continues to be a loss making business. Xbox sales continue to grow steadily, in line with our expectations. Microsoft also completed the acquisition of Skype this quarter, and will start including Skype’s financials in its reports starting next quarter.

Factoring in the new information, we have revised our Trefis price estimate for Microsoft to $31, which stands nearly 15% above the current market price.

See our full analysis for Microsoft

Here are the most important drivers which will have the most impact on Microsoft’s stock price going forward.

Office

Microsoft Office accounts for nearly 30% of the total $31 Trefis price estimate for Microsoft. It brought in the most revenues this quarter and also reported a steady 8% growth in revenues. The strong sales of Office 2010 partially compensated for the lull in Windows sales. Microsoft’s other productivity offerings like Lync, Sharepoint and Exchange also grew 17% this quarter reflecting strong enterprise demand.

We expect Microsoft’s share in the productivity market to show a steady marginal decline, but the overall market is set to expand much faster, giving Microsoft enough room to grow its Office revenues at a steady rate.

Windows

Windows is the second most valuable business for Microsoft. Just as we expected, Windows sales have been slowing down, as the growth in the consumer PC market remains relatively flat, owing to the growing popularity of tablets. Windows 7 was a huge hit, selling more than 450 million copies to date. However, we expect Windows sales to continue to trend downward until the launch of Windows 8 in 2012. We expect the slowdown in Windows sales to continue to be a drag on Microsoft’s overall revenue growth in the next couple of quarters.

Windows Server

Windows Server was the fastest growing business this quarter, growing over 10% YOY, reflecting strong enterprise demand. It is Microsoft’s third most valuable division, and contributes almost 25% of its revenues.

Microsoft recently announced a new database appliance and previewed some features of the next version of SQL Server which will be released next year. We expect to see continued growth in this business.

Xbox

Xbox and Windows Phone together contribute almost a tenth to Microsoft’s Trefis price estimate. Revenues from Xbox continue to boost Microsoft’s topline growth, growing around 10% this quarter. We expect Xbox sales to jump in the coming quarter, accounting for the holiday season. Rumors suggest that Microsoft will launch the Xbox 720 in 2013, which should lead to explosive growth going forward.

Windows Phone sales have been dismal this year, but Microsoft is pushing new devices to the market. We expect Windows Phone sales to grow significantly going forward, but it is unlikely to contribute much value to Microsoft’s overall revenues anytime soon.

Bing

Bing continues to be a drain on Microsoft’s cash flows, posting almost half a billion dollars in losses this quarter. However, Microsoft has been able to expand Bing’s organic market share to 14.7%, and has also managed to reduce its operating losses in the Online division. We expect the Online division to become profitable by the end of the forecast period, and also continue to expand its global market share.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Microsoft Reports Record First-Quarter Results, Press Release [↩]
2. Microsoft Management Discusses Q1 2012 Results – Earnings Call Transcript, Seeking Alpha [↩]