Microsoft (NASDAQ:MSFT) will announce its Q3 FY12 earnings on July 19. This year is going to be a crucial year for Microsoft as it will see the launch of Windows 8, the beta launch of Office 15, and decide the fate of Windows Phone, which has hardly seen any significant traction since launch despite Microsoft’s best efforts. We could also see the transformation of the Xbox + Kinect combo into the ultimate home entertainment device this year and some details about the Xbox 720, which is expected to be launched in 2013. In this earnings call, the focus will be primarily on Windows, Xbox and Windows Phone. We also expect the launch of the Surface tablets to boost Microsoft’s chances in the tablet market.
Microsoft competes primarily with Apple‘s (NASDAQ:AAPL) Mac OS X in the operating system space, Google (NASDAQ:GOOG)’s Android and Apple’s iOS in the smartphone space, and Google Docs in productivity software.
Windows sales have been flat in the last couple of quarters as Windows 7 was launched more than 2 years ago and customers stall purchases for Windows 8, which is expected to be launched soon. We expect Windows sales to be flat in the last quarter as well or even show a slight decline, but show a massive jump following the launch of Windows 8, which has received rave reviews so far, and will serve three huge markets – desktops, notebooks and the rapidly expanding tablet market. The launch of the Surface tablet could provide a very positive impact to Windows 8 sales in the tablet space.
Office is Microsoft’s most valuable business, which showed modest growth in the last quarter. Though Microsoft unveiled the Technical Preview of Office 15, the final version will be launched only in 2013, which could lead to a slowdown in the sales of the Office suite in the coming quarters.
Operating margins for Office may also be squeezed a bit, as the cloud-based Office 365 gains traction in the enterprise, and leads to an increase in the overall operating costs of the Office business.
Xbox, Kinect, Surface & Windows Phone
A continued increase in sales of the Xbox and Kinect have driven Microsoft’s revenue growth in the last couple of quarters. The Xbox 720 is expected to be launched in 2013, and should lead to a boost in sales. This quarter, we will be looking primarily for any sales numbers for Kinect for Windows, which was launched in February. Given the large Windows user base, we expect significant sales of Kinect for Windows in the last quarter and the coming ones, which should further drive revenue growth for the Entertainment adn Devices division.
Microsoft has also focused on making Xbox Live the complete entertainment hub by adding live TV, streaming video content, music, TV shows, sports content, streaming music etc. This could give Microsoft a strong foothold in the consumer’s living room, which Apple and Google are also trying to enter with their TV offerings. We expect to see increased revenue from Xbox Live subscriptions in the coming years.
We also expect Microsoft’s focus on Windows Phone – wooing developers, focusing on the budget segment and spending heavily on marketing – to eventually pay off, and give Microsoft a larger share of the global smartphone market. Microsoft recently launched Windows Phone 8 which brings the Windows and Windows Phone platforms closer.
We also expect sales of the Surface tablets to add to Microsoft’s topline growth in the Entertainment and Devices division.
Windows accounts for nearly 25% of Microsoft’s $40 Trefis price estimate, while Office accounts for around 36%. Xbox, Windows Phone and other devices account for around 4%.