Microsoft Is Worth $41 As New Launches Will Provide Catalysts

MSFT: Microsoft logo

Microsoft (NASDAQ:MSFT) announced its earnings for Q4 FY 12, raking in revenues of $18.06 billion, a 3% increase year over year. [1] Its operating income decreased however to only $192 million due to a $6.2 billion non-cash goodwill impairment charge for its investment in aQuantive. Despite the decrease in operating profit due to the write-down, Microsoft’s revenue numbers provide hope as it experienced single digit growth in the economically troubled developed world and double digit growth in developing economies. [2] The next few quarters are extremely important for Microsoft with its new operating system Windows 8 set to release in October, and Office 15, its new productivity suite, rumored to release early next year.

Check out our complete analysis of Microsoft

Below is an analysis of Microsoft’s Q4 FY 12 results by segment:

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During the fourth quarter, Microsoft’s revenues from its Windows division decreased to $4.1 billion (including deferred revenues) relative to $4.7 billion in FY 11. This occurred largely because customers were aware that a new version of Windows would be released soon, and decided to push back their OS upgrades until the release. The lull in Widows OS sales is expected to be temporary, and we are forecasting a slight increase for Windows’ market share in due to Windows 8. We think that the new OS could also entice customers to buy Windows tablets because customers prefer uniformity of operating systems across devices.

The divisions’ operating income declined approximately 18% in part due to increased research and development costs. However, due to the increase in revenue we expect after the Windows 8 launch (which could also decrease R&D costs as the focus temporarily shifts to maintaining an OS instead of creating a new one) we expect that operating income will rebound in the coming quarters.


The company’s primary cash cow, the Office productivity suite, maintained its growth from the previous quarter posting a 7% gain in revenues year-over-year. This was primarily driven by an increase in business revenue, attained due to multi-year licensing growth for its products. The divisions’ revenues would have been higher if not for the decrease in the revenue from consumers, which declined primarily because the Office productivity suite has started to come pre-installed with new computers.  The company also mentioned that the consumer segment was hit due to lower than expected sales from developed markets, a possibly worrying trend if the macro-economic issues in Europe persist.

The company reported that its research and development costs increased for the quarter for this division which, while lowering income now, could be a good sign over the long term as more and more features are implemented in its already dominant Office suite.

Server & Tools

Revenue from Server and Tools grew 13% this quarter driven by an increase in multi-year licensing revenues. During the earnings call the company stated that it expects multi-year licensing arrangements to make up approximately 60% of the divisions’ revenues, providing the company with a strong recurring revenue base in coming years. The increase in revenue was partially offset by increased headcount expenses, which signals that the company expects further growth in this segment as more talent is brought on to meet current and future customer demand.

Online Services Division (OSD)

This division continued to hemorrhage money and negatively impact the overall profitability of the company. In GAAP terms, the division posted a loss of $6.7 billion a $5.6 billion increase on the $745 million loss it posted during the quarter in 2011. The silver lining here however is that if the non-cash goodwill impairment charge for aQuantive is removed, the divisions’ loss decreased to $266 million.

More good news from the division was that Bing’s organic US search market share increased to 15.6%, representing a 1.2% increase in market share year over year. We forecast Bing’s global market share to increase steadily throughout our forecast period but any surprises to the upside are not expected to increase the company’s value substantially. You can determine the impact of Bing’s market share on Microsoft stock price by using our tool below:

Please note that the large write down of aQuantive does not affect our price estimate because of its non cash nature. The purchase was fully paid for and the write down is purely for accounting purposes. If in the future, Microsoft writes down any of its currently fully paid for portfolio companies, they will also not affect the company’s value since the purchase price for the acquisitions has already been removed from Microsoft’s cash reserves.

Entertainment and Devices Division

The division posted a 20% revenue increase primarily due to the addition of Skype in its metrics. In line with our expectations, Xbox 360 sales fell to 1.1 million from 1.7 million year-over-year. We expect sales to decline until the new version of the Xbox is released, probably in 2013. The device maintained its market share leadership during the year, and Xbox subscriptions increased approximately 15% year over year.

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  1. MSFT Press Release, SEC []
  2. Earnings call transcript, Seeking Alpha []