Microsoft (NASDAQ:MSFT) is set to announce its earnings for Q1 FY12 later this week. We currently have a $28 Trefis price estimate for Microsoft, which is in line with its current market price. Going forward, we expect the Windows and Office business divisions to continue to be Microsoft’s primary revenue engines. However, we also expect the Entertainment and Devices division to start contributing more to its revenues and its $28 Trefis price estimate.
See our full analysis for Microsoft
Windows
Windows accounts for more than 25% of the total Trefis price estimate for Microsoft. Microsoft recently unveiled a developer preview of Windows 8, but it’s still almost a year from launch. Though Microsoft has sold more than 400 million Windows 7 licenses to date, its sales have been slowing. In the latest quarter, Microsoft reported a decline in Windows sales, and we expect sales to continue to decline slightly until Windows 8 launches.
Office
Office is Microsoft’s most profitable business and accounts for almost 30% of the Trefis price estimate for Microsoft. Sales of Microsoft’s Office suite and its enterprise software offerings have continued to grow steadily in the past, and we expect the growth to continue.
Microsoft has made some strides in the cloud segment. This will be the first full quarter for which Office 365, its cloud based office suite, and we will look for the contribution of Office 365 to the total revenues though it’s expected to be quite low compared to revenues from Office 2010 and other Microsoft offerings.
Bing (Online Services)
Microsoft continues to invest in the Bing Search engine and has managed to grow its combined (Bing + Yahoo) market share in the U.S. to almost 30%. However, it has been losing money trying to do so. The Online division had an operating loss of around $728 million in the last quarter and continues to be a drag on Microsoft’s profitability. We expect the losses to continue into the near future.
We will look at what Microsoft has to say about their plans to turn the Online division profitable and to grab search market share from Google.
Xbox
The Entertainment and Devices division showed the highest revenue growth last quarter, following excellent sales of the Xbox console and the Kinect motion gaming addon. We expect the growth to continue going forward. Revenue growth from this division should compensate for the sagging growth in Windows sales.
Windows Phone
It has been more than a year since Microsoft launched Windows Phone. However, sales of Windows Phone devices have been “below expectations” in the past. Microsoft recently launched Windows Phone 7.5 Mango and we should see new dual core, LTE enabled Windows Phone devices being launched in the coming quarter. We expect Windows Phone to capture almost 20% smartphone market share by 2015. It should start generating a significant amount of revenue soon. We will be focused on what Microsoft has to say about its Windows Phone strategy, and how it plans to beat Apple’s iOS and Google’s Android.
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