Microsoft (NASDAQ:MSFT) is set to announce its earnings for Q2 FY12 later this week. We currently have a $32 Trefis price estimate for Microsoft, which stands nearly 10% above its market price. Though Windows sales have slowed down considerably, we expect the Windows and Office business divisions to continue to be Microsoft’s primary revenue engines. In the last couple of quarters, Entertainment devices have contributed largely to Microsoft’s revenue growth. We expect that trend to continue as Xbox sales stay strong and Windows Phone sales pick steam following a strong showing at CES 2012. Microsoft competes primarily with Apple‘s (NASDAQ:AAPL) Mac OS X in the operating system space, and Google (NASDAQ:GOOG) Docs in productivity software, its two major markets.
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Windows
Windows sales have almost flattened in the last couple of quarters, primarily because Windows 7 was launched more than 2 years ago. We expect Windows revenue to stay flat with minimal growth in the last quarter, but we expect sales to jump again in the second half of 2012, as Microsoft launches Windows 8, which serves a much larger market – desktops, notebooks and tablets.
Microsoft hasn’t yet announced a launch date for Windows 8. We will be watching the earnings announcement closely, for any information about the launch of Windows 8.
Office
Office is Microsoft’s most valuable business, which showed modest growth in the last quarter. Since the next version of Office – Office 15 – is still at least a year from launch, we expect Office sales to slow down marginally.
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
Xbox sales are expected to be at a record high this quarter, and could account for the largest portion of Microsoft’s revenue growth. Microsoft saw record sales of the Xbox and the Kinect addon in the holiday quarter. Going forward, we expect Xbox sales to remain strong. Rumors suggest that Microsoft may launch the next version of the Xbox in 2012, which may lead to a jump in sales.
Microsoft will also launch Kinect for Windows this quarter, which should lead to a huge jump in Xbox related revenue. We expect the Entertainment & Devices division to be Microsoft’s fastest growing division in the coming quarters.
Windows Phone
Despite being launched more than a year ago, Microsoft’s Windows Phone failed to gain any major traction in 2011. We don’t expect it to contribute to Microsoft’s revenue in any significant way in the last quarter. However, Microsoft launched some really impressive Windows Phones at CES 2012, which could boost its revenues in the coming year. We will be watching any announcements related to Windows Phone in Microsoft’s earnings release.
Windows accounts for nearly 25% of Microsoft’s $32 Trefis price estimate, while Office accounts for around 30%. Xbox, Windows Phone and other devices account for around 8%.
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