Microsoft profit view lifted at Jefferies

Jefferies & Co. increased its earnings and revenue estimates of Microsoft Corp. (MSFT) on strong sales of Kinect hardware and software. The brokerage maintained its 'buy' rating on shares of the software major with a price target of $33.

Kinect is a hardware extension to the Xbox gaming console. It sits in front of a TV set and allows on screen menus to be navigated and games to be played with only body movement, i.e. without a controller. The device also contains robust voice and facial recognition. There are currently 17 games available for Kinect, including four first party titles.

Kinect is based on software technology developed internally by Rare, a unit of Microsoft Game Studios owned by Microsoft and range camera technology by Israeli developer PrimeSense, which interprets 3D scene information from a continuously-projected infrared structured light.

Kinect was launched in North America on Nov. 4, in Europe on Nov. 10, in Australia, New Zealand and Singapore on Nov. 18 and in Japan on Nov. 20. Kinect can be purchased separately for $150 or in a bundle with an Xbox 360 console for $299 to $399. Kinect with a 4-gigabyte (GB) hard drive Xbox is available at $299, while Kinect with a 250 GB Xbox hard drive is available at $399.

We have lifted our forward estimates for Microsoft due to strong sales of Kinect hardware and software. It appears that Kinect is also pulling through a significant amount of Xbox 360 console revenue, especially for the high end 250 GB devices. We foresee a variety of future uses for the Kinect technology, including multi-modal gaming, natural movement navigation, and 3D gaming, said Katherine Egbert, an analyst at Jefferies.

The brokerage raised its 2011 EPS estimate for Microsoft to $2.51 on revenue of $68.43 billion from $2.48 on revenue of $67.25 billion and its 2012 estimate to $2.74 on revenue of $73.60 billion from $2.70 on revenue of $71.40 billion.

Overall, Egbert thinks Kinect-related software and hardware sales could add $1.6 billion in revenue to fiscal 2011 and $2.2 billion for fiscal 2012.

According to NPD, within one month of availability Kinect became the 'top-selling accessory item in terms of dollar sales on a year-to-date basis'. Twenty-five days after the release of Kinect, Microsoft reported the sale of 2.5 million Kinects to end users, a run rate of 100,000 units per day.

The company expects to sell through five million Kinects this holiday season, and our proprietary checks at over 55 US retailers indicate widespread sellouts and high demand, said Egbert.

If Microsoft does reach the five million unit figure by December 25, it will mean that Kinect is the fastest-selling device of all time, selling 2.5 times faster than Apple Inc.'s (AAPL) iPad -- 100,000 units per day for Kinect over the first 50 days vs 36,000 iPad units per day for the first 27 days, said Egbert.

However, it is important to note that Kinect is not only substantially less costly than the iPad, Kinect sales are also probably highly seasonal, whereas iPad sales have accelerated since launch. However, Kinect sales are likely to slow post the holiday season, Jefferies said in a note to clients.

Still, the technology has applicability beyond gaming, and we see Kinect as an important psychological win for Microsoft as it seeks to regain relevance in consumer tech. We believe the device has implications beyond gaming and the potential to significantly change the way people interact with technology, said Egbert.

Based on our survey of 55 retail stores in the US earlier this week, it appears that the $150 standalone Kinect is sold out nationwide, as is the $399 250GB Xbox/Kinect bundle, said Egbert.

Egbert said the survey found a few retailers with the $299 Xbox 4GB/ Kinect bundle in stock, and some stores were expecting new shipments this week, but typically for only a few units per store. Kinect was a worldwide launch, but the survey was only performed checks inside the US, said Egbert.

Egbert finds it interesting that both the high-end 250GB bundle and standalone sensor are in highest demand. The sell-out of the high-end SKU may mean that Kinect is winning over the hard-core gaming crowd, or that it is potentially being seen by the casual user as more than just a gaming hub.

While it seems too early to call a turn in investor sentiment on Microsoft stock, we think Kinect’s success has the potential to turn the current negative sentiment into a more neutral attitude. Microsoft shares are up over 2 percent since Kinect’s debut on November 4, said Egbert.

Microsoft shares closed Tuesday's regular session up 1.38 percent at $27.62 on the NASDAQ stock market, while in the after-hours the stock fell 0.18 percent to $27.57.