Microsoft Announces Record Revenues, Increased Game Losses

Tech giant and Xbox 360 creator Microsoft has announced revenue of $11.84 billion for the quarter ending December 31, 2005, a 9% increase over the same period of the prior year, and the highest quarterly revenue in the company's history, though revenue lagged slightly on Xbox 360 shortages. In addition, profit for the quarter was $3.65 billion, which grew 5% from $3.46 billion for the same quarter of the previous year, but Microsoft's Home and Entertainment division, including Microsoft's game divisions, showed sharply increasing losses. Colleen Healy, a senior director at Microsoft, commented in remarks reported by CNET News: "Overall revenue did come in slightly below expectations, mostly driven by our home and entertainment unit. We did have some component shortage issues [for Xbox 360] that we believe are behind us." Microsoft's Home and Entertainment division, which overall includes the Microsoft Xbox video game console system, PC games, the Home Products Division, and TV platform products for the interactive television industry, saw revenue of $1.56 billion in the 3 months to the end of December and a significant loss of $293 million, compared to $1.37 billion revenues and a small profit of $55 million in the same period last year. The company revealed that 1.5 million Xbox 360 console units shipped worldwide up to December 31, a figure which more than offset the approximate $300 million revenue impact of the Halo 2 launch that occurred in the second quarter of fiscal year 2005. There was an overall increase in Xbox revenue of $125 million or 12% for the quarter, and strength of new PC games software sales, especially Ensemble's Age of Empires III, was also noted as good for revenue. However, there were a number of cautionary statements from Microsoft in looking forward. The company confirmed: "Currently, Xbox consoles have negative gross margin," and the company did not give a timeframe in which economies of scale or component discounts would help this problem. The company's final statement indicated that it expected more losses from Home and Entertainment in both the near and medium term: "In fiscal year 2006, we expect Xbox console unit volumes and revenue to increase from fiscal year 2005 due to the launch of Xbox 360. In fiscal year 2006, we expect PC games revenue to increase from fiscal year 2005 driven by the availability of more new game titles." The statement concluded that, though it was implied that Microsoft's profitability in other divisions will continue to bankroll its video game aspirations: "We expect operating expenses and operating loss to continue to increase as a result of Xbox 360 launch-related activities and Xbox 360 console costs." [UPDATE: 3.59pm PST 01/26/06 - Added Microsoft comments on Xbox 360 shortages.]