Today, Microsoft announced strong Q4 and annual results for financial year 2004. Q4 revenue of $9.3 billion represented 15 percent growth over the same quarter a year ago, and was well above Wall Street's expectations of $9 billion. Operating income of $3.1 billion was also slightly ahead of analyst expectations--but far ahead of results for Q4 last year, which were artificially depressed by the settlement of Microsoft's lawsuit with Time Warner. Net income of $8.17 billion on annual revenue of $36.84 billion was respectively 9 percent and 14 percent ahead of results for FY 2003. The low-key analyst call gave most of the credit for the strong performance to increased OS sales triggered by growing hardware sales, and subscription sales of software to corporate clients.

The call kept the focus on Microsoft's bread and butter: business applications and operating systems. Though the company's game business received comparatively short shrift, some interesting information about the console's performance was revealed. It seems the spring 2004 price cuts have been effective in driving sales: Xbox shipments increased 27 percent over the same period a year ago. Microsoft reports 15.5 million units sold worldwide through the end of June: 1.5 million in Asia Pacific, 3.9 million in Europe, and 10.1 million in North America. The company also quoted industry research group NPD's claim that Xbox has a 33 percent market share in the US, with 50 percent growth in software sales over Q4 last year.

Those are solid numbers for Xbox, and give credence to the idea that it is gaining ground on its competition, especially in the US. On June 20, NPD reported that despite strong sales in the last month, year-to-date game sales for all consoles are up just 2 percent over this time last year. Combine this fact with 50 percent growth for Xbox titles in this quarter, and it seems that Xbox must have stolen some share from other consoles.

On the other hand, despite a strong market position, the Xbox is still a long way from achieving profitability. The Home and Entertainment Group, which includes the Xbox division, had a $339 million operating loss for the quarter on revenue of $499 million and anemic revenue growth of 3 percent--the lowest growth rate of any of Microsoft's seven business segments. Though Microsoft doesn't break out separate results for the Xbox, it's pretty clear that the console business is still a strategic investment, not a profit center.

Many analysts have criticized Microsoft's multibillion dollar cash hoard, and the company is taking steps to change its cash management strategy. The key parts of its new strategy will be cash dividends to shareholders and a share buyback program worth up to $30 billion over the next four years.

Though the explosive growth of the 80's and 90's is over, Microsoft continues to deliver strong results, and it will be interesting to see how it applies its industry savvy and financial muscle to the next generation of console games.