MS meets financials, Xbox division lags

The first generation of Microsoft's foray into console gaming is officially in the books. Today the company released its first quarterly report for fiscal year 2006. It covers the three-month period that ended September 30, the last quarter before the launch of the Xbox 360 and what Microsoft hopes will be a new, more profitable era for its Home and Entertainment division.

On the whole, Microsoft reported figures right in line with expectations. Revenue increased 6 percent to $9.74 billion from $9.19 billion for the same period last year. Operating income came in at $4.05 billion, a little lower than expected due to a $361 million loss resulting from a settled lawsuit with RealNetworks. Diluted earnings per share were $0.29, on the low end of the company's projected range, but without the settlement it would have been on the opposite end of the range with $0.31 per share. Microsoft indicated that its numbers this quarter were driven largely by software sales for its core programs and by growth in PC and server shipments.

This helped offset the performance of Home and Entertainment, which was the only division in the company to perform worse this quarter than for the same quarter last year. Not only was the Xbox's division the only part of the company to bring in less revenue than last year ($525 million compared to last year's $634 million), but it also increased its operating losses for the quarter from $138 million to $141 million.

Even so, these numbers can't be considered terrible for the division. Costs associated with ramping up for the Xbox 360 launch, combined with the beginning of the console-generation transition (when hardware and software sales across the board are typically flat), give some perspective on the losses. Regardless, it's still a marked improvement over the first-quarter reports from two years ago, when the Home and Entertainment division lost $273 million.

Keep an eye peeled for Microsoft's second quarter FY2006 in three months. That report should be particularly interesting for a couple of reasons. Not only will it contain figures that include the Xbox 360 launch, but it will also have comparisons to the Q2 FY2005, when the Home and Entertainment division posted a profit for the first time.

[UPDATE]: In its investor conference call yesterday, Microsoft announced some figures it hadn't included in the quarterly report. First and foremost, the company expects to ship between 4.5 million and 5.5 million Xbox 360s in FY 2006, which ends June 30, 2006. Also, the Home and Entertainment division's revenues are projected to increase sharply, with Microsoft expecting it to bring in 50 percent more money for this fiscal year than the last one and expecting the next quarter's revenue to be up between 26 percent and 32 percent from the same quarter last year.