Microsoft game division sales spike

Microsoft's preferred Xbox color scheme has always been heavy on the green, and that choice has never been more appropriate. Today, the software giant reported record revenues for the three months ended December 31, 2006, with a 76 percent spike in its Entertainment and Devices Division sales attributed in part to its green machine.

For the final three months of 2006, the division pulled in $2.96 billion, a leap over the $1.69 billion it posted over the same quarter in 2005, when the Xbox 360 launched. The number also represented nearly a quarter of Microsoft's $12.54 billion total revenue, which was up nearly 6 percent from the same quarter the previous year.

In its SEC filing, Microsoft said the jump in sales was driven primarily by sales of the Xbox 360 console and its new media player, Zune, as well as greater licensing of its SQL Server, Windows Server, and Visual Studio offerings. Over the course of the quarter, Microsoft said it sold around 4.4 million Xbox 360s. During the three months prior, it sold approximately 1 million of the gaming systems.

However, the Xbox business has yet to help the division turn a profit. For the quarter, the Entertainment and Devices division posted an operating loss of $289 million, slightly greater than the $286 million loss it sustained over 2005's holiday quarter. Microsoft has previously said it expects to post a profit with the division in its 2008 fiscal year, which starts in July of 2007. Overall, Microsoft's profits were down more than 25 percent for the quarter, slumping to $3.47 billion from $4.66 billion in the same quarter the previous year.

Shares of Microsoft have risen 12 percent since the start of the second quarter. Today, prior to the earnings news, the stock closed down 64 cents to $30.45.

[UPDATE] Following the release of its earnings report, Microsoft held a conference call with analysts in which it downgraded shipment projections on the Xbox 360. During the company's CES keynote address, Microsoft touted a total-systems-sold figure of 10.4 million. In a press release the next day, the company's interactive entertainment business corporate vice president Peter Moore sent out a press release stating that the company was on track to have shipped 13-15 million Xbox 360 systems by the end of June. During the conference call today, however, Microsoft CFO Chris Liddell changed that target to 12 million systems sold.

One analyst on the call suggested that the anticipated sales shortfall in the current quarter was the result of a managed decision to clear out inventory in preparation for a price drop, but Liddell didn't bite. He offered no insight into a price drop in the near future.

Additionally, Liddell articulated growth forecasts for the entertainment division's full fiscal year, expecting positive growth of 26 to 31 percent, but for the current quarter ending in March 31, 2007, he expects a revenue shortfall, quarter-on-quarter, of 15 to 25 percent.

[UPDATE 2] Immediately after the call, GameSpot had a chance to speak with Xbox boss Peter Moore (whose official title is corporate vice president, Interactive Entertainment Business, Entertainment and Devices Division) who had these words to say about the recent quarter's earnings, current and upcoming strategy, as well as the entertainment division's drive to profitability.

The drop in sales expectations:
"It's the result of a number of things. There's a little bit of uncertainty in the market, and so we have taken a fiscally conservative view of the balance of the fiscal year, which is a traditionally slow period anyway, and gone down to our number of 12 million, or around 12 million. And a little bit as well, is a focus on profitability, and that is making some investment decisions differently than we normally did or would have done if we were not focused on getting this business turned around to profitability. We think we are now built to scale. We know we have all of the basic business components of the business model right: the right hardware at the right price, inventory levels coming in well, our supply chain in under control, a great games portfolio and a tremendous lineup for 2007, Xbox Live is on fire... When you think of that and you think about the future--and you know you are in good shape--you then have to start to making different investment decisions and that's what the company is doing."

On whether Microsoft makes money now on each console:
"We look at entire platform. You tend to look at the cost of what it goes out at what you are selling it at. We typically don't dive into Yes or No, but not necessarily. [Now], we're completely focused on cost reduction. That doesn't mean that even if you are breaking even [on the hardware] that you want to spend $100 per box in marketing. You've got to start thinking about getting your business under control. We've got our installed base and we feel good about critical mass. The developers and publishers are firmly on our side. The retailers feel real good about what we did for them this holiday. It's about getting the shape of the business right for profitability."

A price drop to the platform:
"We still feel good about where we are with pricing where we are right now, particularly in relation to the [PlayStation 3]. With a focus on profitability, it's a subject I have to look at very hard."

How soon the losses might level out:
"It's a commitment Robbie Bach has made to Wall Street, and that's a commitment I have to Robbie with my business, which forms the overwhelming majority of revenues that go into Entertainment and Devices."

On the success of Gears of War and Halo 3 on the way:
"I feel more than comfortable, real good about having Halo 3 still to come when I've got Gears of War operating the way it is now. The Japanese thing, it's a small data point, but a moment of pride when you've got a game of that genre...it's a Z-rated game over there so you can't even sell it openly, and yet it showed up at #7 in Japan this morning."

Where the Xbox division could have done better:
"Having some broader games is something we feel there's still work to be done. We can't be blind to the fact Nintendo has got its finger on the pulse of the more casual gamer or family gamer. It's something I admire them for doing. It's of, course, well within their DNA. It's something that as we get into the out-years of a lifecycle, it's something we've got to focus on more and believe me, we are doing that.

In the rush to profitability, are changes to leadership in the offing:
The only change will be if we don't hit profitability...then we might see some changes.