Microsoft's game division suffers $1.89B shortfall

Entertainment and Devices Division sees a 47 percent increase in its annual operating loss, thanks to $1.06 billion in warranty-extension costs and slowing 360 sales.

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Last July, Robbie Bach, president of Microsoft's Entertainment and Devices division, promised that his department would be profitable during the company's 2008 fiscal year. However, he also warned that, like the years before it, the EDD--as the department is referred to in Microsoft's financial documentation--would suffer a loss during the software giant's 2007 fiscal year, which ended June 30.

Given Bach's warning, today's announcement that the EDD is still in the red didn't surprise anyone. For the year, the division suffered a $1.89 billion operating loss, a 47 percent increase from the $1.28 billion hit the division took the prior year. The shortfall came despite $6.08 billion in annual revenue, 28 percent above the $4.76 billion it took in the year prior.

Microsoft shipped--not sold--6.6 million 360s during its fiscal 2007, up from 5 million FY2006--when it wasn't on sale for nearly half the year. Its current installed base stands 11.6 million strong, the most of any of the latest crop of consoles. However, the company only shipped 0.7 million units in the April-June quarter, versus 1.8 million during the same period in 2006.

Besides decreased Xbox 360 console sales, the EDD's fourth quarter suffered a catastrophic blow when then-Corporate Vice President Peter Moore announced a three-year extension of the Xbox 360 manufacturer's warranty. Today, the company confirmed it took a $1.06 billion charge as a result of the unprecedented move, causing operating losses for the quarter to tally a massive $1.2 billion--a staggering 183 percent year-on-year increase. The company said the loss was lessened somewhat by "decreased Xbox 360 console manufacturing costs" and "increased Xbox accessories and video game sales."

Among the grim financial figures were a few nuggets of interesting news. Apparently the EDD is beefing up its staff, since the company's report says that "headcount-related costs increased 15 percent [for the year], driven by a 9 percent increase in headcount and an increase in salaries and benefits for existing headcount, partially offset by a decrease in stock-based compensation expense." The company also said that for the year "Zune, consumer hardware and software, and TV platforms revenue increased $539 million, or 65 percent."

But while Microsoft's game-industry efforts proved costly, they were more than made up for by the company's other businesses. Despite the $1.06 billion 360 warranty charge, the company saw a $3.04 billion net income on $13.37 billion in revenue during its fourth fiscal quarter, 11 percent higher than the same period in 2006. For the full fiscal year, the company saw $14.7 billion of net income on revenues of $51.12 billion, a 15 percent increase over the prior fiscal year.

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