Microsoft fiscal Q1 games revenue drops 22%

Software pullback offsets more console shipments

By Danny King -- Video Business, 10/23/2008

OCT. 23 | Microsoft said today that its fiscal first-quarter sales from Xbox 360 consoles and games fell 22% from a year earlier because of lower games console prices and a comparison to the year earlier release of Halo 3, reflecting a slowdown from the worldwide gaming boom earlier in the year. The company, which said today that its games revenue was better than it expected, also cut its earnings and sales forecast for the fiscal year ended June 30, 2009.

Sales for the quarter ended Sept. 30 at Microsoft's entertainment and devices unit, which includes Xbox revenue, dropped 6%, as software sales and hardware prices more than offset a 22% jump in consoles shipped. The unit accounted for 12% of the parent company's revenue, down from 14% a year earlier, the world's largest software maker said today. The division's operating income rose 6.6% to $178 million on falling production costs associated with the Xbox 360 console.

Xbox's performance reflected a U.S. videogame industry that last month started to feel the effects of an economic slowdown. U.S. consumers spent $1.27 billion on videogame hardware and software in that period, representing a 7% decline from a year earlier and marking the first year-over-year industry shrink since March 2006, NPD Group said last week.

Last month, Microsoft sold more than 347,000 Xbox 360 consoles, second only to the 687,000 units Nintendo sold of its Wii console, NPD said. In August, Xbox's unit sales were less than half that of Wii.

“We had a good quarter,” said Microsoft general manager of investor relations Bill Koefoed, noting on a conference call today that the games sales decline from year earlier revenue that had been boosted by Halo 3 wasn’t as steep as the company had forecast.

Overall, Microsoft's fiscal first-quarter net income was $4.37 billion, or 48¢ a share, slightly up from $4.29 billion, or 45¢ a year earlier, as sales rose 9.4% to $15.1 billion. The company was expected to earn 47¢ a share on $14.79 billion in sales, the average analyst estimate in a Thomson Financial survey.

The company also said today that revenue for the fiscal year ended June 30, 2009, would be as much as $66.4 billion, down from its July forecast of $68.1 billion. Microsoft predicted earnings would be as much as $2.10 a share, down from its prior forecast of $2.18 a share. For the entertainment and devices unit, fiscal second-quarter sales would range from 5% less to 1% more than a year earlier, according to Microsoft chief financial officer Chris Liddell.

“We still expect the division to continue its profitability this year,” Liddell said.