Microsoft cautious on Xbox 360 shipments, warns of profit impact

The latest financial report from software giant Microsoft shows that the firm's overall profits continue to soar, although major losses are expected from the Xbox 360 in the coming months, and Xbox revenues are declining sharply.

The Home and Entertainment Division, which houses the Xbox as well as the firm's PC games business and other media related businesses, saw its September quarter sales fall to $525 million from $634 million last year, and racked up a loss of $141 million - up marginally from $138 million last year.

Revenue from the Xbox is plummeting in anticipation of the launch of Xbox 360, it seems; the Xbox actually saw a drop of $132 million in revenue, while the PC games business drove a $23 million rise in revenues across the rest of the division.

Financially at least, the division is in for a tough time going forward as well, with the Xbox 360 set to inflict heavy losses in the early stages of its life, as would be expected from any such console.

"Historically, Xbox consoles have negative gross margins," the report says. In fact, all console manufacturers barring Nintendo traditionally rack up negative gross margins early in the lifespan of the hardware, although the systems are generally sold at break-even or better by the end of the lifespan - a milestone which the Xbox never reached due to using off the shelf components from Intel and NVIDIA.

"In fiscal year 2006, we expect Xbox console unit volumes and revenue to increase from fiscal year 2005 due to the launch of the Xbox 360," the report explained. "We expect operating expenses and operating loss to continue to increase as we near the launch of Xbox 360 as a result of launch-related activities and higher initial Xbox 360 console costs."

Speaking to Reuters after the results were announced, Microsoft CFO Chris Liddell also sounded a note of caution about initial shipment numbers of the console - saying that analysts are "expecting more of a launch spike than we were," which seems to suggest that the roll-out of the console may be even slower than previously anticipated.

Looking at the bigger picture, Microsoft had revenue of $9.74 billion for the quarter (up 6 per cent on last year), and racked up profits of $3.14 billion, up an impressive 24 per cent year on year; so while the Xbox may yet have to prove itself financially, the company can certainly afford to bankroll it for a while yet.