Microsoft's game division suffers $1.89B shortfall

[Seboist]

http://www.gamespot.com/news/6175367...stnews;title;1

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.

[Blu Titan]

They have a lot of money.

[akadkins]

Let's not get too excited about this...Sony is having the same tyupe of losses - which would mean leadership for both companies might see Video Games as a losing industry. They'll both drop out and Nintendo will take over again. Read up on your history - this is what happened to Atari in the 80's when video games died.

Only thing we have going for us is that our platform support next generation movie support in addition to games...so if Blu-Ray is the future then PS3 is set.

[dialog_gvf]

Sony has shown they can make great gobs of money from consoles. Microsoft is now about $7 billion in deficit with the Xbox franchise.

Gary

[Zaphod]

Originally Posted by dialog_gvf

Sony has shown they can make great gobs of money from consoles. Microsoft is now about $7 billion in deficit with the Xbox franchise.

Gary

Yeah, but when you have like 60 billion in CASH reserves, this is a drop in the bucket...although a pretty big drop!

[Blus Brother]

Originally Posted by Zaphod

Yeah, but when you have like 60 billion in CASH reserves, this is a drop in the bucket...although a pretty big drop!

LOL That is about how much Gates is worth - that includes what he owns, their cash availability is much lower.

[Zaphod]

Originally Posted by bosels11

LOL That is about how much Gates is worth - that includes what he owns, their cash availability is much lower.

Actually that is cash reserves, a couple of years ago when they started offering dividends for their stock they had about 50-60 billion in cash reserves and the reason they started offering dividends was due to this overabundance of cash.

From the Microsoft Annual Report:

Cash for the following years:

2004 - $60 billion
2005 - $38 billion
2006 - $34 billion

And for comparisons sake

From the Sony Annual Report

Cash for the following years (converted from yen)

2005 - $4 billion
2006 - $4.75 billion

[Nismobeach]

Originally Posted by akadkins

Let's not get too excited about this...Sony is having the same tyupe of losses - which would mean leadership for both companies might see Video Games as a losing industry. They'll both drop out and Nintendo will take over again. Read up on your history - this is what happened to Atari in the 80's when video games died.

Only thing we have going for us is that our platform support next generation movie support in addition to games...so if Blu-Ray is the future then PS3 is set.

LOL, WTF ever. There is no way in Hell that Sony will just "walk away" from the cash cow that is known as the Playstation brand. Furthermore and unlike Microsoft, Sony has actually made a profit at this business before and will probably do so again within the next 1 to 2 years.

BTW, if you read up on your history you would know that the current situation is nothing like the video games crash of 1983. The crash happened because there was an overabundance of both console manufactures as well as an overabundance of crappy overpriced games that nobody wanted to buy.

Does ET for the Atari ring a bell? I would argue that a game like Ratchet and Clank Future shares nothing in common with it so go spin your FUD somewhere else.

[Nismobeach]

Originally Posted by Zaphod

Actually that is cash reserves, a couple of years ago when they started offering dividends for their stock they had about 50-60 billion in cash reserves and the reason they started offering dividends was due to this overabundance of cash.

From the Microsoft Annual Report:

Cash for the following years:

2004 - $60 billion
2005 - $38 billion
2006 - $34 billion

And for comparisons sake

From the Sony Annual Report

Cash for the following years (converted from yen)

2005 - $4 billion
2006 - $4.75 billion

Feel free to post up a link to a reputable site which substantiates your claims.

[Zaphod]

Here you go:

2006 Microsoft Annual Report

http://www.microsoft.com/msft/report...0k_fr_bus.html

Under Financial Highlights for Microsoft's Report

2006 Sony Annual Report

http://www.sony.net/SonyInfo/IR/fina...00000aksmr.pdf

Page 64 for Sony's Report

[dialog_gvf]

Xbox is currently the business run by Jr. that super-rich Dad props up.

Just because he CAN afford to support it indefinitely, WILL he?

At some point the Microsoft shareholders will get sick of seeing their money thrown away. Someone ask them if they'd prefer another 70 cent per share in dividends, or the Xbox franchise.

Gary

[JTK]

Originally Posted by dialog_gvf

Xbox is currently the business run by Jr. that super-rich Dad props up.

Just because he CAN afford to support it indefinitely, WILL he?

At some point the Microsoft shareholders will get sick of seeing their money thrown away. Someone ask them if they'd prefer another 70 cent per share in dividends, or the Xbox franchise.

Gary

http://www.dailytech.com/Microsoft+A...rticle8119.htm

One wonders how long that will take with mixed signals like these?

[Zaphod]

As long as Microsoft keeps showing investers a 40% ROI based on their stock price, based on the previous 12 months, I don't think they will care. A 1.89 billion charge taken when you have revenues of 13.37 billion for a quarter is not going to make a huge difference to shareholders...yet.

It's interesting to note that the stock price has soared over the past 12 months even with all the losses annouced by Microsoft. Their software side is so lucrative and so profitable that big losses in other divisions are easily offset.

[JTK]

Originally Posted by Zaphod

As long as Microsoft keeps showing investers a 40% ROI based on their stock price, based on the previous 12 months, I don't think they will care. A 1.89 billion charge taken when you have revenues of 13.37 billion for a quarter is not going to make a huge difference to shareholders...yet.

It's interesting to note that the stock price has soared over the past 12 months even with all the losses annouced by Microsoft. Their software side is so lucrative and so profitable that big losses in other divisions are easily offset.

^^ This was the point I was trying to make earlier either in this thread or another like it somewhere else around here.

[Maximus]

Well from deep inside a few companies I have worked with:

MS are taking valuations on the entertainment division, it could be for one of two reasons,

1. Selling up (though no one will buy it).

2. A massive (think in terms of billions) write-down on the value of the division to be taken in the next financial year.

I would go for the second one, but who knows?

[What'sHD]

maxpower1987, what do you mean by writedown? As in further losses similar to but bigger than the warranty issue? thanks

If further fiascoes lie ahead for E&D, perhaps this is why Bach sold stock. It could not have been just the warranty cos that amount hardly made a dent in their valuation and I am guessing Bach knew that before he sold... 2c

[Maximus]

Originally Posted by What'sHD

maxpower1987, what do you mean by writedown? As in further losses similar to but bigger than the warranty issue? thanks

If further fiascoes lie ahead for E&D, perhaps this is why Bach sold stock. It could not have been just the warranty cos that amount hardly made a dent in their valuation and I am guessing Bach knew that before he sold... 2c

Basically another one off charge caused by a revaluation to the worth of the division, basically because of RRoD the division accrues a lot of losses and MS need to show that somewhere.