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Xbox digs into Microsoft's coffers
Revenue takes a hit from "lower than expected" sales...

By Ina Fried

Published: Friday 27 January 2006

Microsoft on Thursday reported second-quarter profits in line with Wall Street estimates but revenue came in slightly less than expected amid component shortages for the Xbox 360.

The software maker said it made a profit of $3.65bn, or 34 cents per share, on revenue of $11.83bn, for the three months ended 31 December. Profits were boosted by a tax benefit that amounted to about a penny per share. That compares with profits of $3.46bn, or 32 cents per share, on revenue of $10.82bn for the same quarter a year ago.

Analysts had anticipated profits of 33 cents per share on revenue of $11.96bn, according to First Call. Microsoft said in October to expect revenue of $11.9bn to $12bn and per-share profits of 32 cents or 33 cents.

Shares in the company rose slightly in after-hours trading, changing hands recently at $26.93, up 43 cents, or 1.6 per cent from Thursday's closing price.

Microsoft said it saw strong PC demand during the quarter.

The company blamed the revenue miss on component shortages for the Xbox 360, which launched during the quarter. MSN also came in slightly below expectations, though results for the company's server and tools unit were better than expected. The Windows client unit and the Office business largely met expectations.

Colleen Healy, a senior director at Microsoft, said: "Overall revenue did come in slightly below expectations, mostly driven by our home and entertainment unit. We did have some component shortage issues that we believe are behind us."

Microsoft said it sold 1.5 million Xbox consoles during the holiday quarter: 900,000 in North America; 500,000 in Europe, the Middle East and Africa; and 100,000 in Japan.

Chief accounting officer Scott Di Valerio said on a conference call with analysts: "This was lower than we expected due to component shortage. We believe this is a short-term manufacturing challenge."

Microsoft also cut its forecast for Xbox 360 sales over the first 90 days. The company had hoped to sell as many as three million consoles over that time but now expects just 2.5 million units, due to capacity constraints. Microsoft said it still expects to sell 4.5 million to 5.5 million of the game consoles by June.

The software giant also saw profitability, for the first time, in two of its emerging business units. Healy said: "For the first time ever, the Microsoft Business Solutions and Mobile and Embedded were in the black."

The business solutions unit, which sells business software for medium-sized companies, earned $10m in operating income, while the mobile unit posted a $20m operating profit.

Microsoft slightly raised its sales forecast for the full year, saying it now sees 11 per cent to 12 per cent growth, compared with an early forecast of 10 per cent to 12 per cent growth. Healy said: "We're feeling better about our top-line growth."

The company also had its biggest ever quarter for share repurchases, buying back more than $7.7bn in stock. As a result, Microsoft saw a dip in its cash balance. The cash and short-term securities balance ended the quarter at $34.7bn, down from $37.8bn at the end of June.

For the current quarter, Microsoft said it sees things generally in line with analysts' forecasts. The software maker expects projected revenue of $10.9bn to $11.2bn, with per-share profits of 32 cents or 33 cents. Analysts have been looking for per-share profits of 33 cents and revenue of $10.99bn.

Ina Fried writes for CNET News.com