Microsoft Gaming Division Records $1.89B Loss, Maintains Profit Expectations

The bulk of the losses came during the fourth quarter due to a costly extension of the Xbox 360 warranty prompted by excessive hardware failure. The move cost Microsoft $1.06 billion and fell within the company's previous estimate of $1.05 billion to $1.15 billion.

The charge made fourth quarter operating losses significantly higher than any other quarter, at $1.20 billion, yielding an inordinately high 183% increase over the fourth quarter fiscal year 2006 losses of $423 million. Staffing increases were also mentioned as a secondary reason for the fourth quarter's heavy losses, with a 19% increase in headcount-related expenses.

Despite these daunting figures, Microsoft CFO Chris Liddell maintained the company's guidance on achieving profitability for the division in fiscal year 2008 during an analyst conference call on the earnings. "We have the best first and third party title lineup we've ever had highlighted by the launch of Halo 3 this September," he said. "These games, combined with Xbox accessory attach and an expanding Xbox Live installed base, set us up for an excellent year in our Xbox business."

Liddell would not address specifically which quarters he expected to see profitability from the division, as he said that would require him to reveal too much of the company's plans. "It's profitability overall for the year, and that's the key from my point of view," Liddell said. "To be honest, we have a pricing strategy for the next 12 to 24 months we've embedded in that, and a console strategy as well, and those two are related to each other. At this stage we're keeping relatively quiet about that because from a competitive point of view, we really don't want to signal anything."

Microsoft reported shipments of Xbox 360 consoles during fiscal year 2007 at 6.6 million, up from 5 million in fiscal year 2006. This brings the total number of Xbox 360s shipped to 11.6 million, just shy of the company's earlier projection of 12 million. Fourth quarter shipments for fiscal year 2007 were down to 0.7 million from 1.8 million during the same period the previous year.

As one of three divisions under Microsoft Corporation, the Entertainment and Devices division's losses weren't enough to stop the company from growing overall during both the fourth quarter and all of fiscal year 2007. Microsoft's revenue for the quarter increased 13% year-over-year to $13.37 billion, bringing fiscal year 2007 revenues to $51.12 billion, a 15% year-over-year increase.