Xbox 360 Unit Shipments Fell 12 Percent Q3, Microsoft Says

Microsoft’s game business was among the few blemishes for the company in its Q3 ended March 31, the company said. Xbox 360 console shipments decreased 12 percent from Q3 last year to 1.5 million units, while game revenue fell 4 percent, Bill Koefoed, general manager of investor relations, said on an earnings call.

The Xbox 360 decline was “roughly in line” with the overall videogame market, Koefoed said. The 360’s software-to-hardware attach rate continued to lead the industry at 8.8:1, but first-party software revenue declined due to a “difficult comparison” with last year, when Microsoft released the game Halo Wars, he said. But the game declines were “substantially offset by the continuing strong revenue and membership growth of Xbox Live,” he said. Microsoft’s overall cost of goods sold also dipped 2 percent to $2.8 billion, “driven primarily by lower Xbox 360 volume and console costs,” he said.

Despite weakness in games, overall Entertainment and Devices Division revenue increased to $1.665 billion from $1.629 billion in Q3 last year. The division also swung to a $165 million operating income from a $41 million loss. But Microsoft said in a 10-Q filing with the SEC that R&D expenses in the division jumped 7 percent, or $31 million, mainly due to “increased headcount-related expenses.” That was “partially offset by decreased third-party development and programming costs,” it said.

Non-game revenue increased 14 percent from Q3 last year, reflecting growth in the PC hardware market and increased Windows embedded revenue, said Koefoed. He estimated the PC market grew about 25 percent, with consumer PCs up nearly 30 percent and business PCs up 14 percent. Netbooks represented about 10 percent of the total PC market, he said.

Overall Microsoft Q3 revenue increased 6 percent to $14.5 billion from Q3 last year and its profit jumped 35 percent to $4.01 billion, 45 cents per share. “Strong demand for Windows 7 was a primary contributor to our performance,” said Chief Financial Officer Peter Klein. “Internal and external checks show that over 10 percent of all PCs worldwide are already running Windows 7,” he said.

The company still expects that Entertainment and Devices revenue for the fiscal year will be “roughly flat” vs. last year, Klein said. That “translates into a fairly robust growth rate” for Q4, “driven by the uplift from the strong PC market, increased gaming attach revenue and momentum in Windows embedded,” he said. Due to Microsoft’s “operational initiatives, improved Xbox 360 console costs and a continuing favorable revenue mix,” the company now expects that gross margin for the year will expand 1 percent from last year, he said.

The Entertainment and Devices Division will introduce “an unprecedented wave of innovation in the first half” of next fiscal year, including the “Project Natal” motion control system for the 360 and its launch games, as well as the game Halo: Reach, Klein said. But he said, “The single largest variable driving cost of goods sold” this year “will be hardware demand in the Xbox business.” As usual, Microsoft said nothing specific about Q3 sales of its Zune digital media players.