Kinect Provides Microsoft with Q2 Lift
Strong demand for the new Kinect for Xbox 360 motion sensor helped drive a 55 percent revenue increase for Microsoft’s Entertainment & Devices Division (EDD) in Q2 ended Dec. 31 versus the same period a year earlier, it said. The 8 million Kinect sensors sold in its first 60 days available “exceeded our expectations,” Chief Financial Officer Peter Klein said in an earnings call.
Kinect “is the fastest selling consumer electronics device in history,” Klein claimed. The million sensors sold included standalone units and those bundled with 360 consoles, said Bill Koefoed, general manager of investor relations. EDD operating income passed $1 billion year-to-date, “a major milestone for this division,” he said.
Xbox 360 sales “momentum,” meanwhile, continued, Koefoed said. Microsoft sold “a record 6.3 million consoles” in Q2, a unit increase of 21 percent from Q2 the year earlier, he said. That “helped drive Xbox Live membership up 30 percent to 30 million active members,” he said.
EDD revenue grew to $3.7 billion, while operating profit in the division jumped to $679 million from $365 million versus Q2 last year, Microsoft said. Xbox 360 platform revenue overall grew $1.3 billion, or 56 percent, in Q2, Microsoft said in a 10-Q filing at the SEC. Cost of revenue in the division jumped $906 million, or 61 percent, “primarily reflecting higher volumes of Xbox 360 consoles and Kinect sensors sold, and increased royalty costs resulting from increased Xbox Live digital content sold,” it said. EDD sales and marketing expenses grew $57 million, or 20 percent, mainly due to “increased Xbox 360 platform marketing activities,” while R&D expenses jumped $35 million, or 15 percent, due mainly to “higher headcount-related expenses,” it said. The division also includes Zune MP3 players, but Microsoft again offered no sales data for those devices.
Microsoft also launched Windows Phone 7 in Q2, and it’s “now on nine devices with 60 operators in 30 markets,” Klein said. Customer satisfaction data indicated that 93 percent of customers globally were “happy with the product and we're also seeing strong developer engagement,” he said. Handset makers bought more than 2 million Windows Phone 7 licenses in Q2 and there are now more than 24,000 registered developers, said Koefoed. While Microsoft was “encouraged by the early progress, we realize we still have a lot of work ahead of us, and we remain focused and committed to the long-term success of Windows Phone 7,” Klein said.
Microsoft estimated that nearly 90 million PCs were sold globally in Q2, representing “the biggest quarter ever,” with 2-4 percent growth from a year earlier, said Koefoed. Business PCs “grew faster than consumer PCs as companies continued to refresh hardware and adopt Windows 7,” he said. Within consumer PCs, netbook sales “declined from their peak last year while notebook growth remained healthy,” he said. Klein said “netbooks sort of hit their peak … last year in Q2.” What’s been seen “over the course of this year” is that “some of that volume” has been “replaced with newer devices, like ultra portables and tablets … and that’s caused a little bit of a drag on the consumer side” of the PC market, he said. Q2 “marked the one year anniversary of Windows 7,” and Microsoft has now “sold over 300 million Windows 7 licenses to date,” Koefoed said.
Total Microsoft Q2 revenue grew 5 percent from the prior year to $19.95 billion. But profit dipped slightly to $6.63 billion from $6.66 billion.
Cost of goods sold grew 33 percent to $4.8 billion in Q2, “driven primarily by increased Xbox hardware volume and online costs,” said Koefoed. Microsoft predicted that EDD revenue will grow about 50 percent in Q3 from Q3 last year and about 40 percent for the fiscal year.