Huge Xbox 360 Sales Boost Microsoft Revenue
The surprise of the day came during Liddell’s guidance for the next quarter: “With that strong momentum, we’re making tradeoffs and choices in managing the Xbox business to achieve our targeted profitability in fiscal year ’08. In the near term, this means we will optimize for profitability.”
What does that mean? Good news often comes in small words; with Microsoft, the word “great” is most common. Bad news often comes couched in euphemisms, such as the need to “optimize for profitability.” It means, brace for a storm.
While Liddell projected Xbox 360 will go into the spring quarter with the strongest third-party game lineup of the three major consoles, inventory levels could start to rise as demand gets soft. “As we look at historical seasonality, pricing, and inventory levels,” Liddell continued, “we’re taking a more cautious view of the market, and our Half 2 revenue and console guidance reflects that. We’re now forecasting full-year revenue growth of 26-31%, and a decline of 15-25% for the third quarter, and expect to exit June having sold about 12 million Xbox 360 units since launch, down from our previous guidance of 13-15 million. That reduction in console units also results in a reduction in revenue related to attached software, accessories, and [Xbox] Live.”
In case your calculator isn’t handy, that means Microsoft expects to sell as many as three million fewer Xbox 360 consoles worldwide in the coming quarter, despite its metamorphosis, as touted at CES two weeks ago, into what Microsoft described as the only IPTV console anyone would rationally desire.
Does this mean, one analyst asked, that Microsoft’s considering price reductions? Liddell gave a fuzzy response: “Certainly, the healthy inventory that we’ve seen, which is partially a result of the very good sales into the channel...is one of the factors behind what we’re looking for in the second half. We’re also starting to look at fiscal year ’08, and what the best approach to take [is] in terms of profitability. So we’re just making some strategic decisions around what we might do there, too.”
Analysts kept pressing: Is Microsoft planning to pare down inventory levels prior to a price cut? “I wouldn’t put it in those terms,” replied Liddell, who might have preferred the term “optimizing for profitability.” “We’re looking at the numbers that we sell into the channel based on where we see the inventory at the start of the year, and the patterns of sales that we think will come up. The net result of that may well be that we see inventory come down, but that’s an outcome, not a management of that.”
If Microsoft is planning a price cut for Xbox 360, then it doesn’t want to execute that cut while the channel is awash with product, partly because the company doesn’t really reap much from console sales anyway. It would rather make that cut when demand has begun to taper off, and the channel is a little drier. Those conditions may very well be the “patterns” to which Liddell referred.
Meanwhile, for the eighteenth consecutive quarter, the Server and Tools division came through for Microsoft with double-digit revenue growth, and 30% revenue growth in SQL Server alone. Steadily, SQL Server is becoming just as principal a pillar of Microsoft as Office. Colleen Healy did confirm today that Windows Server “Longhorn” (the latter term having served as a blindfold for the product’s model year) is being planned for release-to-manufacturing during the second half of the calendar year.