Decline in Xbox 360 Sales Dampens Good Microsoft Quarter

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In its quarterly report to analysts for its third fiscal quarter of 2007, Microsoft executives repeatedly stated much lower than expected Xbox 360 sales for the quarter. After selling as much as 1.8 million consoles per quarter last summer, the company sold only 500,000 consoles in the previous quarter to retailers.

Revenue for the Entertainment Division in the fiscal third quarter was down a staggering 21.5% annually, to $929 million; and the division posted a $315 million loss, though that's less of a loss than the $402 million posted during the same quarter last year. Microsoft CFO Chris Liddell told analysts to expect revenue for the Entertainment and Devices division for the fiscal fourth quarter to fall as much as 11%.

Just after the closing bell on the New York exchanges, Microsoft released a preliminary note on its performance for the first calendar quarter: It reported $14.3 billion in revenue, a gain of 32% over the same quarter a year ago, and net profit of $4.93 billion. That's a 65.5% annual gain, which sounds pretty astonishing, and trumpets will certainly blare today and tomorrow.

But as the company warned three months ago, it is deferring revenue from the previous quarter attributable to initial sales of Windows Vista to business customers. Exactly how much of that $4.93 billion number is deferred revenue won't be known until later tonight, though that's not stopping financial news sites from trumpeting the deferred gains as a milestone anyway.

One possible clue: The company declared $4.5 billion in unearned revenue for the quarter as cash flow from operations, and charged $6.1 billion as the cost of recognizing that unearned revenue. Hopefully we'll get the full story of that intriguing pair of line items.

5:42 pm ET April 26, 2007 - Microsoft CFO Chris Liddell gave the deferral number up front, in the interest of full transparency: $1.7 billion of that revenue number was deferred (pretty much the difference between the two figures about), meaning without the deferral, Microsoft's revenue growth was still 17%.

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