Written by Naveen Selvaraj
Microsoft Corp.(MSFT) reported 4Q08 Operating income growth of 42% Yoy. Excluding the $1.1 billion charge in 4Q07 related to the expansion of Xbox 360 warranty coverage, Operating income has increased only 12% Yoy. Xbox had some part in this poor earnings growth.
The Entertainment and devices division(Xbox sales fall in this segment,EDD) continues to be a drag on operating earnings, despite robust Xbox volumes, as seen in Exhibit I.
Exhibit I: EDD - Volumes Grow But Earnings See Red
While Xbox shipments have perked up in the last two quarters (with expected seasonality), product sales do not seem to translate to segment earnings. Year-on-year, Xbox volumes have grown by 160% and 86% in the last two quarters, but EDD operating earnings seem to be non-correlated to this volume spurt. EDD has slipped back in the red in 4Q08,with a segment loss of $(188) M, after reporting small segment profits in the prior three quarters of FY08. MSFT has in its 4Q08 earnings release cited increased product costs of Xbox as a drag on operating income and this could explain the lack of Xbox volume leverage in segment operating earnings.
With increased console shipments not bringing in profits, it remains to be seen if Xbox game sales can rake in the profits in the quarters to come? After all, software is where Microsoft’s profits lie!