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Microsoft's Q3 profits rise 65%

The fiscal third quarter was very kind to software giant Microsoft. The company witnessed a 32 percent increase in revenue to $14.4 billion USD, operating income of $6.59 billion USD and net income of $4.93 billion USD. Earnings per share also jumped 72 percent to $0.50.

"I am extremely pleased that we delivered a quarter of strong double-digit growth for revenue, operating income and EPS," said Microsoft CFO Chris Liddell, chief financial officer at Microsoft. "And I am looking forward to a very good finish to this fiscal year with strength continuing into fiscal 2008."

The strong performance from Microsoft in Q3 can be attributed to the launch of Windows Vista and Office 2007. The two products were heavily promoted and launched on January 30.

But while Microsoft did well overall, the Entertainment and Devices Division (EDD) saw its revenue fall during the quarter. The EDD’s operating loss dropped from $402 million USD to $315 million USD. Revenues, however, also dropped 21 percent during the quarter to $929 million USD.

Poor sales of the Xbox 360 were blamed for the lower performance. "EDD revenue decreased during the three months ended March 31, 2007 primarily because of decreased Xbox 360 console sales," Microsoft reported in its 10-Q filing. "During the quarter, we shipped 0.5 million Xbox 360 consoles as compared to 1.7 million consoles in the third quarter of fiscal year 2006, which was the first full quarter of Xbox 360 console sales. Xbox and PC game revenue decreased $393 million or 44% during the three months ended March 31, 2007 due to the decrease in console sales." Microsoft has shipped over 11 million Xbox 360s since its November 2005 launch.

The Xbox 360, however, wasn't the only culprit during Q3. Microsoft cited expenses related to its Zune launch as adding to the operating loss. Microsoft's Zune -- its first home-brewed competitor for the iPod -- was launched in November and is expected to pass the one million shipped mark in June. The company also attributed some of the blame to "increased Xbox 360 console warranty expenses." The company boosted the console's warranty to one-year in December 2006 and just recently announced a more flexible warranty program for owners.

Microsoft forecasts that EDD revenue for fiscal 2007 will be up year-to-year thanks to increased Xbox 360 shipments and increased Zune sales. The company’s rumored flash-based Zune could be instrumental in such gains.

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RE: Elite may have more demand then expected...
By Oregonian2 on 4/27/2007 1:44:25 PM , Rating: 2
I think a warranty is almost by definition a money losing operation. It's something that costs money to provide, but gets no income whatsoever for it as such (unless some financial wizard transfers some percentage of the purchase price revenue as the warranty department's "income"). Certainly it can be higher or lower than budget targets, but other than for things like "extended warranty" that has revenue attached to it, it's always a money loser.

RE: Elite may have more demand then expected...
By alifbaa on 4/27/2007 2:35:33 PM , Rating: 2
Warranties can increase sales and be a source of profit if they inspire consumer confidence in a product or enhance its value significantly. Of course, if you offer too generous of a warranty or are manufacturing an unreliable product, you will lose money. Ultimately, it's like advertising -- you have to spend money to make money. It's not a 1:1 relationship, so determining how much to spend is always a balancing act.

If you have a good product, you should be confident enough in its quality to guarantee its maintenance costs for a reasonable period of time. In the case of electronics, there is no reason why a well designed piece of hardware can't be expected to be maintenance free for at least a year in all but rare cases.

Of course, if you've designed a thermally unstable product, you can expect an accelerated failure rate. Microsoft never really came clean on this ongoing problem. To blame consumers for inadvertently putting a piece of entertainment equipment in entertainment cabinets next to a stack of DVDs doesn't cut it for me. Extending the warranty to 1 year went a long way, but I wonder about the longer term problems the 360 will face. I don't think customers should pay for thermal related problems within 2-3 years of purchase, if not a little more.

By Oregonian2 on 5/1/2007 2:13:19 PM , Rating: 2
I agree with your comments when talking about things from the global point of view. I was speaking about just the warrantee department of the organization not being a revenue generator. It, like the advertising department, are overhead expenses that are necessary so the operations department can roll in the revenue. So although it itself doesn't profit, it may contribute to making the operations department more profitable, and therefore the "net" more profitable.

"And boy have we patented it!" -- Steve Jobs, Macworld 2007

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