MS earnings for Fiscal 2007

[RobertR1]

http://www.microsoft.com/msft/earnings/FY07/earn_rel_q4_07.mspx#Balance

The 360 1billion dollar write off hurt and hurt bad. I don't think they can afford another disaster. Well technically, they can afford it but at some point they need to show progress made.

The next 6months should define the future of the 360 from Microsoft's eyes.

 

[Zaphod]

Besides, that game wouldn't fit with the current Xbox 360 profile. If anything, a game where you have to count to $50 Billion would obviously be targeted for the Wii...

As for the write off: Technically, they could have afforded four more of them this quarter and still be in the black. I'm not saying that taking a 20% hit on net income is by any means 'a good thing', but they performed better than last year, even 'adjusted for certain items'. That's more of a minor bump in the road, and the market seems to have been treating them well over the last week.

Edit: Oh, and for the mod (hopefully) moving the thread, wouldn't this be more appropriate in '3D Graphics Companies, Industry, & Misc'? I mean, virtually everything is (at least vaguely) console related these days, but that doesn't mean a finance thread should necessarily go in the console forum.

 

[Rangers]

http://www.vgchartz.com/news/news.php?id=433

This article, if I can read the maze of financial jargon correctly, seems to state something interesting that people aren't noticing. Basically, if I get it right:

Besides decreased Xbox 360 console sales, the EDD's fourth quarter suffered a catastrophic blow when then-Corporate Vice President Peter Moore announced a three-year extension of the Xbox 360 manufacturer's warranty. Today, the company confirmed it took a $1.06 billion charge as a result of the unprecedented move, causing operating losses for the quarter to tally a massive $1.2 billion--a staggering 183 percent year-on-year increase. The company said the loss was lessened somewhat by "decreased Xbox 360 console manufacturing costs" and "increased Xbox accessories and video game sales."

Total EDD loss was 1.2b and 1.06 of that was the writedown for 360 repair. The point though is that leaves "only" $140 million in losses outside that one time charge for EDD, which is really a vast decrease from the over 300m last quarter, and of course quarters prior to that. And they shipped 200k more 360s than the prior Q (700k versus 500k) so "falling sales" isn't the reason for the loss decrease.

I would say it's as good as evidence as any that 360 probably easily breaks even on hardware these days (I would suspect current EDD losses (outside the one time charge) are more due to Zune, 360 repairs, etc etc).

Again if I understand all this financial stuff, and the whole 1.06 billion charge goes in the 07 Fiscal year, then their goal of profit in fiscal 08 should be pretty easy. Granted, they'll have a price drop coming, but 65nm must be expected to cancel that out.

 

[Carl B]

Total EDD loss was 1.2b and 1.06 of that was the writedown for 360 repair. The point though is that leaves "only" $140 million in losses outside that one time charge for EDD, which is really a vast decrease from the over 300m last quarter, and of course quarters prior to that. And they shipped 200k more 360s than the prior Q (700k versus 500k) so "falling sales" isn't the reason for the loss decrease.

I would say it's as good as evidence as any that 360 probably easily breaks even on hardware these days (I would suspect current EDD losses (outside the one time charge) are more due to Zune, 360 repairs, etc etc).

Well, two things. The "losses" accrued on the manufacture of 360s are recorded when they are manufactured, not when they are sold. In the interim they are kept on record as an asset. So, a company doesn't make or lose more money on the sale of a lossy console, but rather simply on its manufacture. I think the consoles they sold in this quarter, were manufactured in a previous quarter, and in a very real sense the reduced losses on manufacture are likely to be the leading edge of the new Falcon generation.

Again if I understand all this financial stuff, and the whole 1.06 billion charge goes in the 07 Fiscal year, then their goal of profit in fiscal 08 should be pretty easy. Granted, they'll have a price drop coming, but 65nm must be expected to cancel that out.

I do think that they have a strong chance of being profitable in '08, but I don't know that I think the hardware itself is profitable yet - afterall in that situation barring the one-time charge what you would expect is a profit for the quarter rather than a loss. But there are a lot of other factors at play in that division, to be sure. Anyway though, whatever the losses on hardware, with Falcon and MS' games line-up for this fiscal year, they should readily reach their target.

 

[Rolf N]

Again the shareholders have failed to extract information about the failure rate from the corporation that's burning their money. But there's a next-best thing: 350 million USD for ...

a write-down of the inventory that we have had returned to date that we believe that we will not be able to sell as a repaired unit

Source: http://seekingalpha.com/article/41697?source=feed

So depending on how much value an XBox 360 represents to Microsoft (i.e. manufacturing cost or wholesale price or somewhere in between), and further depending on how complete that write-off is (they might be able to keep and reuse the drives, the case materials and the packed-in accessories, or they might dump the entire retail box into a landfill), that's somewhere between 700k and 2M units that are not just broken but broken beyond repair. And that's on official record.

 

[RancidLunchmeat]

, that's somewhere between 700k and 2M units that are not just broken but broken beyond repair. And that's on official record.

I think that's an indication of the seriousness of the design flaw, and a direct result of previous attempts to repair the returned consoles.

Which adds evidence to explain why people who had to replace a 360 unit had to do so multiple times. They were getting refurbished units. Which is why some people are still on their launch unit and have never had any problems and others have gone through 3-4-12 units.

I'd really love to know what QA process MS was using during their repair and replacement procedures. What was being replaced? How were the units being tested?

Their troubleshooting process just had to have undergone the most interesting changes to get to the point where they are throwing away that many units because they've concluded it simply isn't cost effective to attempt to repair them.

 

[one]

I would say it's as good as evidence as any that 360 probably easily breaks even on hardware these days (I would suspect current EDD losses (outside the one time charge) are more due to Zune, 360 repairs, etc etc).

That's the best scenario for Microsoft but I doubt it's the most likely, the software sales must have improved a lot compared to previous quarters but it still is nothing in front of the hardware loss. Then a possible price cut.

 

[Mythos]

So do they or dont they take a price cut? and if so is it 50$ or $100?

 

[Johnny Awesome]

They should drop the Premium by $100 in early November to $299, maybe on the 2 year anniversary date or just before the Thanksgiving shopping rush. The should also drop the core to $229 and include a memory card and change its controller to wireless. That's the optimum strategy IMO. Make the diehard Halo fans pay full price and scoop up Christmas shoppers and non-Halo fans with a big price drop.

 

[Rangers]

That's the best scenario for Microsoft but I doubt it's the most likely, the software sales must have improved a lot compared to previous quarters but it still is nothing in front of the hardware loss. Then a possible price cut.

But I'm looking at it apart from the 1.06 billion one time charge.

Besides that, they lost 140 million in the quarter in EDD. That's a relative pittance. Sony lost 914 million last Q in their gaming division, for example.

Take away the charge and the division had remarkably low losses. That's all I'm saying. Also, it's impossible to really tell where gaming fits in, since that division includes various other products. Personally, I'm of the opinion all other products in the division combined are a probably a net negative, though I really have nothing but a feeling on that.

The quarter before this EDD lost 300+m.

Again take away the charge and you're seeing clear profitability improvement. Still profitability will be a tough task..

So do they or dont they take a price cut? and if so is it 50$ or $100?

$100 and coming soon.

 

[one]

But I'm looking at it apart from the 1.06 billion one time charge.

Of course. I'm talking about the fact that the growing software sales are still not enough to offset the other loss apart from the 1.06 billion charge, and logically you can guess the main reason for that loss is the Xbox hardware.

Take away the charge and the division had remarkably low losses. That's all I'm saying. Also, it's impossible to really tell where gaming fits in, since that division includes various other products. Personally, I'm of the opinion all other products in the division combined are a probably a net negative, though I really have nothing but a feeling on that.

The Zune startup is already over and its cost was included in the last (or before) quarter, also the scale of the Zune business is a lot smaller than Xbox. Moreover, Entertainment & Devices Division includes the former Mobile and Embedded Devices Division. This division had been developing the OS for Windows-based smartphones if I read correctly, I doubt it was not obscenely profitable by then.

BTW the article also says

However, the company only shipped 0.7 million units in the April-June quarter, versus 1.8 million during the same period in 2006.

It shows the aftereffect of the overshipping to meet the 10 million goal in the previous year, 360 suffered from the shortage in the same period in 2006 but the shipment in 2007 is even lower than that.