Glitches dent Microsoft’s Xbox sales

Glitches in the manufacturing plans for the Xbox 360 dented sales of Microsoft’s new games console over the holiday shopping season, holding back the software company’s revenue growth to 9 per cent in the latest quarter, below the 11 per cent that had been expected.

Microsoft also said on Thursday that its internet search operations had not performed as well as it had forecast in the final three months of last year, though it continued to see the business as an area of long-term growth.

Despite that, Microsoft’s earnings for the latest period, at 34 cents a share, were 1 cent ahead of forecasts, thanks to a lower tax charge than expected. The latest profits represented only a small increase from the 32 cents a share of the year before, as
the company increased its marketing spending to launch a number of new products, including the games console.

Chris Liddell, chief financial officer, blamed a shortage of components for the Xbox 360 for slightly lower sales than expected. Some 1.5m consoles had been sold by the end of the year, compared with market forecasts of 1.8m. He added that Microsoft was pleased with the overall success of the launch and was maintaining its forecast for sales by the end of the company’s fiscal year in June.

Meanwhile, revenues at MSN, the company’s troubled internet services division, slipped by 2 per cent in the quarter, to $593m, partly reflecting a continuing shift in its business model from charging for internet access to selling advertising. The division was also hampered by a switch in the provision of search engine advertising away from Yahoo!, which had supplied adverts in the past, to Microsoft’s own new AdCenter, Mr Lidell said. Microsoft’s home-grown technology was not yet as efficient as the technology it was replacing, holding back sales, he added.

These weaker areas were offset by continued solid growth in the PC and server markets, with two of Microsoft’s biggest three divisions – client, and server and tools – notching up double-digits revenue gains. The client business grew 10 per cent to $3.459bn, reflecting high growth in the global PC market, particularly in emerging countries. Meanwhile, the launch of the latest version of the SQL Server database software pushed revenues in the server and tools division up 14 per cent, to $2.907bn.

Microsoft reported net income of $3.65bn, or 33 cents a share, on revenues of $11.84, compared with earnings of 32 cents a share on revenues of $10.8bn a year before.

Microsoft’s shares edged up in after-market trading, despite the revenue disappointment, as the company reaffirmed its financial guidance for this year.