Xbox One increases Microsoft revenues - but its cost cuts into profits

UPDATED Shipments of 1.2 million Xbox Ones in early 2014 boost Xbox hardware revenues 45 percent -- but that drives hardware profits downward. And Xboxes may be lingering on shelves.
Microsoft has posted its financial results for its third quarter of fiscal 2014, which comprises January 1 - March 31, 2014. The company's gross revenue was $20.4 billion for the quarter, with net income of $5.66 billion -- slightly lower than what it posted a year ago. Alongside its financial news, the company is trumpeting its success with Windows, Azure, and Office 365 -- but it's worth digging into the slight gains in its Xbox business, and what they mean. For the quarter, the company reveals, it shipped 1.2 million Xbox One consoles globally, alongside 800,000 Xbox 360s. A week ago, the company announced it had shipped a total of 5 million Xbox One consoles to retailers. (Sony, of course, has already sold 7 million PlayStation 4 consoles to consumers.) Revenues for Microsoft's Devices and Consumer Hardware division for the quarter reached $1.97 billion -- a 41 percent year-on-year leap from the $1.4 billion it did in 2013. That jump is powered, in part, by 45 percent higher Xbox platform revenues year-on-year -- relating to the increased price of the Xbox One console at retail. It's also more expensive to make, though. CFO Amy Hood's statements to that effect last quarter are borne out by these results: Cost of revenue jumped 70 percent for the division, and a big chunk of that is thanks to the Xbox One. That being so, gross margin for the division decreased 34 percent year-on-year. As the Devices and Consumer Hardware division also contains its Surface hardware and PC accessories business, it's impossible to ascertain precisely how much revenue Xbox platforms generated, as Microsoft has chosen not to provide those numbers. The company also didn't break out any of its first-party video game numbers, but it did note that Xbox Live transactional revenue grew by 17 percent year-on-year. UPDATE: The topic of Microsoft's Xbox business was barely raised during its investor call, with no analysts asking about it at all. Some of CFO Amy Hood's statements did imply, however, that there is more supply than demand for its Xbox consoles. "We do expect to work through some inventory in Q4," said Hood, referring in this case to the period between April 1 - June 30, 2014. She also referred to "channel inventory drawdown for Xbox consoles," implying that manufacturing of Xbox consoles will slow or stop, to allow retailers time to work through existing inventory.

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