Q3 Profits Solid, but 2002 Estimate Lowered

Microsoft earned a record US$2.74 billion in net income on revenue of US$7.25 billion in the third quarter (ending Mar. 31, 2002) of its 2002 fiscal year. The positive result is due mostly to recognition of unearned revenue from multiyear licensing agreements signed in past quarters, making up for disappointing Xbox sales and a lower-than-expected gain on investments in the quarter. In addition, the company lowered its expectations for FY’02, which ends June 30, and explained areas of focus and investment for FY’03.

Xbox Sales Lower than Expected

The closely watched consumer software, services, and devices segment pulled in US$1.07 billion this quarter—a 132% increase over the same quarter last year, but less than Microsoft’s previously stated expectations of US$1.2 billion. Microsoft attributed the lower-than-expected result to disappointing Xbox sales, particularly in Japan. Although the company did not reveal how many units it sold this quarter, it drastically lowered its estimates for fiscal year 2002: it now expects to sell between 3.5 million and 4 million units worldwide by June 30; previously, it had said it would sell between 4.5 million and 6 million. The company also announced it was lowering prices on the Xbox about 30% in Europe (to US$288 in the United Kingdom and US$266 in the rest of the continent) to spur sales there. In the same segment, revenues for MSN were up 40% over the same quarter last year, mainly from increased advertising sales.