Microsoft shoots its way to a record with ‘Halo 3'

Times Staff Writer

It can take a lot of time to master video games: Microsoft Corp. needed seven years.

The world’s biggest software company on Thursday reported its largest-ever quarterly profit for its division that makes the Xbox console and such games as the smash hit “Halo 3.” Strong demand for “Halo” put Microsoft’s entertainment division into the black with a $165-million profit, reversing a year-earlier loss of $142 million.

The turnabout put an exclamation point on a blowout quarter companywide, one that far surpassed Microsoft’s earlier estimates and sent its shares soaring 11% in after-hours trading to $35.52, the highest since 2001. They had risen 74 cents, or 2.4%, to $31.99 in regular trading.

“In 24 hours, they added $38 billion in market capitalization,” said Sanford C. Bernstein analyst Charles Di Bona. “That’s a pretty good day’s work.”


The stock surge contributed to a banner week for Redmond, Wash.-based Microsoft. On Wednesday, it nosed out rival Google Inc. to expand an advertising partnership with Facebook Inc. and invest $240 million in the social networking company for a 1.6% stake.

Overall, Microsoft reported a 23% jump in profit to $4.3 billion, or 45 cents a share, for its fiscal first quarter, which ended Sept. 30, from $3.5 billion, or 35 cents, a year earlier. Revenue jumped 27% to $13.8 billion, propelled by strong sales of the Windows Vista operating system. The company raised its full-year revenue and profit forecasts.

“This fiscal year is off to an outstanding start with the fastest revenue growth of any first quarter since 1999,” Chief Financial Officer Chris Liddell said.

Although Vista hasn’t commanded the same attention in the U.S. as some previous versions of Windows, the much greater number of computers in the world today dictates much larger software sales.


“Even if it’s not a heroic product, the numbers are going to be bigger,” Di Bona said.

The gaming division’s profit was dwarfed by those units that sell Windows and Office, which reported profit of $3.2 billion and $2.7 billion, respectively. And the results driven by “Halo” were a small repayment on Microsoft’s investment of more than $6 billion in games since it worked to launch the Xbox console in 2001.

Microsoft’s game division last earned a profit almost three years ago, when “Halo 2" came out. This time, it expects the whole fiscal year to be profitable.

The solid performance gives immediate ammo to the company’s pleas for patience as it looks to replicate its successes with desktop software. Microsoft also has invested heavily in online services for businesses and consumers, and that division said its quarterly loss more than doubled to $264 million.


Liddell said online services wouldn’t reach profitability this year. Sometimes, he said, revenue growth is more important.

That formula is finally paying off with the Xbox, though it took “Halo” to do it.

When it hit stores in September, “Halo 3" needed only a week to ring up $330 million in revenue. The game also helped turbocharge sales of the company’s Xbox 360 console, which surged in September to nearly 528,000 devices in the U.S. That made it the month’s best-selling console, research firm NPD said.

The consoles have cost more to make than Microsoft charges for them. But with “every console they sell, they will make $120 in profit selling games,” said Michael Pachter, an analyst at Wedbush Morgan Securities.


More money comes in when Xbox owners pay $50 a year to subscribe to Microsoft’s online game service. “Once the division is profitable, every incremental customer becomes immensely profitable,” Pachter said.

Analysts expect the company’s games business to remain profitable in the current holiday quarter as consumers snap up hot titles, even though the number of consoles sold may fall.

The immense amount of money generated by Windows and Office could help Microsoft capitalize on its gaming customers in other ways.

The Xbox could become more of an entertainment hub, driving media sales and rights-management software that Microsoft sells, Di Bona said.


Games also could include more ads, a key area for Microsoft as it tries to build an advertising business as large as its software pillars.

“They are generating more cash flow than most technology companies produce in revenue,” Pacific Crest Securities analyst Brendan Barnicle said, adding that Microsoft was far outpacing Internet ad leader Google Inc.

“If they want to build an alternative media network, they are the only ones who can,” he said.