Halo effect: Xbox success puts a glow on Microsoft's killer quarter

October 29, 2010: 1:38 PM ET

The company's blowout quarter came from nearly every division, but taking over the top spot in the video game world was its most surprising statement.

Despite a corporate restructuring, criticism that it's failing to innovate in certain sectors, the departure of Chief Software Architect Ray Ozzie and analysts downgrading its stock, Microsoft (MSFT) trumpeted a record first quarter yesterday. Overall revenue rose 25% to $16.2 billion and net income rose 51% to $5.4 billion compared to the same period last year. One the biggest movers? The Xbox 360. (The other big mover-- its stock. Nearly flat for a decade, MSFT is up about 6% so far today.)

The Xbox 360 platform, which includes hardware, games, its Xbox LIVE online community, and accessories, are all considered part of the company's Entertainment and Devices Division [EDD], which posted sales of $1.8 billion between July and September compared with $1.4 billion the same time last year. Microsoft credited that overall 27% division increase in large part to the console's growing success.

Console sales spiked 38%, selling 2.8 million units and outselling the Nintendo Wii and Sony's Playstation 3 in the U.S. for each of the last four months. In mid-June, the company introduced the redesigned Xbox 360 "S" console that is 17% smaller, houses significantly quieter, cooler and more power-efficient hardware, and offers built-in WiFi. The unexpected uptick comes at a time when Nintendo's own financials have stumbled -- the company, which dominated this console generation's console sales until recently, reported a $24.7 million loss during the first half of the year, marking the first time in seven years that the gaming giant did not turn a profit.

Microsoft also pointed to Halo: Reach for robust sales. The first-person shooter experienced the biggest game launch ever, racking up $200 million in global sales on day one and banking $350 million in revenue for the company to date.

The success, particularly in EDD, is a good sign for the company that has arguably struggled to keep up with current trends like mobile and tablets. In May, division president Robbie Bach announced his retirement, effective this fall. Former division Chief Experience Officer and Chief Technology Officer J Allard, the guy behind the Xbox, Zune and the aborted Courier tablet, also announced his fall departure as well. Given the timing, it's fair to say the success of EDD is due at least in some part to the direction and actions set in motion set by Bach. (Senior VP Don Mattrick of Interactive Entertainment and Senior VP Andy Lees of Mobile Communications began reporting directly to CEO Steve Ballmer as of July.)

Other bright spots for the company were attributed to the launch of Windows 7, which the company has said is the fastest selling operating system in history with more than 240 million licenses sold since its July launch and enterprise interest in the latest edition of Microsoft Office. The company did not disclose sales figures for Office.

Said Microsoft CFO Peter Klein in a statement: "Our ability to grow revenue while continuing to control costs allowed us to deliver another quarter of year-over-year margin expansion."  The Xbox's impressive staying power also shows that the company is not giving up on reaching into consumers' homes, not just their offices and server rooms.

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JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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