Redmond (WA) - Microsoft today reported record revenues of 11.84 billion and a profit of $3.65 billion for the fiscal quarter ended on Dec. 31, 2005. While client software remains the cash cow of the company, the Xbox 360 revealed its first impact: the company shipped 1.5 million units and was hit by a $293 million loss in its Home and Entertainment division.

Once again, Microsoft posted a solid revenue and profit increase, 9% and 5%, respectively over the results of Q4 2004 (fiscal Q2 2005). The core businesses of Microsoft, especially its client as well as its server and tools group continue to provide the foundation for the firm's operation, as they finished the quarter with an operating income of a combined $3.73 billion - which is 80% of Microsoft's total operating income of $4.66 billion.

The Client business remains the most profitable unit with earnings of $2.64 billion (and sales of $3.46 billion), while the server group brought in a profit of $1.1 billion ($2.91 billion of sales).

The Home and Entertainment group, which is responsible for the Xbox 360, was expected to post a significant loss due to the launch of the new console and a number of games. However, shipments appear are behind Microsoft's ambitious goals to sell between 2.75 and 3 million units in the first days. Considering the fact that the holiday season is long over and that Microsoft shipped just about 50% of its 90 day forecast in the first 40 days after launch, the original target may not be realistic anymore. And even the goal to sell a total of 5.5 million Xbox 360 devices in fiscal 2006, which ends on June 30, may be in jeopardy.

According to Microsoft's SEC filing, revenues of the Home and Entertainment group climbed from $1.37 billion in Q4 of 2004 to $1.55 billion in Q4 of 2005. The $300 million of sales the company achieved with the launch of Halo 2 in the 2004 quarter was partially offset by the launch of the new game console, which enabled the company to increase its Xbox sales by $125 million. However, since the Xbox 360 is losing money on a per-unit basis, last year's profits of $55 million turned into a $293 million loss this time.

The company expects operating expenses and operating loss to continue to increase "as a result of Xbox 360 launch-related activities and Xbox 360 console costs,"

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