Microsoft officials have posted slightly better than expected figures for the company’s first quarter results. Unusually sales were boosted from outside of the company’s core business, in particular servers and MSN. For the period ended September 30 sales rose 6% from the same period last year to $8.22 billion. Excluding employee stock-based compensation, which have only been reported this quarter, the company earned 30 cents a share – one cent higher than analysts had expected. Net income also increased to $2.61 billion, up from $2.04 billion last year.
Importantly the company saw a 20% revenue growth in its home and entertainment unit, which includes the Xbox, with $581 million in revenue generated. Nevertheless shares in the company still fell once the figures were announced, due to news that fewer large corporate contracts for software had been agreed than expected. This fall in contracts is largely due to a number of high-profile security scares involving Microsoft products.
Well, that explains the $US18 million listed as a “deferred revenue associated with an unannounced contract” that showed up on ATI’s books last quarter. This apparently was a prepayment for R&D associated with developing the graphics chips for the next-gen Xbox. The deal was announced Thursday (Aug. 14th) and wraps up a year of negotiation. It seems that ATI has learned from NVIDIA’s bitter experience dealing with an 800 pound gorilla (read about that here). ATI’s agreement is royalty based, where ATI gets a slice of every Xbox2 sold, as opposed to NVIDIA’s deal as a subcontractor to Microsoft. Microsoft will also subsidize ATI’s research costs. This seemed NVIDIA’s deal to lose, and even with the happy happy sound bites from Microsoft’s Robbie Bach – “We selected ATI after reviewing the top graphics technologies in development and determining that ATI’s technical vision fits perfectly with the future direction of Xbox”, NVIDIA apparently wasn’t willing to be too flexible to make a deal with Microsoft – even though it accounted for up to 20% of NVIDIA’s sales over the last two years. Guess they really didn’t like having to do that arbitration thing. ATI should still be wary, NVIDIA also got an advance – $US200 million – and put 200+ engineers on the Xbox team (and then missed the initial deadline).
“After the way the first Xbox went, I would view NVIDIA’s involvement with the next Xbox as a negative,” said Joe Osha, a senior analyst at Merrill Lynch. Osha also stated that ATI could get $US35 million in Xbox revenues in 2005. Osha expects ATI will reap $25 million to $35 million in royalty revenues (about 5 to 8 cents additional earnings per share) in 2005, assuming a Christmas 2005 roll out for the Xbox2.
An NVIDIA press release announced that they had reached an agreement with Microsoft over the pricing dispute of the GPU (graphics) and MPU (audio/networking) chips that NVIDIA manufacturers for the XBOX. NVIDIA president and CEO Jen-Hsun Huang, states “This is a win for both companies, and we couldn’t be more delighted with the results, NVIDIA and Microsoft can now take our partnership to the next level and focus our substantial resources to maximize the full potential of Xbox game console.” which is seemingly some happy-happy joy-joy speak if you’ve read an earlier report from The Inquirer that NVIDIA “will not interfere” with Microsoft’s arbitration attempt. We speculate that they reached some happy arrangement about NVIDIA manufacturing chips for XBOX II and that NVIDIA is firmly entrenched in the XBOX II camp, willingly or not. This is an about face from earlier this week even though there were rumors of Microsoft courting ATI from last month. Given that XBOX has only sold about 8 million (compared to PS2′s 50 million), this might not be a good deal for NVIDIA, especially if it turns out that they have to manufacture the chips at a loss for Microsoft. Reuters reported that NVIDIA claims that Microsoft owed them $46.2 million back in July, NVIDIA’s fiscal Q2.Details of the exact agreement are due out at NVIDIA’s quarterly conference call Feb. 13th.
San Jose— So where does an 800 pound gorilla sleep? Where ever he wants. Microsoft has told NVIDIA that they deal that they had for pricing chipsets last year isn’t so cool. Microsoft points out that – hey, you must be producing them for less now, eh? So let’s renegotiate, so what if a goodly chunk of your revenue come from us, I know you’ll do da right thing. Officially NVIDIA disclosed that it’s in arbitration with Microsoft over the pricing of its chips used in the XBOX. Just look at the corpse of SGI lying by the roadside, you’d think all those ex-SGI NVIDIA employees’d know better. Microsoft has a term for working with other companies…”GUBO”.