Microsoft Corp. will incur pretax costs of as much as $1.15 billion related to repairs of its Xbox 360 video-game consoles and said sales of the machines missed its forecast for the year.
Warranty coverage for the consoles is being extended after an ``unacceptable'' number required repairs, the company said today in a statement. Microsoft expects the move to cost $1.05 billion to $1.15 billion in the quarter ended June 30.
The quality problems may hinder Microsoft as it strives to catch up with Nintendo Co.'s Wii, which has outsold the Xbox every month since going on sale in November. Microsoft, the world's biggest software maker, pledged last July to make the Xbox division profitable in the fiscal year ending June 2008. The unit has lost money since it began in 2001.
``It's a pretty big black eye,'' said Matt Rosoff, an analyst at research firm Directions on Microsoft in Kirkland, Washington. ``It's certainly not going to help the Xbox compete against Nintendo, and it may be the stumble'' that PlayStation 3 maker Sony Corp. needs to win sales.
Shares of Redmond, Washington-based Microsoft fell 8 cents to $29.91 in extended trading. They dropped 3 cents to $29.99 at 4 p.m. New York time in Nasdaq Stock Market trading.
Microsoft missed its forecast for Xbox unit sales for the fiscal year just ended, Robbie Bach, president of Microsoft's entertainment and devices unit, said in an interview. The company has sold 11.6 million machines since the Xbox 360's release in November 2005, missing Microsoft's target of 12 million. It initially forecast sales of as much as 15 million.
Profit Goals Intact
Bach said the company is still shooting for Xbox profit in the year that began July 1. Microsoft has forecast total profit of 37 cents to 39 cents a share on sales of $13.1 billion to $13.4 billion for the quarter that ended June 30. The company reports earnings on July 19.
``You have to wonder how expensive the Xbox business is going to be,'' Rosoff said. ``This is another billion in the hole.''
The expense is enough money to fix 2.5 million consoles, Rosoff said. Bach declined to say how many have failed so far.
``It's a meaningful number and it's got our attention,'' Bach said. ``When you look at the financial implication, obviously it's not a small number.''
Any customer whose console experiences a general hardware failure, indicated by three flashing red lights, will now be covered by a three-year warranty from the date of purchase. The previous warranty lasted one year in North America and Asia and two years in continental Europe, Bach said.
While Microsoft made the right decision by acting, the announcement could cause customers to worry about the quality of the machine, Rosoff said. Microsoft Chief Financial Officer Chris Liddell said the new warranty should ``enhance'' customer confidence in buying an Xbox 360.
Bach said the issue was the result of a ``complex set of factors'' and it would have been difficult to predict the problem in advance. The failures cropped up in the past few months and weren't apparent in the first year the machine was on sale, he said. The company has made changes that he expects will cut the incidence of failures in machines from now on.
Repair shops in the U.K. have been swamped with affected consoles, the Times of London reported earlier today. Some had to turn away customers complaining of the ``red ring of death'' syndrome, named for the blinking lights, the paper said.
Flextronics International Ltd. manufactures the Xbox 360. Bach said Microsoft takes responsibility for the problems and won't be seeking to replace Flextronics.
Source : BLOOMBERG