Microsoft Xbox Repair Costs May Cut Fourth-Quarter Profit Gain

19 Jul 2007 • by Natalie Aster

Microsoft Corp., the world's biggest software maker, may report slower fourth-quarter profit growth today after paying as much as $1.15 billion to fix faulty Xbox video-game consoles, reported The Bloomberg.

Net income probably rose to 32 cents a share in the quarter ended June 30 from 28 cents a year earlier, according to the average estimate of 11 analysts surveyed by Bloomberg. Sales may have increased 12 percent to $13.3 billion, the survey showed.

The repair expenses, which eroded gains from new Windows and Office programs, revived debate over whether Microsoft should be in video-game consoles at all. The unit that includes Xbox has lost more than $5 billion in the past five years amid competition with Nintendo Co. and Sony Corp.

``Given the amount of capital and time they've put in, at some point you evaluate the feasibility of going against Sony and Nintendo,'' said Pat Becker Jr., who helps oversee $2.5 billion including Microsoft shares at Becker Capital Management in Portland, Oregon. ``Is that really a place Microsoft should have resources deployed?''

Microsoft said this month that an ``unacceptable'' number of its Xbox 360 machines were experiencing a complete shutdown customers call the ``red ring of death,'' after the circle that appears on defective consoles. Chief Executive Officer Steve Ballmer, 51, extended the warranty and the software maker is reimbursing users who have already paid for fixes.

The Redmond, Washington-based company reports results today after the close of regular Nasdaq Stock Market trading. Spokesman Bill Cox declined to comment for this story.

The repairs cut profit by about 8 cents a share, according to Goldman, Sachs & Co.'s Sarah Friar in San Francisco. At least eight analysts reduced their earnings per share projections after the announcement July 5, lowering the average estimate by 7 cents.

The Xbox breakdowns add to a stream of bad news holding back the stock, Friar said. ``People reacted like `God, what else can happen?'' said Friar, who rates the shares ``buy.'' ``Microsoft needs to prove they can create large profitable businesses outside of the operating system.''

Shares of Microsoft have risen 3.5 percent in 2007, giving up some of the gains that came before the Jan. 30 release of the new Windows Vista program. Rivals Apple Inc., Oracle Corp. and Google Inc. have all posted bigger increases this year.

Microsoft rose 14 cents to $30.92 yesterday on the Nasdaq. Twenty-five analysts suggest buying the shares, eight recommend holding them and one has a ``sell'' rating, according to data compiled by Bloomberg.

In the Xbox unit, revenue probably declined 10 percent to $1.16 billion, Friar said. Console sales missed forecasts amid competition with Kyoto, Japan-based Nintendo's Wii, she said.

Sales in the other four main divisions probably rose at least 10 percent each, with revenue from Windows for personal computers jumping 17 percent on Vista purchases, Friar said. The Web business may have gained 10 percent as advertising growth continues to lag behind leader Google, she said.

Microsoft may yet prove to be a better value than companies such as General Electric Co. and Coca-Cola Co., which have similar price-to-earnings ratios and are growing at a slower pace, Becker said.

Joel Hirsh, an analyst at Kovitz Investment Group in Chicago, expects the stock to rise as much as 20 percent within 18 months.

``Yes, they are trying to find growth, but it's not like they aren't growing already,'' said Hirsh, whose firm manages $1.1 billion, including Microsoft shares. ``The beauty of this company for us is that other people are bored of it.''