Microsoft said late Thursday that it will take a charge of up to $1.15 billion for the month of June due to a new expanded warranty program and for a number of repairs and failures in its Xbox 360 game consoles.
The company said it is planning to spend at least $1 billion to repair general hardware failures in recent months, and will extend the warranty on the gaming console to three years, from one. In a conference call with analysts, Microsoft said the problems involved engineering issues, and not component or manufacturing issues.
The world's largest software maker said it will record the charge for its fourth fiscal quarter, which ended June 30, to cover the additional costs associated with the warranty extension.
Microsoft Chief Financial Officer Chris Liddell said that the charge will have no impact on the company's overall guidance for fiscal 2008, and some analyst believe it may bode well in the long-term.
On the negative side, Microsoft will take a one time hit to earnings in the June quarter, Goldman Sachs analyst Sarah Friar told clients on Friday, but on a positive note, by expanding the warranty coverage it could gain more traction in the gaming community and regain some momentum with its console sales.
Hardware issues with the Xbox 360 have been widely reported lately. The most notorious involves the illuminated ring surrounding the power button turning red; dubbed the Red Ring of Death by gamers and bloggers.
The entertainment and devices unit president, Robbie Bach declined to disclose the number of consoles that have experienced failures, though he said that with a billion-dollar charge... it's a meaningful number.
The executive said the Redmond giant has made some changes to its manufacturing process and believes the problem should not occur in newly made systems.
We think we have our hands around it at the engineering level, he told analysts.
Microsoft has sold 11.6 million Xbox 360s through the end of June. The company had previously projected the total would be 12 million.
Shares of Microsoft fell 2 cents, or 0.07 percent, to close at $29.97 on the New York Stock Exchange.