XBOX MANUFACTURING MOMENTUM SLOWS
Copyright 2002 www.reuters.com

[ April 11th 2002 ]

Microsoft Corp. may be falling behind on its fiscal-year shipment targets for the Xbox according to two Wall Street analysts who cover the manufacturer of the video game console. One of the analysts, Chris Whitmore of Deutsche Banc Alex. Brown, said on Tuesday that part of the problem came from weaker than expected sales of the $299 console at the consumer level.

The Xbox debuted in the U.S. last November, in Japan in February and in Europe in March. Flextronics International Ltd. manufactures it for all three regions under a contract analysts have said could be worth at least $1 billion a year. Analysts said on Tuesday that production has slowed, jeopardizing Microsoft's target of shipping 4.5 million to 6 million units worldwide by June 30, the end of the software giant's fiscal year.

The slowdown also hurts Flextronics, which Whitmore said books revenue as the video game players leave the production floor. "Xbox momentum is slowing from an easy start," Banc of America Securities analyst Paul Fox wrote in a note to clients.

That factor, coupled with trouble with customers in the optical networking business, could make Flextronics' near-term revenue growth plans difficult to achieve, he added. "This time of year is historically a slower time for console and game sales, so we're watching the market carefully and taking slight measures to best manage supply," said James Bernard, a spokesman for Xbox.

Bernard declined to discuss specific numbers, citing Microsoft's upcoming quarterly earnings report. He said, however, that sales are expected to track "usual business cycles," and the company is happy with the console's numbers thus far. In afternoon Nasdaq trade, Flextronics shares were off 84 cents, or 4.8 percent, at $16.71, while Microsoft fell $1.56, or 2.7 percent, to $55.66.

While Microsoft has claimed strong sales for the Xbox in the United States, at least in its initial holiday season, the company has admitted it is not meeting expectations in Japan, a market where it was expected to have difficulty. "Japan is going well on the software side and probably is a little behind where we want to be on the hardware side," Xbox director Robbie Bach told Reuters last week.

In its regular global video game survey last week, Goldman Sachs said U.S. retailers showed a "surprisingly clear" preference for Sony Corp's PlayStation 2 over the Xbox.