Nintendo Announces Switch Lifetime Hardware Sales Pass 110 Million as Revenue & Profit Dip in 1st Quarter 2023

First it was Microsoft. Then it was Sony. Now it’s time for Nintendo to get in on the action, reporting its first quarter fiscal 2023 (already!) financial results out of Japan today.

Like trends seen at other console manufacturers, Nintendo’s numbers were mixed with a sprinkling of positive highlights and major milestones. The Kyoto-based manufacturer and publisher is experiencing normalization back towards pre-pandemic levels, facing the impact of a high comparable last year, hardware supply challenges, inflationary pressure plus a lighter lineup of summer blockbusters.

During the three months ending June, Switch passed a major milestone in terms of its global unit sales. It’s now become only the third home console ever to surpass the 110 million units shipped threshold, sharing such rarefied air with Sony’s PlayStation 2 and PlayStation 4. Even amidst chip shortages going into its sixth year on market, the Switch is persevering.

Even so, Nintendo’s financials proved to be weaker than the same time last year. Both revenue and operating profit experienced declines, the latter in the double-digit range. Gains due to a weaker yen and Switch OLED’s higher contribution couldn’t outweigh pressure from chip shortages and people returning to experiential spending elsewhere. It’s also important to keep in mind how the last two years have been outliers, in many respects.

“Positive factors included the depreciation of the yen and the addition of Nintendo Switch OLED Model with its high unit price to the hardware lineup,” executives shared in the company’s presentation. “But hardware production was impacted by factors such as the global shortage of semiconductor components, resulting in a decrease in hardware shipments and subsequent decline in overall sales.”

This is partially due to lower software unit sales, as Switch saw less than half as many “million-sellers” in this year’s fiscal Q1. New releases centered on casual sports, as both Nintendo Switch Sports and Mario Strikers: Battle League hit during this window, and both became million-sellers. Kirby and the Forgotten Land continues its excellent performance, becoming the best-selling game ever in the mainline Kirby franchise. Like usual, Nintendo’s software results were bolstered by ongoing momentum from the likes of Mario Kart 8, Animal Crossing: New Horizons and the healthy Ring Fit Adventure.

Nintendo, and I, expected this sort of movement from last year’s highs based on things like the general release slate and various macroeconomic factors. Which is why the company reaffirmed annual guidance around sales, profitability, hardware and software units. I’ll write a bit later about my own forecasts given this framework.

There’s not a moment to waste! It’s time to slide right into the numbers. Get ready for two whole galleries of images, the first from Nintendo’s presentation and the second a grouping of my own charts displaying key financial indicators.

During this April to June time frame, Nintendo generated around $2.37 billion in revenue or 5% lower than last year when measured in local currency. Operating profit totaled $784 million, representing a 15% drop on rising expenses mainly associated with Switch marketing and game development.

It’s a classic mean reversion I’ve written about for similar results recently, a dip towards more normalized spending after two years of substantial boosts from the pandemic. While COVID and its variants are still present, there are more people vaccinated which means they are turning to other types of entertainment outside the house. That is, when they can afford it. People’s hard-earned cash isn’t going as far lately as many countries suffer from the worst inflation in decades.

There’s also the more technical element of yen depreciation, which ends up hurting Japanese companies whose primary business is conducted overseas. This leads into Nintendo’s latest regional breakout which saw 44% from The Americas, a number consistent with last year’s split. Then it’s Europe at 26%, up from 24%. It follows that Japan now represents only 20% of Nintendo’s business, down from 22%. This means that only one-fifth of its revenue is gained locally, meaning a weaker yen has a significant effect on its sales.

Now I’ll dig into product categories underlying Nintendo’s quarterly output. Software and related content comprised 56% of Q1 revenue, up from 53%. It follows that Switch hardware made up the remaining 44%, down compared to the 47% a year ago. What this indicates is hardware is losing ground at a more rapid pace than software, as the latter benefits greatly from ongoing events or downloadable content for legacy titles. If it wasn’t for the Switch OLED model, this skew would be even more towards software.

There are two charts in the below gallery showing the trend of quarterly revenue and profit, where we see the declined compared to recent years however still trending above that from fiscal 2019. Then there’s the two charts which smooth out these results by showing trailing 12-month figures, as I add up the latest four quarters. Trailing annual revenue is right near $13 billion for Nintendo, severely hampered by the yen weakness when converted to dollars. Operating income over the last year is $4.43 billion. This helps keep the overall business in context, rather than focusing strictly on shorter-term movement.

Using these recent annual figures, I’d like to compare Nintendo’s results to industry peers in Tencent, Sony and Microsoft. I will preface this by saying the conversion from yen is really taking a toll on Nintendo and Sony right now. Tencent’s $33 billion in annual gaming revenue is untouchable, though it’s the only one of these that hasn’t reported this quarter and I expect it could decline. Sony’s $21 billion from PlayStation is up next, then Microsoft’s Xbox revenue of $16.22 billion comes in third. If Microsoft’s accounted for Activision Blizzard, which it won’t until next year, it would rival Sony’s output. Which means Nintendo’s revenue is on the lower end at $13 billion. However, Nintendo’s $4.43 billion in operating profit over the last 12 months is higher than PlayStation’s $2.44 billion.

Focusing now on Nintendo’s console business, Switch shipped 3.43 million units globally during the quarter. That’s down 23% from the 4.45 million in Q1 of fiscal 2022. It’s the lowest number of Switch hardware shipments since 3.28 million in January to March 2020.

The base model felt the most precipitous drop, moving down 60% to 1.32 million of the quarterly total. Switch Lite posted a 48% dip, shipping 590K. Which means the Switch OLED model was the best-selling in the family during the last three months, moving 1.52 million boxes. That brings the lifetime total of just Switch OLED to 7.32 million since October 2021. This was precisely Nintendo’s intention, to shift buyers towards the fancy, higher-priced OLED.

Overall, Switch lifetime shipments now total 111.08 million. Compare that to lifetime sales of 89 million at this same time in calendar 2021. In an ironic twist, Switch is now the third home console AND the third portable device to pass the 110 million mark. PlayStation 2 and PlayStation 4 reached 155 million and 117 million, respectively. Separately, on the handheld side, Nintendo’s own Nintendo DS achieved 154 million while Game Boy/Game Boy Color settled at almost 119 million. For now, the PlayStation 4 is in the Switch’s sights, especially since Sony stopped reporting its prior generation hardware figures just this quarter.

As referenced in an earlier slide, sell-through to consumers for the quarter ending June declined for the second year in a row. While the company didn’t specify the exact amount, the trend-line is clear at this point in the life cycle. Especially given the tremendous impact from Animal Crossing: New Horizons back in March 2020, when sell-through of Switch consoles peaked.

Even amidst lower global hardware sales, Switch is still holding up among its counterparts in its biggest market. That’s according to the Q2 2022 report from industry tracking firm The NPD Group, an often cited source here at the site. Switch was the best-selling console in the U.S. during April to June when measured by units, and is still the year’s best-seller by this metric as I wrote earlier in the month. This dynamic makes sense given the Switch’s more attractive pricing and consistent availability at retail, plus supply challenges having an outsized effect on new generation consoles.

Switching over to Nintendo’s software sales for the quarter, it’s a bit brighter than its hardware counterpart. In that it didn’t see as big a decline from a unit standpoint.

Total game shipments in the period ending June declined to 41.4 million, down 9% from the prior year’s 45.29 million. Namely because it was a quiet time for those million-sellers: only four games sold this amount in the period alone, and none of them were from third parties. Compare that to 9 this time a year ago, 7 from Nintendo and the remainder from external partners. So, while there are select titles hitting this threshold, there were less of them amidst a sparse release calendar.

Because of this, lifetime software unit sales for Switch reached 863.59 million. That’s up from 892.18 million back in March, and 587.12 million back in June 2021. Might it cross 900 million by September? (Yes.)

Nintendo decided to kick off the summer with two sports titles during the three months ending June, launching both Nintendo Switch Sports and Mario Strikers: Battle League.

Nintendo Switch Sports scored 4.84 million shipments in its debut quarter. It’s tricky to compare this to prior mainline Sports releases, the last major one being Wii Sports Club in 2014, itself a remake of the original 2006 Wii Sports which launched alongside the ever-popular Wii console. There’s also Wii Sports Resort that released in 2009 at 1.61 million. We could also compare to Wii Fit, which started at 3.6 million. Any way you slice it, it’s a strong start to a title Nintendo expects could keep up momentum over time as more content rolls out.

Mario Strikers: Battle League spent less time on sale after its mid-June launch, shipping 1.91 million copies since. It’s the first mainline Mario Strikers title in 15 years, back when Mario Strikers Charged accumulated 1.71 million in its first quarter. That puts this latest game slightly higher than its predecessor’s initial sales.

The last flagship Switch game of the quarter was Fire Emblem Warriors: Three Hopes. This one hit market during the final week of June and is co-published by Koei Tecmo. Nintendo hasn’t publicly shared any results for it just yet.

As for earlier games, Kirby and the Forgotten Land continues its expansion, which is natural for Kirby. It’s scooping up sales left and right, amassing 4.53 million units to date after selling-in another 1.88 million in fiscal Q1. During its first 15 weeks on sale, it’s already sold-through over 4 million copies. That’s the best cumulative sales to consumers ever for the series, already outpacing the lifetime total of 2018’s Kirby Star Allies.

The best-selling first party Switch game list is unchanged at the top. Mario Kart 8, of course, somehow sold another 1.48 million to bring its lifetime total past the 46 million mark, settling at 46.82 million. Animal Crossing: New Horizons is at 39.38 million, while Super Smash Bros. Ultimate fought up to 28.82 million.

Fan favorite Ring Fit Adventure remains in the Top 10 best-selling on the platform, moving 450K units up to 14.54 million. It’s creeping up on a couple Pokémon games, I’d wager it can move into 8th place on the lifetime Switch sellers list by year-end.

Speaking of Pokémon, for 2022 to date in the U.S., Pokémon: Legends Arceus remains on the best-selling premium list, currently catching the third spot as of June. That’s according to The NPD Group, and it doesn’t even include the game’s digital portion. The aforementioned Kirby and the Forgotten Land and Mario Kart 8 are presently 8th and 9th, respectively.

Another growth avenue for Nintendo last quarter was digital sales of software, rising 16% to $679 million. That comes out to roughly 29% of its total revenue. Nintendo also shared that more than half of software sales are now digital, at 53% of the total. This is up from 47% last year, partially due to downloadable content like Animal Crossing: New Horizons Happy Home Paradise and the Nintendo Switch Online + Expansion Pack offering.

Unfortunately, there’s no new data on Nintendo Switch Online subscription count. The most recent update from the company was 32 million in September 2021. Management did state that sales from this online service are “showing growth,” just didn’t indicate by how much.

And as we’ve seen many times before, Nintendo’s engagement stats are lacking. Its “Annual Playing Users” metric is now up to 104 million, compared to 102 million last quarter. To me, this doesn’t mean much other than people that buy a Switch turn it on at least once in the last 12 months. Not the most descriptive of metrics.

It’s a decent start to the new fiscal year for Nintendo, seeing drops where expected on the hardware side and maintaining solid results for both new games and ongoing software spending. It’s too early for the forecast to change, even given the amount of uncertainty that exists on the supply side plus game release dates moving around soon.

“Due to delays in the procurement of components such as semiconductors this year, we have not been able to conduct production as planned.” management said. “However, we expect procurement to gradually improve from late summer towards autumn, giving us a clearer outlook regarding production for the remaining calendar year. In preparation for the holiday season, we will leverage appropriate means of shipment, and work to deliver as many Nintendo Switch systems as possible to
consumers in every region.”

As a quick reminder on its guidance, Nintendo anticipates sales will decline in the single digits this fiscal year to roughly $12.34 billion at the current exchange rate, a figure in dollars that could improve if the yen improves. Operating profit is expected to take a bigger hit, dipping 16% to under $3.9 billion. Which would be the lowest result since the pandemic begin, yet still above levels prior to that point.

It’s on the conservative side, which is where I’m at as well. When there’s this many unknowns, both at a macro level and within the games industry, I tend to be cautious. I think it’s prudent for executives to do the same, especially for a company like Nintendo which isn’t as diversified as other consumer technology peers.

I continue to believe there won’t be any substantial new Switch iterations over the next few quarters. Instead, Nintendo should be working more on a successor than a model change. As for units, I’m reiterating my forecast of 20 million to 21 million which is a bit lower than Nintendo’s 21 million guidance. Right now, I’m slightly more bearish than management.

Another portion that Nintendo left unchanged is the guidance of 210 million software units selling in the year ending March 2023. Nintendo reiterated that stance, which I lean towards being a bit high unless a couple key titles hit market in this time frame.

Short term Xenoblade Chronicles 3 launch a few days back. Kirby’s Dream Buffet is a smaller title slated sometime this summer. Next up, there’s a pair of “third in the series” entries in Splatoon 3 and Bayonetta 3, launching in September and October respectively. Out of these, I’m way upbeat on the latter, the first mainline Bayonetta game since 2014.

I expect Pokémon Scarlet and Pokémon Violet, which are introducing all new pocket monsters, could potentially break records for early sales for the franchise on Switch and overall upon debuting in November. Granted, there’s been a lot of Pokémon lately. That won’t stop the series from selling, especially when there’s a new generation to collect.

The Legend of Zelda is the proverbial, hm.. wild card of the bunch. Will there be a new version of something like Windwaker soon? Might Nintendo put out a Switch version of Twilight Princess? That would be well and good, and certainly attract demand. It really comes down to whether the fabled Breath of the Wild sequel hits by March 2023. At least for now, it remains listed as Spring 2023 in Nintendo’s reporting. If I was to guess, I’m mildly confident it’s out this fiscal year.

Finally, there’s also Advance Wars 1+2: Re-Boot Camp and Metroid Prime 4. Both stayed as to-be-announced in Nintendo’s presentation. If anything, I’d wager the former has a better chance of hitting this fiscal year because it was scheduled to be out already. I don’t see the latter until the back half of calendar 2023, the earliest.

With its latest hardware sales milestone and a lot of good games before its life cycle ends, it’s still an exciting time to be a Switch owner. Especially for fans of JRPGs, sports games and Pokémon. Investors may be wearier, though shouldn’t let declines from all-time highs distract from Nintendo still being in its best financial shape since the Wii era.

Thanks for visiting the site and checking out this analysis. Feel free to drop a comment here or on social media. Enjoy the remainder of earnings season everyone!

Note: Comparisons are year-over-year unless otherwise mentioned. Exchange rate is based on reported average conversion: US $1 to ¥129.66.

Sources: Company Investor Relations Websites, The NPD Group.

-Dom

PlayStation 5 Lifetime Shipments Total 21.7 Million As Sony’s Gaming Business Sales & Forecast Decline in First Quarter 2022

After writing about Microsoft’s earnings earlier in the week, it’s now time to recap Sony’s fiscal year 2022 first quarter results.

Mixed as they were. Overall sales and profit grew for Sony overall, in part due to a weaker yen and boosts from the likes of Pictures and Music. However, sales within its PlayStation business declined amidst a variety of factors. This was mostly expected based on a high comparable last year, a limited suite of first-party exclusive games plus signs of a broader slowdown in discretionary spending.

Sony’s Game & Network Services (G&NS) segment sales declined in the low single digits over the last 3-month period, marking the lowest Q1 output since fiscal year 2019. Profitability took an even bigger hit, moving down almost 40%, due to general weakness in software plus increased spending on its pending projects.

Hardware proved to be the main bright spot, experiencing a double-digit revenue rise as PlayStation 5 reached 21.7 million in lifetime units shipped. That’s after selling-in 2.4 million boxes in the April to June period, up ever so slightly from last year’s 2.3 million.

Sony also reduced its financial forecast for the PlayStation business, revising downward both revenue and profit metrics while highlighting it expects a bigger decline in 3rd-party software sales. Profit will also be impacted by closing the purchase of Bungie, which went effective a couple weeks back.

Somewhat surprisingly, management reiterated its PlayStation 5 hardware shipment target at 18 million consoles for full year. I tend to disagree, personally. I believe Sony’s management is exceptionally bullish in the face of continued pressure from multiple angles, including supply chain and broader price pressure. I expect reduced guidance within the next two quarters unless input costs drastically improve.

“At this point in time, we have made no change to our 18 million unit sales forecast for PlayStation hardware in FY22,” said executives in the company’s prepared remarks. “But since we are seeing a recovery from the impact of the lockdown in Shanghai and a significant improvement in the supply of components, we are working to bring-forward more supply into the year-end holiday selling season.”

Time to move forward into recapping the underlying financials and make some fun predictions of my own!

First referencing the slides from Sony in the above gallery, these display how it generated $17.86 billion in revenue during the quarter which is up 2%. Operating profit rose 3% to $2.37 billion.

Both these set all-time highs for a first quarter, when measured in local currency. I’m using an average exchange rate to convert into dollars.

Given the environment these are very good, even if slight, gains. Granted, it’s worth reiterating how a weak yen will help top-line growth for global consumer companies like Sony.

That currency impact is on display within the PlayStation business, where its top-line would have been even worse if the exchange rate impact wasn’t as robust. Sony’s gaming division saw revenue dip 2% to $4.67 billion. With higher costs recently, operating profit declined a precipitous 37% to $408 million.

As the G&NS segment slide shows, the top-line revenue includes a substantial foreign exchange rate impact. It also accounts for a decline in both 1st and 3rd party software, a trend consistent with Xbox’s quarter as well. Compared to this time in 2021, people simply aren’t spending as much time or money on software and related content, even if they still have demand for hardware.

This exact dynamic is reflected in the product category slide from its supplemental information and the colorful chart I’ve compiled. Sales from Physical Software, Digital Software and Add-On Content all fell double-digits in the quarter. Hardware and Others, which includes peripherals and first-party game sales not on PlayStation platforms, boosted 12% and 28% respectively. Network Services is also proving to be resilient right now, moving up a modest 4%.

The two additional charts provided expand Sony’s reporting over the latest 12-month period, a method I use to smooth out results and provide better perspective on how companies are performing. It smooths seasonality and considers the last four quarters in aggregate. On the revenue side, PlayStation revenue topped $21 billion. Which is up compared to this time last year when it was $20.6 billion. Operating profit is also up year-on-year, from $2.33 billion in the 12 months ending June 2021 to $2.44 billion now.

What does that mean? Well, in the scope of recent years, these quarterly drops aren’t as damaging as they seem because the last few quarters have been abnormally high for the games industry. It’s that normalization I’ve written about before, as things like global inflation and folks seeking other forms of entertainment enter the picture.

In comparison to industry peers like Tencent, Microsoft and Nintendo, Sony’s current gaming output is near the top. Tencent’s recent annual figure is roughly $33 billion, continuing its reign as the biggest gaming company in the world by sales. Then Sony slots in next at $21 billion, which is lighter lately because it’s converted from a currency in free fall. Microsoft recently reported $16.22 billion, while Nintendo’s latest from last quarter is around $15 billion. The last two years have been a healthy time for the biggest publishers, manufacturers and developers, given all that’s happened, so some headwinds now are natural.

In addition to the financial metrics I love to highlight, Sony shared a variety of additional figures on software sales, digital contribution, services and engagement factors. All very important in gauging the well-being of PlayStation as a business.

First, I’ll talk software sales, the bread and butter of any gaming ecosystem. We already know that revenue from these sources declined in the double-digits, which is reflected in unit sales as well. Full game software on PlayStation platforms dipped 26% to 47.1 million units. Within that, first party titles (those published by PlayStation) lowered even further, down 39% to 6.4 million.

This period includes the second quarter for titles like Horizon Forbidden West, Gran Turismo 7 and MLB The Show 22. It could mean sales a few weeks out from launch are lower because people are playing less, which they are, or potential buyers are waiting until discounts because many new generation titles now start at a higher price point. Which extends the length of a title’s sales trajectory, though earns Sony less per unit sold over time.

Those gamers that are buying software for PlayStation platforms are doing so via its digital storefront more than ever. The number of digital game units sold compared to the total reached 79%, which ties an all-time high set back during the quarter between January and March 2020. To say it another way, fiscal Q1 had the same digital proportion as around the beginning of major quarantines during the early parts of the pandemic.

With respect to player count and engagement, it’s another mixed bag. PlayStation Plus memberships rose 1 million compared to last year’s number, currently reaching 47.3 million subscribers. It’s almost the same number as last quarter, down only around 100K. On the other hand, the key metric of Monthly Active Users (MAUs) showed weakness, going down from 105 million last year to 102 million now.

Sony’s explanation is that hours spent on the platform came in below estimates. Which fits with my expectation, given the release slate and other entertainment options.

“Total gameplay time for PlayStation users declined 15% year-on-year in Q1,” management said in its remarks. “Gameplay time in the month of June improved 3% compared with May and was down only 10% versus June 2021, but this is a much lower level of engagement than we anticipated in our previous forecast.”

This report also marks a bittersweet milestone, as Sony no longer reports hardware sales for the PlayStation 4. The 2013 console ends its historic run around 117 million units sold globally. That’s enough to be the second best-selling home console of all time behind only the PlayStation 2. Where does PlayStation 5 stack up against its predecessor right now? Well, PlayStation 4 had shipped 25.4 million by its seventh quarter on market, meaning PlayStation 5 is lagging by almost 4 million units. Congrats to everyone behind the PlayStation 4, one of the highest-selling devices across the history of gaming.

Stepping back to take it all in, Sony’s fiscal first quarter results were mildly impressive overall while expected temporary weakness hit the PlayStation segment. Three months ago, I wrote about being more cautious than Sony’s management on its gaming prospects for the coming fiscal year. So, this sort of decline fits with that hypothesis, which I’m continuing here.

“The results forecast we announced in May incorporated an outlook for the growth of the global economy developed in January as well as major risks contemplated at the time of the forecast such as the direct impact of the situation in Ukraine and the impact of COVID-19 in China,” executives noted in the company’s prepared remarks.

The highest profile aspect of guidance is PlayStation 5 hardware, where Sony stubbornly kept the 18 million unit sales target for the year ending March 2023. While the next couple quarters will feature software titles that can be system-sellers, my problem is how chip prices could rise in the double-digits over the remainder of this year, and shutdowns or lockdowns will continue to impact part suppliers in the pipeline. My current target is between 15 to 16 million sold this fiscal year for PlayStation 5, implying it still has upwards of 13 to 13.5 million to go.

I also want to address a question that arose during today’s earnings call. Per a transcription from Video Games Chronicle, executives were asked about the potential for a price increase for PlayStation 5. That’s right, an increase! In fairness, Sony has recently bumped up prices for certain items in its local Japanese market plus Meta increased the cost of its Quest 2 virtual reality headset by US$ 100.

Even given the challenges faced by electronic manufacturers right now, I think it’s potential product suicide to drastically raise prices on consumers that are already cash-strained. Especially when it comes to the PlayStation 5, which already sees inflated secondhand prices amidst rampant scalping and limited inventories. Thankfully, Sony Chief Financial Officer (CFO) Hiroki Totoki agrees, for now, and dismissed the question.

On the financial forecast side for the remainder of this fiscal year, Sony raised its sales estimate by 1% while simultaneously reducing its operating income projection by 4%. For PlayStation alone, it revised revenue and profit downward by 1% and 16% respectively. That PlayStation profit reduction stands out the most, factoring increased costs associated with closing Bungie and Haven Studios acquisitions.

I’d say I’m cautiously bullish on this update. Even with big blockbusters like Madden 2023, FIFA 2023 and the highly-anticipated God of War Ragnarök on the horizon in the coming months, I’m worried about those diminishing engagement hours, lower spend on ongoing content and, of course, stagnating hardware production. Uncertainty is the enemy of those who make predictions, so I’ll keep my tentative outlook and say I think we might see lower results.

One wildcard in this scenario is PlayStation VR2, which has a launch roadmap that’s apparently in full swing according to PlayStation Blog. I continue to be shocked by how soon Sony is showing the device, which I didn’t expect for at least another year or more. It seems like it’s been in development for a long while, though release has been pushed back given the difficulties of supplying PlayStation 5, which is necessary to run the headset.

I don’t know if it’s a wise decision to spend on making and marketing both PlayStation 5 and PlayStation VR2 during a holiday season where costs are moving up across the board, and consumers can barely find the console at retail. Does Sony intend to launch the peripheral before March 2023 to meet that fiscal year deadline? Can it match the US$ 400 price tag I think it needs to be attractive? Based on where it’s at in development, I can see it. Even if I don’t necessarily agree with the move.

Thus concludes another recap session during this busy earnings season. Hop over to my full calendar for more on when other companies are reporting in the coming weeks, and thanks for taking the time to visit the site! Be safe, friends.

Note: Comparisons are year-over-year unless otherwise mentioned. Exchange rate is based on reported average conversion: US $1 to ¥129.4.

Sources: Company Investor Relations Websites, Getty Images (Photo Credit), Meta, PlayStation Blog, Video Games Chronicle.

-Dom

Microsoft’s Xbox Sales Reach New Fiscal Year High in 2022 Despite Fourth Quarter Declines in Content & Hardware

It’s here. My first big recap article of this latest earnings season!

In case it wasn’t clear from my recent calendar post, late July signals the start of that season. Let’s kick it off with Microsoft’s fourth quarter fiscal 2022 results, which means I’ll cover both quarterly and annual figures. The more, the better!

This latest 3-month period featured somewhat mixed results that capped off a historic year for the company’s gaming division, where it achieved the best ever fiscal revenue for Xbox as a brand.

As anticipated, gaming revenue declined in the quarter ending June 2022, dipping 7% to roughly $3.45 billion. Like many results lately in the industry, it sounds a lot worse than it was. This number is the second best Q4 in Xbox history, trailing behind only last year’s massive $3.71 billion spike.

It’s one of those “good enough” scenarios, falling perfectly in-line with the company’s, and my, expectations of a mid-to-high single digit decline. Either a big beat or epic miss would have been much more newsworthy.

What’s important is the impact on fiscal year revenue from Xbox, which moved past $16 billion for the first time ever. That’s yet another all-time year for gaming at Microsoft. It’s the sixth straight fiscal year where Xbox has achieved record sales.

Underlying this growth was upward movement in Content and Services, which houses software sales along with the likes of Xbox Game Pass and cloud offerings. A constant here has been claims from management that Xbox Game Pass subscriptions have been steadily increasing, although the team still hasn’t shared an updated sub figure since the 25 million I wrote about back in January.

On the other hand, Xbox hardware sales have stagnated over the latest 12 months which resulted in a double-digit decline during the year. Which is curious, considering comments from Chief Executive Officer (CEO) Satya Nadella indicate the family of devices is selling better than ever.

“We’ve sold more consoles life-to-date than any previous generation of Xbox and have been the market leader in North America for three quarters in a row among next gen consoles,” Nadella said in his prepared remarks on the earnings conference call.

The declining revenue along with high unit sales indicate a major talking point to me: There’s a high proportion of unit sales coming from the lower-priced Xbox Series S. Which fits with mounting evidence and anecdotes that these are much easier to find and plays from a manufacturing cost standpoint because they are less expensive to make. Plainly, Microsoft and its suppliers can’t produce enough high-end Xbox Series X boxes to grow hardware revenue. I expect high input costs to continue, thus this trend will keep up into the new fiscal year.

Now I’ll dig into the underlying numbers and highlight key trends from this report.

Peeking first at the above slides from Microsoft, they show that 7% decline in quarterly gaming revenue which gets us to that $3.45 billion figure. Not bad considering Xbox achieved a best-ever Q4 result this time last year!

The main reasons for lower sales proved to be people spending less time and money on the platform over those 3 months, which impacted purchasing of both first-party and third-party software. The main bright spot was growth in Xbox Game Pass subscriptions. I’ll go more into these segments in a bit.

Expanding to a longer time frame is my chart, which shows 12-month trailing sales figures for the Xbox business unit. This shows a couple major points.

First, if we focus strictly on each fourth quarter, it displays that record high fiscal year from Xbox: $16.22 billion between July 2021 to June 2022 compared to the prior record holder of fiscal 2021 at $15.37 billion.

Subsequently, the full chart illustrates last quarter was the first decline for trailing annual gaming sales since back in Q2 of fiscal 2020. That initial rise back then corresponds to quarters leading into the start of quarantines during the pandemic, and the figure has since leveled off right around $16 billion lately. Still, it’s only a 2% decline from last quarter’s all-time best. Which is something I’ve expected given the strong prior years and macroeconomic forces at play, including inflation.

Note: These dollar totals are based on growth rates over the prior year. Microsoft has yet to publish its 10K filing, I’m confident the math will be very close.

Where does this put Xbox sales right now in comparison to major peers in the games industry?

Since Microsoft is the first to report, I’ll use the latest annual figures for the likes of Tencent, Sony and Nintendo. Tencent is the clear leader of the pack, aggregating to annual sales of $33 billion. Sony is up next, reaching $24.4 billion. That number will refresh later this week when the company reports on Friday. That leads into Microsoft’s $16.22 billion, which will increase when the Activision Blizzard deal closes to somewhere between $23 to $24 billion depending on redundancies and cost-savings. Lastly, Nintendo is close to Microsoft’s current figure, hitting $15 billion in yearly sales.

The main caveat I’ll note when comparing across the industry is how revenue is one of many metrics used to gauge financial strength. I’d prefer profitability when available, however Microsoft does not report this granularity for Xbox alone.

That doesn’t mean we can’t glean anything on Xbox’s profit contribution from this recent report. The broader segment of More Personal Computing (MPC) experienced an operating income decline of 5% as expenses rose 8%. Microsoft called out Windows, Search and news advertising as main drivers of this weakening profit dynamic, which indicates that gaming’s contribution likely remained consistent. Which I’d say is good news, especially for the cost of making consoles.

For the quarter ending June 2022, both of Xbox’s main segments of Xbox Content & Services and Xbox Hardware suffered declines. Although the latter was more precipitous, neither was very concerning to me because of where we are in the broader cycle plus supply conditions being nowhere near normal.

Starting with Content & Services, this segment contributed 6% lower sales than a year ago. Which, like total Xbox revenue, was in-line with the company’s guidance and my own expectations. This equates to $2.77 billion in Q4, implying it contributed around 80% of the total. Another way to consider this is 4 out of every 5 dollars spent on Xbox was on software, downloadable content, subscriptions and non-hardware purchasing.

In fact, the latest annual contribution from Content & Services is a big positive for the Xbox brand. It’s now above $12.5 billion, or 77% of the total, a dollar figure which is actually up 3% compared to the prior year. That means despite weakness in the fourth quarter, Content & Services had its best fiscal year in reported history.

The main factor, of course, is Xbox Game Pass momentum and its proven impact on spending habits for ongoing subscribers. While executives refuse to share anything beyond the 25 million figure, I estimate it’s closer to 30 million by now. I’d wager it hasn’t breached that milestone. Because otherwise Microsoft would have said so!

There’s also the element of offerings like Xbox Cloud Gaming plus recent partnerships with companies like Epic Games and Samsung. Microsoft is benefiting from rounding out its ecosystem play and expanding how and where people play, which has a tangible effect on revenue growth even as individual title sales may slow.

“We’ve partnered with Epic Games to make Fortnite available for free via browser,” noted Nadella in an example of this strategy. “Over 4 million people have streamed the game to date, including over 1 million who were new to our ecosystem.”

Hardware is proving to be the more challenging business line for Xbox, declining 11% in the quarter to under $680 million. That’s the second lowest output in the past seven quarters, no doubt impacted by higher margins and continuously low availability of the premium Xbox Series X version.

Along the lines of its counterpart, the annual numbers are more reassuring. Microsoft generated $3.7 billion from Xbox console sales in fiscal 2022, which is up from $3.2 billion previously. That’s a gain of nearly 16%. This is mainly due to excellent performance during the initial stages of this fiscal year, meaning hardware has trailed off recently.

That’s not to say demand isn’t there. It’s mainly that Xbox is selling its lower-priced SKU, which doesn’t boost the top-line as much. Last quarter, I posited that lifetime unit sales of Xbox Series X|S could be between 14 million and 14.5 million. After this latest period, I’m estimating it at 16 million to 16.5 million.

It’s unfortunate we don’t know for sure, especially since Sony and Nintendo are more transparent.

The last numbers I’ll cover before wrapping up are for Microsoft as a whole. The firm generated $51.9 billion in revenue, up 12%. Operating profit reached $20.5 billion, or an increase of 8%. Quarterly sales from Microsoft Cloud moved past $25 billion for the first time ever, jumping 28% year-on-year.

Focusing on the More Personal Computing (MPC) business unit, it was responsible for $14.4 billion in sales. This means Xbox, at $3.45 billion, made up almost a quarter of the segment’s total.

These results are quite staggering as the company benefited greatly from hybrid working models and enterprise cloud usage. Still, quarterly revenue and earnings both missed analyst consensus estimates.

During the full fiscal year, Microsoft posted $198 billion in revenue and $83 billion in operating profit. It’s hard to even understand these numbers!

Now to look ahead, let’s focus on gaming within the broader company.

According to Chief Financial Officer (CFO) Amy Hood, here’s the rundown of guidance for the first quarter of fiscal year 2023, which runs from this July to September. Note this does not include any impact from the Activision Blizzard deal, which it still expects to close by June 2023.

Gaming revenue is forecasted to decline in the “low to mid single digits” driven by a drop in first party software. Content & Services has that same exact guidance. Though the management team does anticipate Xbox Game Pass subscriptions will grow again and thinks Hardware will rise as well, albeit didn’t provide any more specifics.

Let’s assume “low to mid single digits” means a dip of 3%, that should be a good barometer. This implies total quarterly revenue from Xbox of around $3.48 billion, or the second best Q1 on record. Then, for both Content & Services to decline and Hardware to increase, the former must decline 4% or more. Which would follow that Hardware can increase a percent or two and the math still works out.

Personally, I do expect a slight decline in total Xbox sales during the current quarter. There’s a handful of major 3rd party titles, including a new Madden game in August, and Xbox Game Pass will certainly have a few great additions. It’s just last year’s high was powerful, it remains a tough comparison. I’m not so sure about Hardware gains, that’s where I’m skeptical. I’m expecting flat to slightly negative contribution there unless something changes with the split of Xbox Series S to Xbox Series X.

On a bit longer of a timeline, where’s the growth other than the traditional means? There’s the clear upside of bringing Xbox Cloud Gaming to other television brands outside of Samsung. Then the substantiated plus rumors of the team developing a dongle-like device like a Google Chromecast or Amazon Fire TV Stick. And, of course, people calling for Xbox to make a handheld now that both Nintendo and Valve have active portable gaming devices.

“As announced last year, we’ve been working on a game-streaming device, codename Keystone, that could be connected to any TV or monitor without the need for a console,” a Microsoft spokesperson said to Windows Central, who first reported on the cloud stick’s development.

“We are constantly evaluating our efforts, reviewing our learnings, and ensuring we are bringing value to our customers. We have made the decision to pivot away from the current iteration of the Keystone device. We will take our learnings and refocus our efforts on a new approach that will allow us to deliver Xbox Cloud Gaming to more players around the world in the future.”

So, I’m a believer in the expansion of cloud and whatever this Project Keystone turns out to be. I don’t expect the dongle to hit market this fiscal year, so that will impact future time frames. And I really don’t think an Xbox handheld fits with its direction, for a multitude of reasons that I’ll probably write about at some point! What I do expect is for Xbox Game Studios to ramp up its output in 2023, featuring titles like Starfield and Redfall plus some surprises too.

That concludes Xbox’s results this quarter. I’ll be back soon with articles on other major gaming companies, and updates on social media throughout the coming weeks. Thanks for reading and be safe all!

Note: Comparisons are year-over-year unless otherwise noted.

Sources: Company Investor Relations Websites, Windows Central.

-Dom

Earnings Calendar Jul & Aug 2022: Gaming, Media & Tech Companies

What’s the best way to cool off when global warming has you melting?

Well, it’s probably being in the shade, staying hydrated, sitting in front of a fan or pumping up that air conditioner.

Personally, I’d add checking out the latest calendar here because the latest earnings season is underway!

As long-time fans of the site know, every quarter companies gear up to report their latest results and host conference calls with analysts. It’s going to be an eventful one for gaming, media and technology as consumer spending habits are shifting lately in light of rampant inflation and higher interest rates.

I expect to see mixed results and significant headwinds, especially among those companies with focused revenue streams. The past couple years brought substantial growth in these spaces and it’s time for mean reversion to take over. Though a general movement towards subscriptions and ongoing content will soften the blow of weaker product sales and supply constraints.

Going forward, I’ll have some articles up the next couple weeks summarizing results for select companies in these sectors. For now, see the above image or the Google Sheets link below for a rundown of earnings dates for 100 companies. I’ve also quickly highlighted three companies to watch in this current environment.

Note that for international firms, days are displayed in local time zones based on investor relations announcements. Stay cool and be safe everyone!

Working Casual Earnings Calendar Jul & Aug 2022: Gaming, Media & Tech Companies

Apple Inc (AAPL): Thursday, July 28th

The world’s largest consumer electronics company is always a barometer for spending habits, and it reports third quarter fiscal 2022 results this week. This is a major moment to see how much inflation has affected buying and upgrading of Apple products, namely its flagship iPhone line. Analysts expect upwards of $82 billion in quarterly revenue, an increase from $81.4 billion, however earnings-per-share could decline from $1.30 to $1.16. Executives told the market last quarter to expect anywhere between a $4 billion to $8 billion hit on revenue due to supply challenges and China lock-downs. It still sounds like demand for its main products are keeping up, plus other areas like services will boost contributions. I’m usually upbeat that Apple will report better-than-expected profitability, and that’s no different this time around. Which would signal some resilience in consumer buying in what might already be a recession for certain economics, including the United States.

Unity Software Inc (U): Tuesday, August 9th

Gaming engine maker Unity reports fiscal 2022 second quarter results in early August, and has been in the news a lot lately. Not for the best reasons, I might add. It’s been very active in the merger and acquisition department for a while now. Last year alone, it purchased Parsec and Weta Digital. This year, Ziva Dynamics. Then its biggest deal is a controversial one in that it’s merging with digital app monetization company ironSource as announced two weeks back. This deal values ironSource, which has an infamous reputation for software with a history of being flagged as malware, at $4.4 billion. As part of the interview circuit alongside this deal announcement, CEO John Riccitiello had some choice words for developers making games without also considering how to monetize, calling them “f***ing idiots.” He has since apologized, of course, but the original sentiment expressed by the person who runs this company is likely to cause hesitation among those creators using Unity as a platform after the merger occurs. Not to mention, the company isn’t profitable right now so this is an important time from a financial standpoint as well.

NetEase Inc (NTES): Mid August

Mobile publisher and internet tech giant NetEase hasn’t reported a specific date yet, though it will announce 2nd quarter of fiscal 2022 release around the middle of next month. The massive Chinese is making key moves lately, notably expanding into the West by creating its first U.S. studio in Jackalope Games along with a development team called Jar of Sparks out of Seattle. It’s also partnered with the likes of Warner Bros, Microsoft and Blizzard on experiences targeting audiences around the globe. Battle royale slasher Naraka: Bladepoint launched in late June. And although it’s after the latest quarter’s close, it brought Blizzard’s Diablo Immortal mobile title to China just this week, a game that exceeded 20 million downloads before even entering this massive market. It’s also been operating locally in a more constrained environment for releases, though will benefit from the government’s easing restrictions. As some other companies saw declines, NetEase generated double-digit revenue and profit growth last quarter, driven by online game sales.

Sources: Company Investor Relations Websites.

-Dom

Elden Ring Retains Top Spot for Software as Total Spending Declines Again in June 2022 U.S. Games Industry Sales Report

The first half of 2022 is in the books, and the year’s best-selling premium game Elden Ring has repeated as the top software amidst another downward slide in consumer spending.

Based on today’s monthly sales report from tracking firm The NPD Group, FromSoftware’s masterpiece has led the premium ranks every month since launch in February except for one.

This sort of early success, even for the premium soulslike developer, is truly remarkable. Plus, it’s mostly unpredictable even for the most bullish of analysts. Including me!

Speaking generally on the industry, while June wasn’t as quiet as May, it’s still been a chill start to the summer. Overall spend dipped double-digits again in June, marking eight consecutive months of declines. Subscription growth couldn’t outpace headwinds from most other categories. The first half of 2022 was no different for total market spending, coming in 10% lower than last year.

Two of the major segments, Content and Accessories, also declined double-digits. Hardware performed the best from a percentage standpoint, even if still down. Better PlayStation 5 inventories and the lower cost Switch helped stabilize a bit. Perhaps even the Steam Deck?

As I’ve said in recent articles, these reversions to more normalized spending are expected this year as we exit quarantine highs and suffer from the worst inflation in decades. It’s eroding buying power, which hurts when combined with limited supply on the hardware front and fewer premium launches.

Within the broadest category of Content, mobile spending fell albeit at a slower pace than May. Earlier titles Elden Ring and Lego Star Wars: The Skywalker Saga led the premium charts, while Mario Strikers Battle League debuted in the Top 3. There were five new entries among the Top 20 best-selling games.

There was a flip in Hardware that’s actually quite noteworthy. PlayStation 5 took the reigns in June as the best-selling console by dollar sales. Not only that, it also led first half of 2022 by this metric, stealing it away from the Xbox Series X|S family which was in the lead until now. This indicates Sony secured enough production to satiate more demand, not to mention its premium price point boosting that monthly revenue figure.

Speaking of the first half, the biggest factors right now for domestic spending on games are mean reversion from earlier parts of the pandemic, rampant inflation, availability of hardware at retail plus minimal premium games. Subscriptions and ongoing content aren’t enough to push spending towards growth. It’s a cooling off period compared to recent history for this variety of reasons, as the broader economy signals a looming recession. In fact, we might already be there.

What about the numbers behind these trends? It’s time to look deeper into June’s report.

United States Games Industry Sales (May 29th, 2022 – July 2nd, 2022)

Overall sales in June across all gaming categories settled at $4.34 billion, or 11% behind the same month in 2021. This figure is off 10% when expanding to the first six months of 2022, aggregating to $26.27 billion against last year’s $29.29 billion.

Underlying the decrease was lower spending in all segments during both time frames, as displayed in the gallery above. Silver lining is June’s lack of growth wasn’t as bad as March or May, when it shrunk 15% and 19% respectively.

Spending on Content (i.e. software, subscriptions, mobile and related areas) in June saw a similar 11% reduction, to $3.79 billion. During the first six months of 2022, Content spend declined 10% to $23 billion. Which means it comprised 87% of the monthly total and 88% of 2022 to date.

The bright spot here of subscription growth was bolstered by Sony’s PlayStation Plus rebranding attracting users to sign-up or upgrade existing plans. It displays the importance of subscriptions like this and Xbox Game Pass in propping up lulls in mobile and other content offerings.

Last month, mobile decreased nearly 11% which actually improved from the 13% dip in May. Google Play is driving this sub-segment downward, while App Store spending actually rose slightly for the first time since back in February. Very slightly, at 0.16%. Hey, it’s still growth!

This contraction in mobile is backed up by a recent report from Sensor Tower, a tracking firm that collaborates with The NPD Group for these monthly data drops, that global spending on mobile is trending down 7% so far.

Premium title activity picked up in June with some new arrivals. Still, the highest positions were occupied by familiar faces.

Namely Elden Ring, which continues its phenomenal first few months. It topped June’s overall software list, meaning it’s led every month since release except for April. The Bandai Namco-published game continues as best-seller for both 2022 and the latest 12-month period. The legs on this game are ridiculous. It’s maiden them a lot of money!

After Lego Star Wars: The Skywalker Saga in second, we see the Switch in full effect. Mario Strikers Battle League kicked off its placing in 3rd during its initial month on sale, and led the Switch platform list. In fact, Nintendo published 4 of the Top 8 best-sellers on June’s combined list as recent titles like Nintendo Switch Sports and Kirby and the Forgotten Land stuck around. And might have been higher if Nintendo included digital sales.

A number of June releases settled outside the Top 10. F1 22, Fire Emblem Warriors: Three Hopes, Sonic Origins and The Quarry all started in this range.

Then there’s a couple legacy titles re-entering the Top 10 as Overwatch captured the 5th slot and Final Fantasy 7 Remake grabbed #9, impacted by sequel news for both franchises. These worked to push Call of Duty: Vanguard out of the Top 10, a rare sight for the series published by Activision Blizzard whose top executives fostered an environment of misconduct and harassment for years yet still haven’t been punished for it. (They probably never will.)

“In my opinion, it’s the lack of compelling new content that is holding back premium sales right now,” said The NPD Group’s Mat Piscatella on Twitter. “New games that reach market are doing very well, there are just fewer of them. We also had the PlayStation Plus relaunch in June, which gave a nice kick to overall subscription spend in the month.”

As for the 2022 overall chart, there was no movement within the Top 10. Elden Ring, Lego Star Wars: The Skywalker Saga and Pokémon Legends: Arceus continue as the year’s biggest commercial successes.

See below for a full rundown of June and 2022 software rankings.

Top-Selling Games of June 2022, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Elden Ring
  2. Lego Star Wars: The Skywalker Saga
  3. Mario Strikers Battle League*
  4. MLB The Show 22^
  5. Overwatch
  6. Mario Kart 8*
  7. Nintendo Switch Sports*
  8. Kirby and the Forgotten Land*
  9. Final Fantasy 7: Remake
  10. Minecraft
  11. Call of Duty: Vanguard
  12. F1 22
  13. Monster Hunter Rise
  14. Demon Slayer: Kimetsu no Yaiba: The Hinokami Chronicles
  15. Super Smash Bros. Ultimate*
  16. Fire Emblem Warriors: Three Hopes*
  17. Sonic Origins
  18. Pokémon Legends: Arceus*
  19. The Quarry*
  20. Marvel’s Spider-Man: Miles Morales

Top-Selling Games of 1st Half of 2022, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Elden Ring
  2. Lego Star Wars: The Skywalker Saga
  3. Pokémon Legends: Arceus*
  4. Horizon Forbidden West
  5. MLB The Show 22^
  6. Call of Duty: Vanguard
  7. Gran Turismo 7
  8. Kirby and the Forgotten Land*
  9. Mario Kart 8*
  10. Madden NFL 22
  11. Nintendo Switch Sports*
  12. Minecraft
  13. FIFA 22
  14. Marvel’s Spider-Man: Miles Morales
  15. Monster Hunter Rise
  16. Animal Crossing: New Horizons*
  17. Super Smash Bros. Ultimate*
  18. Mario Party Superstars*
  19. Call of Duty: Black Ops Cold War
  20. Dying Light 2: Stay Human*

As for the category with the best year-on-year performance in June, or should I say the least severe decline, Hardware moved down 8% to $371 million. That means first half of 2022 spending on consoles totaled $2.13 billion, or 9% lower than last year’s result of $2.36 billion.

We’ve talked supply to death, and that’s certainly the driver here in addition to some other points I mentioned earlier. There is some good news, in particular for Sony, in that inventories are popping up here and there on both manufacturer storefronts and retailer shops alike. Nintendo Switch availability looks consistent as well.

Sony’s increased production led to PlayStation 5 taking the lead on dollar sales in June as it benefited from a double-digit spending increase. While a month doesn’t make a trend, this sort of data point is positive in this environment. And we’ll certainly take what we can get these days. For the month, Nintendo Switch came in second place by revenue.

Increased availability bumped Sony’s current generation box to win the first half of 2022 by dollar sales. Microsoft’s Xbox Series X|S family, which was leading up until last month, is currently the runner-up.

When using unit sales as the benchmark, Nintendo Switch won June followed by PlayStation 5. Switch also leads units for the year to date, with Xbox Series X|S next up.

Got all that? Hah. I know it’s a lot to sort out when looking at hardware from these multiple angles. I wrote last month that the data points to PlayStation 5 and Xbox Series X|S being very close when using revenue as the indicator, which is supported by Sony taking home June and moving into pole position for 2022. I’d imagine the gap is quite minimal in the scheme of things, and can turn based on whose supplies are producing more because both of these have premium price points.

Switch is consistently competing on units, though generating less revenue than its counterparts which is the logical outcome. It, like PlayStation really, also relies on major first-party titles more because they aren’t available anywhere else. Much less so than Xbox Series X|S which continues Microsoft’s mission of subscriptions and services.

Pushing into Accessories, this felt the worst hit of lower discretionary income and normalizing of buying on the consumer side as it experienced the worst declines of the three major categories.

Spending here on game pads, headphones and similar peripherals lowered 15% in June to $176 million. It saw a 14% decline during the year’s first half, totaling just over $1 billion compared to $1.22 billion during 2021 H1.

After Sony’s DualShock 4 led at least a couple months, the current generation PlayStation 5 DualSense is back as the month’s top-seller. This time, it’s the Midnight Black iteration of the DualSense that took home first place.

Expanding further, Microsoft’s Xbox Elite Series 2 Wireless Controller continued as the best-selling accessory of 2022 currently. Which has been the case most of the year because of the higher relative cost per unit.

The domestic games industry bounced back a bit in June after a two-year spending low in May, showing occasional bright spots in areas like subscriptions, newer premium titles and a current hardware cycle that’s fighting the best it can against supply push-back.

Subscription spending is showing strength. Elden Ring can’t be stopped and five new games on the overall chart are propping up Content amidst softening areas like mobile. Even if the new games aren’t the biggest of commercial hits.

It does feel like the market is yearning for massive new AAA titles in this year of so many game delays, a sentiment echoed by Piscatella’s earlier comments. Game development is difficult in any environment, and teams are still adjusting to the new normal of hybrid working. Not to mention there are still coronavirus variants impacting many countries, plus people are contracting the virus for the second time. It’s a precarious situation, and I give developers credit for hanging in there right now.

Considering this, the calendar is now shaping up for the back half of 2022.

PlayStation seemingly locked in The Last of Us Part 1 remake for September plus God of War Ragnarök for its early November slot. Ubisoft’s collabo with Nintendo in Mario + Rabbids: Sparks of Hope is October, while the French publisher’s Skull and Bones is slated for November as well. Nintendo has Splatoon 3, Bayonetta 3 and Pokémon re-imaginings all before the holiday season. Gotham Knights, Saints Row reboot and, of course, the second Call of Duty: Modern Warfare 2 have been positioned later in the year for a while now.

Before then, July is going to continue as a mostly dry summer month on the premium side. F1 22 will have a full month of sales on record. Stray is an intriguing indie title from Annapurrrrrna Interactive (had to do it), also hitting PlayStation Plus simultaneously next week. As Dusk Falls is a narrative adventure and Xbox console exclusive. Baldur’s Gate: Dark Alliance 2 is out soon on all major platforms, while Live a Live finally reaches the States via Switch. The month’s biggest drop is probably Xenoblade Chronicles 3 also on Switch, though it will only have two days in the period.

With this light of a schedule, I’ll stand behind Elden Ring as July’s top earner again. I can see Xenoblade establishing a Top 5 finish.

Within the Hardware segment, I’m upbeat on PlayStation 5 after its June performance and seeing more stock via anecdotes and retailers online. I think it takes the first month of 2022’s back half on revenue, while Switch stays atop the console charts on units.

July also brings the start of my favorite time of the quarter: earnings season! Before we reconvene for the next monthly NPD sales report, I’ll have articles covering the earnings calendar and major company results.

In the meantime, shout out to Piscatella’s thread on Twitter covering today’s report. I hope everyone has a great rest of the month, feel free to send a comment here or on social media. Be safe and well!

*Digital Sales Not Included, ^Xbox & Nintendo Switch Digital Sales Not Included

Comparisons are year-over-year unless otherwise noted.

Sources: GameDaily.Biz, The NPD Group, Venson Chou (Image Credit).

-Dom

May 2022 U.S. Games Industry Spend Falls to Lowest Monthly Total in Over Two Years Based on Latest NPD Group Report

Even if seasonal gaming announcements are heating up lately with Summer Game Fest and the Xbox & Bethesda showcase, consumer spending here in the States is cooling off. Considerably.

That’s according to the latest monthly U.S. video game sales report from tracking firm The NPD Group. While this made sense based on where we are in post-lockdown times, supply challenges on the hardware side plus a low number of new software titles, the impact on May’s result was greater-than-expected.

Total spending declined almost 20% last month to $3.68 billion. That’s the lowest monthly amount since the early parts of the pandemic back in February 2020. All major categories of Video Game Content, Hardware and Accessories experienced drops, the first two by double-digits.

This marks seven consecutive months of sales declines.

Now almost at the halfway mark, 2022 is proving to be an off year for big budget spending on games. I predicted more game delays due to the knock-on effect of making them in a pandemic, and that’s having a significant impact on spending even when publishers have more ongoing or evergreen titles than ever.

There’s the reversion towards normalized spending down from quarantine highs, weakness in mobile, lacking inventories for consoles and a dearth of AAA games. Plus, I believe rampant domestic inflation is clearly impacting discretionary spending. When a gallon of gas here jumps above 5 bucks and the Consumer Price Index rises at its fastest pace in four decades, people tend to spend less on entertainment.

The largest segment of Content dipped 19% in May, weighed down by a lower mobile contribution and no blockbuster releases. Evil Dead: The Game was the only debut among the Top *50* best-selling titles, starting at an impressive fourth place on the overall chart. Compare this to even as recently as March when five of the Top 10 were new to market.

Within Hardware, a category that declined 11% in May, Nintendo Switch continued its consistency this time as the top-selling box by both dollars spent and units purchased. Nintendo’s hybrid console is 2022’s best-seller by units, though Xbox Series X|S is still in pole position when measured by revenue. Notably bolstered by its premium price and occasionally better availability as of late.

“We have a very light new release slate, we have a return to experiential spending, and we have higher pricing in everyday spending categories like fuel, groceries, and dining,” NPD Group’s Mat Piscatella said to GameDaily. “Each of these factors may be playing a role in the declines we’re seeing right now.”

Even on an off month, we dig into the numbers. Because it’s fun! Read on for more.

United States Games Industry Sales (May 1st, 2022 – May 28th, 2022)

Across the full domestic market of games, consumers spent that $3.68 billion in May overall or 19% lower than a year prior. This leads to a year-to-date figure of almost $22 billion, which is down 10% from the $24.4 billion during the first five months of 2021.

It’s important to keep in mind the annual chart above showing movement in recent years, displaying the trajectory compared to pandemic months. During early months, 2022 was trending above those except for last year’s historic highs. Now, it’s reverting back towards where it was in mid-2019. It’s proving to be a challenging second quarter, no doubt exacerbated by software delays out of this period and publishers still feeling the effect of remote working.

The largest category of Content covers mobile, software and various additional add-on purchases. It experienced the same 19% dip in May, falling to $3.33 billion from over $4.13 billion due to downward mobile pressure and softness in premium. It made up 91% of the total during both time frames.

Expanding to the current annual figure, Content has generated $19.3 billion in sales through May which is down 10% year-on-year from $21.45 billion.

Focusing on mobile first as the segment’s primary indicator, this is at least the third straight month of declines. Google Play revenue in particular is having a rough go, dipping 23% in May, while Apple’s App Store lowered less than 3%. At least the Top 10 sellers rose in contribution, adding 1% to the total. So there’s some silver lining in the current cloud of dreariness.

Elden Ring regained the top spot on the premium best-sellers list for May, boosted by topping Xbox and Steam platform charts, flipping spots with Lego Star Wars: The Skywalker Saga which moved to second place. This means FromSoftware’s Elden Ring has led each month since its launch except one. It’s still the best-selling title during both 2022 and the latest trailing 12-month period.

As I alluded to before, Evil Dead: The Game was the sole new title to chart, ranking fourth overall. It snatched up third place on both PlayStation and Xbox individual lists. Publisher Saber Interactive’s parent company Embracer Group said recently the title accumulated over 500K units sold during its first five days on market, echoing its early success here.

Otherwise, it’s admittedly somewhat of a snooze-fest amidst this pre-summer lull. Even without digital, Nintendo Switch Sports and Kirby and the Forgotten Land both moved up a couple spots to #3 and #6, respectively. There’s now three Call of Duty titles in the Top 20 as publisher Activision Blizzard tried to pump up interest by revealing trailers for second Modern Warfare 2. Keep in mind this is the publisher that Microsoft is acquiring and has a management team, led by a CEO in Bobby Kotick who still hasn’t lost his job, that fostered sexual harassment and mistreatment of marginalized groups for years.

Then there’s the games that just don’t quit. People are, somehow, still buying enough copies of Minecraft every month to keep it around the Top 10, this time holding ground at #11. And I assume in light of hype around Bethesda’s upcoming space odyssey Starfield maybe combined with discounting, folks are picking up The Elder Scrolls V: Skyrim enough to land it back in the Top 20 for the first time in almost five years.

Checking out the 2022 to date chart, it’s virtually the same as April. Elden Ring, Call of Duty: Vanguard plus Madden NFL 22 make up the Top 3. Lego Star Wars: The Skywalker Saga edges up into the Top 3, and of course Mario Kart 8 re-enters the Top 10.

Here’s a full look at the May and 2022 premium software lists.

Top-Selling Games of May 2022, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Elden Ring
  2. Lego Star Wars: The Skywalker Saga
  3. Nintendo Switch Sports*
  4. Evil Dead: The Game
  5. MLB: The Show 22^
  6. Kirby and the Forgotten Land*
  7. Call of Duty: Vanguard
  8. Mario Kart 8*
  9. Gran Turismo 7
  10. Pokémon Legends: Arceus*
  11. Minecraft
  12. Horizon Forbidden West
  13. Animal Crossing: New Horizons*
  14. Super Smash Bros. Ultimate*
  15. Call of Duty: Black Ops Cold War
  16. FIFA 22
  17. Mario Party Superstars*
  18. Pokémon Brilliant Diamond & Shining Pearl*
  19. Call of Duty: Modern Warfare 2019
  20. The Elder Scrolls V: Skyrim

Top-Selling Games of 2022 So Far, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Elden Ring
  2. Lego Star Wars: The Skywalker Saga
  3. Pokémon Legends: Arceus*
  4. Horizon Forbidden West
  5. MLB The Show 22^
  6. Call of Duty: Vanguard
  7. Gran Turismo 7
  8. Kirby and the Forgotten Land*
  9. Mario Kart 8*
  10. Madden NFL 22
  11. FIFA 22
  12. Minecraft
  13. Nintendo Switch Sports*
  14. Marvel’s Spider-Man Miles Morales
  15. Monster Hunter Rise
  16. Dying Light 2: Stay Human*
  17. Animal Crossing: New Horizons*
  18. Mario Party Superstars*
  19. Super Smash Bros. Ultimate
  20. Call of Duty: Black Ops Cold War

Sales of Hardware moved in a similar direction as Content, though its drop wasn’t quite as severe. This category moved down 11% in May to $216 million. Which means annual sales to date are 9% lower than the same period last year, or $1.76 billion.

The story remains market inventory with current generation boxes, as manufacturers and their suppliers wrestle with higher costs and limited part availability. At this point in the cycle, even with a good comparable last year, spending should be stronger.

That said, Nintendo was able to maintain enough stock to lead May hardware results by both dollars and units. By my count, that’s three straight months now where it’s led by unit sales after April’s milestone of passing PlayStation 4 on the all-time best-sellers list in the States.

When taking the first five months of 2022 together, Nintendo Switch has the best result so far by units sold driven by a lower cost to buy on average. Xbox Series X|S is best by revenue, followed by Sony’s PlayStation 5. Which is an intriguing stat. The volume of Switch sales on the year hasn’t been enough to earn more than its peers. To me, that signals the Xbox and PlayStation families aren’t far behind on units. (We don’t know for sure as NPD Group doesn’t share more detailed figures publicly.)

In addition to the struggles of supply that have plagued the industry since at least late 2020, I’m curious if a lack of so-called “system-seller” titles is also contributing to hardware performance. This is traditionally a major reason for folks to upgrade to a new console like PlayStation 5 or Xbox Series X|S, when they can find them, so it certainly doesn’t help in a slower part of the cycle.

“The industry needs more new games!” said Piscatella. “And the pressures that we’re seeing from other areas of the market, such as higher prices on everyday spending categories, and having more entertainment options available for folks, sure seem likely to be having an impact.”

While it’s the smallest segment by dollars, Accessories didn’t drop as much as its counterparts did last month. Sales here totaled $131 million, down 7%. However, a weak early portion of the year means it’s still experiencing the worst performance of 2022 as spending is off 15% through May to $743 million.

Intriguingly, last generation’s PlayStation DualShock 4 Wireless Controller Black again leads the monthly Accessories group, same as April. If people can’t find a PlayStation 5, they are playing its predecessor which benefits sales of corresponding game pads.

Even so, Microsoft’s Xbox Elite Series 2 Wireless Controller retains its position as the top seller of 2022 right now. That premium price is paying off.

I wrote last month that I expected a quiet one in May. That it was, and then some, with the lowest output in quite a long time.

Taking its report as a whole, it was an off month at the big budget level for sure. This tends to happen when there’s limited retail inventory, mobile drag, minimal major game releases and significant inflationary pressure impacting buying power.

“The market had been trending under pandemic highs,” said Piscatella. “But May 2022 brought a bigger dip, at least partially driven by the very light new release slate in the month.”

There’s also something I’ve been saying for a while that I think is overlooked: there’s a longer tail from the impact of shifting to hybrid and remote working. And it will continue in the near term, for years to come. I don’t think anyone should be surprised by delays, dry spells and lower spending on games this year.

On this subject briefly, there are also development studios in and around Russia suffering from the country’s invasion of Ukraine. In an especially heartfelt video this week, STALKER 2 developer GSC Game World shared a harrowing diary on how its team was transplanted. There are even employees fighting on the war’s front lines or supporting relief efforts. It’s a difficult yet important reminder of how the geopolitical landscape affects our beloved industry.

Going forward towards June, the good news for Content is there’s a couple notable titles. Nintendo’s Mario Strikers Battle League and Fire Emblem Warriors: Three Hopes will both benefit from the Switch effect. Take-Two Interactive published The Quarry, a campy horror title that may be a cult favorite. There’s even something like Fall Guys hitting new platforms and Diablo Immortal on the mobile side, albeit with pretty rough users reviews with its questionable monetization model. Not to mention downloadable content for Cuphead, Monster Hunter Rise and Outriders among others.

The bad news is sales during June the past couple years has been abnormally high, so I still expect a retraction overall.

What about the winners for Content and Hardware? Well, Elden Ring has a legitimate chance of winning again because of its ridiculous legs. I’ll take a chance and say it’s the new entry from Mario Strikers.

Subsequently, betting on Nintendo Switch in hardware is probably the safest for June. If I can even describe it as “safe.” I’ll wager Xbox Series X|S continues as top dog by dollars for 2022.

Until then, I recommend reading Piscatella’s thread here for further details. Thanks for stopping by. Have a safe rest of the month!

*Digital Sales Not Included, ^Xbox & Nintendo Switch Digital Sales Not Included

Comparisons are year-over-year unless otherwise noted.

Sources: GameDaily.Biz, The NPD Group, Embracer Group.

-Dom

Lego Star Wars: The Skywalker Saga Leads U.S. Game Sales & Nintendo Switch Reaches New Milestone in April 2022 NPD Group Report

It feels like I just posted my March recap, and here’s April! Time flies when you’re having fun, or getting old.

Existential dread aside, this morning The NPD Group was back with its latest monthly games sales report documenting consumer trends in the United States. While folks are spending less on the games industry compared to last year, there’s still plenty of successes to highlight.

Total sales across Video Game Content, Hardware and Accessories categories dipped 8% during April, which means spending has lowered year-on-year for six consecutive months. This is also the second straight April month with lower sales after last year’s 2% decline. Hardware was the only category exhibiting growth, while Content and Accessories both experienced double-digit dips.

Within the largest category of Content, mobile saw worse-than-expected negative momentum mainly due to softness in Google Play activity. On the premium side, Lego Star Wars: The Skywalker Saga led the aggregate chart. It’s the first game to dethrone Elden Ring since February, which remained at the second spot just ahead of MLB The Show 22. As opposed to last month’s bevy of new games hitting the charts, April’s overall software list only featured two new entries.

Performance within the Hardware segment was split depending on the metric being used. Nintendo Switch topped April’s console sales when using units, a metric by which it’s also the year’s best-seller so far. Just like back in March. As a result of this consistency, Switch passed PlayStation 4 on the all-time best-selling home console list. It’s now in fourth place behind only PlayStation 2, Xbox 360 and Nintendo’s own Wii.

However when using dollar sales as the measure, PlayStation 5 took home the win in April. Sony was finally able to secure enough inventory to move up the ranks, though Xbox Series X|S is still 2022’s top-selling hardware by dollars right now.

“Despite a nice hardware bump, the market couldn’t get back to growth as content and accessories lagged,” said The NPD Group’s Mat Piscatella. “Perhaps we’ll see some benefit from that hardware lift next month. In any case, [the] market remains well above pre-pandemic baseline.”

Long-time readers know I like to maintain perspective when writing about monthly or even quarterly sales. Seeing a decline since prior year isn’t necessarily substantial news or a sky-is-falling scenario. The consecutive months on this negative trajectory are representative of a few things, then of course there’s those pockets of positivity for individual games and consoles.

First, quarantining bolstered sales substantially the past couple years. Easing restrictions and some semblance of normalcy means a certain level of reversion is expected. Then there’s retail supply, still hampered by a semiconductor shortage and manufacturing woes. Finally there’s the distressing and growing impact from inflation, which is painful for most folks and can hamstring discretionary purchasing decisions.

Keeping this context in mind, I’ll move into my complete analysis and a detailed rundown of April’s results.

United States Games Industry Sales (April 3rd, 2022 – April 30th, 2022)

As displayed in the above gallery, total consumer spending during April fell 8% to $4.34 billion. That means annual spend to date is also down 8%, to $18.26 billion.

I think the most telling graphic here is the line chart showing spending over time for each of the past four years. It gives clear context on pandemic impact and how the current level compares to earlier periods. For instance, until last month, each month of 2022 was trending above the corresponding one during these years except 2021. This past April’s spending is the lowest April has been in three years, but not by much.

The largest category of Content includes software, add-on, mobile and subscriptions. Spending here lowered 10% to $3.84 billion. That means it comprised more than 88% of April’s total.

The key driver within this part is mobile, which has been in a downward trajectory for months. Normally the report says when it exceeds $2 billion, and it didn’t this time. So I assume it’s below that threshold. Even so, select titles are showing strength which implies people are still playing, albeit spending at a lower clip. Candy Crush Saga, Roblox, Coin Master, Evony: The King’s Return and Royal Match were the top earners.

Moving into premium titles, the aforementioned Lego Star Wars: The Skywalker Saga led the rankings overall and every single individual platform chart as well. Including Nintendo Switch, as it was the first third-party title to top that chart since Monster Hunter Rise in March of last year. This performance across platforms led to the adventure title from Warner Bros. achieving the single best launch month dollar sales for any Lego game in tracked history. It’s immediately the second best-selling title of 2022 at present, behind only Elden Ring.

Speaking of Elden Ring, it was number two on the overall chart in April. Into its third month on market and it’s already achieved an astonishing accomplishment: The open-world soulslike has now outsold November 2021’s Call of Duty: Vanguard in the U.S., making Elden Ring the top-selling premium game of the last 12 months. This is virtually unheard of in the States, where Activision Blizzard’s military shooter perennially dominates sales charts. It’s a combination of relative weakness in Call of Duty lately and the stunning quality of FromSoftware’s latest masterpiece, which reached 13.4 million units globally in March according to publisher Bandai Namco. It’s even more by now, the true definition of a sales giant.

After an early access period led MLB The Show 22 to #4 in March, it advanced up to the third spot in April and moved up to 5th on the year’s best-sellers list after debuting outside the Top 10. While this performance isn’t as high as last year’s entry, which led its initial month, it’s still a quality showing. Intriguingly, it didn’t appear in the Top 10 on Xbox yet from an engagement standpoint, Xbox is its leading platform by player count. It’s a clear display of the Xbox Game Pass effect, as this year’s title was again available on the service at launch. It’s also worth noting this report doesn’t include digital sales from Xbox for this particular title, which of course impacts platform ranks.

The last new release on the overall chart was Nintendo Switch Sports, which really had only two days on sale during this time period. It still scored an impressive fifth place on the overall chart. Within the Nintendo list individually, it ranked third behind Lego Star Wars: The Skywalker Saga and Kirby and the Forgotten Land. It’s another title, like all of those published by Nintendo, that doesn’t account for digital downloads. May’s result will give a better indication, as I expect it to be quite successful.

That covers the new releases, and most other movement on the charts featured familiar names from the prior month. Kirby and the Forgotten Land is holding strong, as is Horizon Forbidden West. Then there’s Mario Kart 8 which will never, ever stop selling. Most of the year’s Top 10 is the same save for the entry of Lego Star Wars: The Skywalker Saga. Check below for a full look at April’s ranks plus 2022 so far.

Top-Selling Games of April 2022, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Lego Star Wars: The Skywalker Saga
  2. Elden Ring
  3. MLB The Show 22^
  4. Kirby and the Forgotten Land*
  5. Nintendo Switch Sports*
  6. Call of Duty: Vanguard
  7. Horizon Forbidden West
  8. Mario Kart 8*
  9. Gran Turismo 7
  10. Pokémon Legends: Arceus
  11. Minecraft
  12. FIFA 22
  13. Call of Duty: Black Ops Cold War
  14. Super Smash Bros. Ultimate*
  15. Marvel’s Spider-Man: Miles Morales
  16. Animal Crossing: New Horizons*
  17. WWE 2K22*
  18. Mario Party Superstars*
  19. Madden NFL 22
  20. Tiny Tina’s Wonderlands*

Top-Selling Games of 2022 So Far, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Elden Ring
  2. Lego Star Wars: The Skywalker Saga
  3. Pokémon Legends: Arceus
  4. Horizon Forbidden West
  5. MLB The Show 22^
  6. Gran Turismo 7
  7. Call of Duty: Vanguard*
  8. Kirby and the Forgotten Land
  9. Madden NFL 22
  10. Mario Kart 8*
  11. FIFA 22
  12. Marvel’s Spider-Man: Miles Morales
  13. Minecraft
  14. Dying Light 2: Stay Human*
  15. Monster Hunter Rise
  16. Mario Party Superstars*
  17. Animal Crossing: New Horizons*
  18. Super Smash Bros. Ultimate*
  19. WWE 2K22*
  20. Call of Duty: Black Ops Cold War

Hardware was the main bright spot of April from a growth standpoint, boosting up 16% since last year to $343 million. Even so, it’s still down for the first four months of the year in aggregate. Sales of consoles year-to-date reached $1.54 billion, or 9% lower than the same period in 2021.

This April figure is somewhat reassuring, considering spending on this segment declined 30% this time last year. It indicates better availability, at least for certain platforms as The NPD Group called out PlayStation and Xbox increasing supply. This year has been a wild one for hardware; a different console has led each of the first three months. Demand is thriving, so consumers are buying whenever inventories pop up. Something like the Xbox Series S in particular is proving attractive because of its price point.

Still, it was actually the PlayStation 5 that showed up in April. Sony’s massive new console led last month on dollars generated as more stock hit shelves, a similar story as other regions including Europe based on data from local providers. Other than January, which was the last time PlayStation 5 topped the list, it’s been a somewhat dry year for Sony and its supply chain. As I wrote just this week, the company announced the platform passed 19.3 million units shipped globally and is now lagging its predecessor considerably.

Not to be overlooked, Nintendo Switch was April’s best seller by units. It’s the same for 2022 to date as Nintendo’s hybrid console continues to attract interest going into its sixth year on sale. In the States, lifetime Switch sales have now outpaced PlayStation 4 to become the fourth best-selling home console of all time. PlayStation 2, Xbox 360 and Nintendo Wii, in that order, are the only home platforms with more units sold domestically.

Xbox Series X|S rounds out this category as it secured second place during April by both dollar and unit sales. Similar to March, Microsoft’s family of devices is currently the year’s best seller by dollar sales. Microsoft has been most consistent on the production side, plus of course benefits from higher average revenue per unit for the premium Xbox Series X model.

I know that’s a lot to digest for hardware, since the report includes multiple metrics. Suffice to say there are at least minor indications of greater supply popping up, however it’s not yet a trend until it keeps happening. We still need to closely monitor the semiconductor shortage and input costs to see if it becomes an upward trend in overall supply movement, rather than one-off monthly spikes.

The third and final category of Accessories unfortunately didn’t track alongside hardware in April, instead showing some weakness compared to a year back. Monthly spending here fell 10% to $151 million. It’s currently the only segment in a double-digit decline for the year as a whole, moving down 15% to $743 million.

In a shocking upset, the PlayStation 4 DualShock 4 Wireless controller in black was April’s best-selling accessory. You read that correctly. That’s last generation’s PlayStation game pad leading a month in the second year of this current console cycle. Perhaps there were discounts leading to this upside? Though this report is mostly based on dollar sales, so there has to be some sort of advantageous average selling price for Sony in order for it to win.

I can’t remember the last time a PlayStation 4 game pad led the category.

Expanding a bit, the Xbox Elite Series 2 wireless controller, which has led all months except this past one, is still the best-selling accessory for the year right now. As it has all year, bolstered by its extravagant price tag.

Lately, it’s proving difficult for spending on games to keep pace with the highs of recent years. Especially early last year, which saw months of historic highs. Six months of monthly declines and we’re seeing this movement away from the ballooning amounts of spending during the pandemic due to restrictions of going out plus stimulus money at the time.

Softening is expected right now, even if it’s challenging to report on a downward trend. It’s just a matter of magnitude as spending normalizes, plus buyers face inflation pressure for essential goods which limits additional cash flow. There’s also the allure of spending on different types of entertainment as more people get out of the house in which they’ve been cooped for a while.

“We’ve also seen an extended run of months showing year-on-year declines,” Piscatella wrote. “[The] video game market is facing a return to experiential spending as well as higher prices in other areas of consumer spend. Tough combo. Will require the bigger games to really pull the market.”

On those AAA projects, the latest news cycle revealed how 2022 is shaping up to be another year of delays. Starfield. Redfall. Suicide Squad: Kill the Justice League. The next The Legend of Zelda mainline entry. Stalker 2: Heart of Chernobyl is on hold due to Russia’s invasion of Ukraine. And I’m not sold on God of War: Ragnarok hitting this calendar year, as I’ve said many a time on social media.

Focusing strictly on the potential for May’s monthly report, it’s a very light month for new software that isn’t a remake, re-release or indie launch. I’m expecting another month of spending declines, except perhaps for consoles. Evil Dead: The Game and Sniper Elite 5 are probably the highest profile releases on the calendar. I’m not sure the Top 10 will have any new entries, let alone the Top 5.

Which means it’s a major opportunity for carryover titles to promote new content or have events that keep players buying. This ties in with the subscription play, a staple in Microsoft’s suite of course and Sony’s strategy with its PlayStation Plus reworking starting in June. Games like MLB The Show 22 and Nintendo Switch Sports will have a lot more days on sale than last month. Lego Star Wars: The Skywalker Saga has a good chance at leading again, as does Elden Ring. I’m not the most upbeat on Call of Duty: Vanguard right now, but it will certainly secure a solid position.

My best guess is Elden Ring returns to number one. With the caveat that if Nintendo included digital, I’d probably bet on Nintendo Switch Sports.

As for Hardware, throw a dart at the wall and take a guess. Xbox Series X|S on dollars. Nintendo Switch again on units. Those are my dartboard guesses, at least.

Now that I’ve come to the end of this month’s coverage, I highly recommend perusing Piscatella’s Twitter thread for more details on platform rankings and additional commentary.

It’s been a supremely busy week for the games industry and business nerds. I’m both exhilarated and exhausted. I hope you enjoyed the articles, I plan to have more in the coming weeks. Thanks for reading. Until next time, be well!

*Digital Sales Not Included, ^Xbox Digital Sales Note Included

Comparisons are year-over-year unless otherwise noted.

Sources: Bandai Namco, The NPD Group, Warner Bros Interactive.

-Dom

PlayStation 5 Hits 19.3 Million Lifetime Shipments As Sony Reports Sales Gains & Sets Ambitious Annual Hardware Target

Now that I’ve posted about recent results from both Microsoft and Nintendo, it’s time to dig into the last of the “big three” console manufacturer this earnings season.

That would of course be Sony, which posted its annual results for fiscal 2021 on Tuesday.

During these 12 months ending March 2022, the Japanese consumer tech company saw positive momentum in both its overall business and PlayStation segment. Sales and operating profit for the firm in general each saw double-digit gains since last year.

Even amidst challenges on the hardware side, momentum hasn’t slowed much since a record holiday quarter for PlayStation. While growth rates hovered in the low single-digits, Sony’s Game & Network Services (G&NS) just achieved its second best trailing annual revenue and operating profit. This is especially impressive given the major demand spike last year during more restrictive quarantines in various markets.

Hardware is the headliner for Sony’s gaming business now that the current console generation has entered its second year. After shipping the expected 2 million PlayStation 5 consoles during the quarter of January to March, fiscal year shipments totaled 11.5 million. This was in-line with Sony’s guidance, which I’ll note was reduced from nearly 15 million just last quarter.

It follows that PlayStation 5 is now upwards of 19.3 million lifetime. It’s still not easy to find one and Sony’s suppliers are limited by part availability, which means it’s lagging its predecessor more than ever. At this point, PlayStation 4 had shipped over 3 million more units. It seems that more than its counterparts in the space, Sony is having a tougher time securing inputs.

Which is why I was a bit surprised by its forecast looking ahead to the next fiscal year ending March 2023. Sony’s management has set quite an ambitious goal of moving 18 million PlayStation 5’s over that time. It would be an increase of 6.5 million, and bring lifetime units to 37.3 million. Personally, I’m not nearly as optimistic.

Elsewhere in the report, Sony reported slight contractions in a couple engagement statistics. Both PlayStation Plus memberships and Monthly Active Users (MAU) declined since March 2021, signifying it’s lost players since the pandemic peaks. However on the financial side, Sony overall and PlayStation saw sales and profit increases which means those people sticking in the PlayStation ecosystem are spending money.

One area where PlayStation excels is first-party software. Its teams are responsible for some of the most critically-successful titles in the industry, thus enticing buyers to pay that premium price tag. So it makes sense executives call out plans to invest more in its game development resources and strategy of placing titles on other platforms, namely PC.

“Going forward, we aim to grow the game business by strengthening our first party software and deploying that software on multiple platforms,” said Chief Financial Officer (CFO) Hiroki Totoki during its earnings call. “

Buckle up, let’s see what’s driving Sony’s recent growth.

The gallery above contains various slides and charts based on Sony’s FY 2021 results.

For the company in total, fourth quarter revenue rose 2% to over $20 billion. That led full year sales growth of 10% to above $88 billion. In terms of operating profit, this was $2.33 billion or almost three times as much as the prior year. That substantial quarterly momentum was behind the annual profit jump of 26% to upwards of $10.71 billion.

G&NS is still the leading business by both sales and income when looking at segment reporting. Pictures and Electronics Products & Solutions (EP&S) grew the most, while Financial Services proved to be the only major business line to decline during this time.

Focusing on the PlayStation business alone, January to March sales increased a modest 1% to $5.9 billion. Operating profit nearly doubled to $777 million. Over the latest 12 months, gaming generated $24.4 billion in revenue which was 3% higher than prior year. Annual operating profit was effectively flat around $3 billion.

The top-line growth was attributed to an increase in hardware sales plus the impact from foreign exchange rate, outpacing a decline in mainly third party software. Sony stated it’s seeing better margins for hardware, contributing to that more consistent profitability. Which is good news in this environment of rising costs. It means when hardware is selling, on average its price point makes up for manufacturing expenses. This is consistent with Sony’s comments in the past that the standard PlayStation 5 edition became profitable after only a handful of quarters on market.

This dynamic is reflected in the product category chart, where annual sales from Hardware & Others grew 10% to $7.5 billion. Network Services boosted 7% to $3.6 billion. Digital Software & Add-On Content was the only sub-grouping to decline, though it wasn’t by much. It saw a 2% dip to $12.7 billion, and still comprises more than half of the PlayStation business. Underlying this was mainly a reduction in add-on content, implying a bit less spending on that type of downloadable content.

Per usual, I’ll run a quick comparison to major players in the games industry. Here’s what I wrote in my article on Nintendo, because it’s relevant here:

Tencent reports later this month, though most recently had an industry best $27 billion from gaming. Microsoft’s Xbox division posted $16.5 billion. Factoring the pending Activision Blizzard deal, it could be upwards of $23 billion to $24 billion depending on cost savings, etc. Unfortunately, both of these companies don’t break out profit from games. Nintendo’s recent results show revenue upwards of $15 billion. Thus, while Nintendo’s overall sales aren’t as much as these others, it’s currently more profitable than the PlayStation brand.

Moving onto a round-up of various supplemental updates from Sony’s materials, I’ll now talk software performance, player engagement, subscription movement and services output.

First up is software sales, as measured by copies sold. For the year, Sony reported declines in both total and first party games. On the whole, 303 million units sold across PlayStation platforms. Out of that, almost 44 million were first party games. Compare that to 339 million and 58.4 million respectively during last year. And it wasn’t really a lack of output. On the console exclusive side, titles like Ratchet & Clank: Rift Apart, Uncharted: Legacy of Thieves Collection, Horizon Forbidden West, Gran Turismo 7, Ghostwire Tokyo and Returnal hit this year. While lower year-on-year, first party software wasn’t as much to blame here.

It’s more releases from external publishers that are causing declines, and I wager softer performance of Call of Duty: Vanguard is the most significant contributor. While it’s still massive, the title is under-performing in the context of premium Call of Duty offerings. Perhaps the suite of sports titles that usually hit in the Fall, as well. And this latest quarter saw Elden Ring, which seems to be more successful on PC, plus Dying Light 2: Stay Human.

Now, it’s also a natural normalization of spending from pandemic highs. People are seeing higher prices elsewhere, thus limiting more discretionary spending. It’s not necessarily a doomsday scenario.

Digital split ended up being pretty consistent in the realm of software sales. Downloads made up 66% of all game sales during fiscal 2021, which is effectively the same as last year’s 65% figure. Lately then, this means 2 out of every 3 games sold on a PlayStation platform is downloaded as opposed to purchased via traditional retail.

Looking at Sony’s current main subscription of PlayStation Plus, memberships declined ever-so-slightly to 47.4 million. It was at 47.6 million in March 2021. The company recently outlined its rebranding plan, which will combine this service with PlayStation Now streaming capabilities into a set of PlayStation Plus pricing tiers. I think it’s overly complicated to have three tiers, and it’s not a true competitor to Xbox Game Pass in its form starting this June. Though I believe it can attract more subscriptions, so the end result should be a net positive. Even if I don’t think Sony is going far enough with what it’s offering.

Similarly on the engagement side, Monthly Active Users (MAUs) dipped in fiscal 2021. It started the year at 109 million, then ended up at 106 million. Management didn’t share much more in the way of engagement or play hours, so I have to infer that they were lower than a year ago. Which makes sense as I’ve talked about mean reversion and spending normalization.

Not to be forgotten just yet, PlayStation 4 made an appearance in the supplementary report with 100K units shipped during the fourth fiscal quarter. That brought its annual total to exactly 1 million consoles shipped, and pushed its lifetime figure to around 117 million. Based on Sony’s optimism around PlayStation 5 shipments increasing, this could very well be the last hurrah for its predecessor.

Considering the current consumer technology environment and where purchasing habits were at this time last year, Sony’s fiscal 2021 report is a triumphant one. Gains in both revenue and profit while battling headwinds from component shortages and rising inflation are worth celebrating. For PlayStation, hardware may be lagging historically and software sales are trending down, yet these are temporary situations. Financially this business is stable as ever, supplementing its traditional console sales with digital, service and add-on spending which will only increase as PlayStation Plus rebranding and partnerships with external publishers continue.

Before closing out, I’ll take a look ahead leveraging Sony’s own forecasts. It’s also time to throw in some predictions of my own!

Starting with that PlayStation 5 guidance of 18 million console shipments expected in the coming year. Management suggests the company will be able to secure enough parts, and at reasonable prices, to reach this elevated goal compared to the 11.5 million over the last 12 months. I believe they *think* they can, yet what will happen in reality is anyone’s guess. Even the smartest leaders can’t accurately predict the future when there’s this much uncertainty.

Personally, I don’t see what executives do. Reading the room using comments from chipmaker CEOs and industry experts, plus considering lock-downs in China, I’m much closer to 15 million or 16 million. More than most, I’m preparing for the semiconductor shortage to last into next year or more. The longer it goes, and if inflation continues with it, I predict Sony will reduce that forecast something like six months from now.

Flipping to financial forecasts, Sony is anticipating some robust top-line growth though guarding against pressures on the profitability side. The firm expects revenue to pass $101 billion in the year ending March 2023, which would be an increase of 15%. Even with that double-digit sales growth, it’s guiding towards 4% lower operating income of around $10.3 billion.

Sony is expecting a similar trend within G&NS where revenue will be higher yet operating profit should decline. In fact, revenue guidance is showing a substantial 34% jump to $32.6 billion which would be a record year for PlayStation. That reflects positive impact from hardware, peripherals, software and exchange rate impact. Still, much higher costs for game development and expenses related to acquisitions will drag down operating income by 12% to $2.7 billion.

“We plan to increase software development expenses aimed at strengthening first party software at our existing studios by approximately 40 billion yen ($300 million) year-on-year,” Totoki said. “And we have incorporated that impact into this forecast.”

Executives expect the $3.6 billion Bungie deal in particular to close before December 31st. If the G&NS segment excluded this acquisition, Sony claims operating profit would be virtually flat.

Taking a look at pending flagship software releases on the console exclusive side, the schedule is actually somewhat light for the next 12 months. Square Enix’s Forspoken was pushed from May to its current window of October. God of War Ragnarok is the big one of course, currently with a nebulous “2022” timing. I may be in the minority, I just don’t buy that the sequel to 2018’s masterpiece God of War will be out this year. However, I do see a launch between January and March 2023, in which case it will help boost sales this fiscal year. Then there’s titles like Marvel’s Spider-Man 2 and Marvel’s Wolverine from Insomniac that are still a ways out.

Then there’s the potential for PlayStation VR 2 during the coming 12 months. Sony’s been drip-feeding information on its next generation virtual reality headset in recent months, showing off its form factor, brand new controllers, advanced technologies and Guerilla Games’ Horizon Call of the Mountain project. Many industry followers think it will launch this year. I’m skeptical given it has to exist in the same supply conditions as the PlayStation 5 right now, though it wouldn’t shock me to see it out this holiday season.

Tangential to gaming is Sony’s transmedia push, seeing as the Uncharted movie has made nearly $400 million dollars since dropping in February. The company clearly has strength in IP ownership, and plans to leverage that in places other than just gaming.

“Following the success of the first movie adaptation of the popular PlayStation game title Uncharted in Motion Pictures, we are leveraging our game IP by proceeding with the adaptation of Ghost of
Tsushima
and The Last of Us into video content,” Totoki said.

Then there’s the constant swirl of rumors around potential acquisitions. Sony of course shouted out the Bungie and Haven Studios purchases. Could there be more in the near future? I’ve heard the rumblings about Square Enix after it sold various assets to Embracer Group. I’m thinking it remains independent and continues to partner closer with Sony. Which leaves other third parties still available. If I had to guess, I’d say another development studio or two will be next. And no, not FromSoftware!

Sony’s plans are ambitious and it expects to see substantial revenue growth in the coming year, even if high costs put pressure on its profitability. I believe top-line growth for gaming in particular will be limited if it misses the PlayStation 5 hardware guidance, so I’m more bearish than Sony’s leadership. It all depends where component cost and availability trend, and my estimates prepare for the worst.

Have any questions on today’s Sony recap? What are your reactions to the news and numbers? Do you think PlayStation VR 2 and God of War Ragnarok will be out this fiscal year? Am I crazy to think it won’t hit the 18 million PlayStation 5 target? Yell at me here or on social media, as always.

Oh. And always check my latest earnings calendar for more on gaming, media and tech company results. Have a great rest of the week and season, be well everyone!

Note: Comparisons are year-over-year unless otherwise mentioned. Exchange rate is based on reported conversion: US $1 to ¥112.3.

Sources: Company Investor Relations Sites, KnowTechie (Image Credit), PlayStation Blog.

-Dom

Nintendo’s Annual Results Decline Slightly Amidst Hardware Shortages During The Company’s Best Year Ever for First Party Software Sales

Everyone that’s seen my latest earnings calendar knows the deal!

Nintendo is up next for this usual series of earnings recap and reaction articles for major gaming companies, this time focused on its annual results for the fiscal period ending March 2022.

While Switch hardware momentum slowed a bit, software is as strong as ever. In fact, stronger than ever.

As part of its report Tuesday, the Kyoto-based video game developer and publisher shared a variety of statistics around its yearly results. Software shipments from a units standpoint rose 2% last year. The firm even reported its highest level of first party software sell-through to consumers for a single platform.

And it’s had a lot of platforms since it entered the games business way back in the 1980s!

Its most recent in the Switch has been a commercial darling since launching in March 2022, spurring growth after the dark days of its failed Wii U console. While it didn’t see as much hardware success as fiscal 2021, it still achieved management’s latest shipment estimate plus had the second highest annual sell-through since it hit market outside of that first year.

Nintendo’s results, which saw dollar sales slow in the single digits and operating profit remain virtually the same, fits the industry theme of reverting to more normalized spending habits. Even if down from highs of last year, this was still its second best annual financial performance in more than a decade.

“Regarding Nintendo Switch, we will continue to convey the appeal of all three hardware models to maintain a high level of sales momentum and expand the install base,” the company wrote in its report. “Other software publishers also plan to release a wide variety of titles, and we will work to strengthen sales through the combination of existing popular titles and a continuous stream of new titles.”

Before moving into the full report, I want to highlight a recent article on Nintendo from friend of the site Kat Bailey at IGN. Entitled “Inside the Growing Discontent Behind Nintendo’s Fun Facade,” this investigative piece digs into the company’s culture and workplace conditions, notably its treatment of contract workers. It’s a rare peek behind the curtain, as relevant as ever considering how well the company is doing. Once you get done here, I highly recommend reading Kat’s fantastic coverage.

It’s time to dig into the nitty gritty.

On the financial side, Nintendo shared that net sales declined 3% to $15 billion. Operating profit lowered ever-so-slightly to almost $5.3 billion. Both of these were the second best amount respectively since fiscal 2010, came in above forecast and fit with the general theme of mean reversion.

These two metrics are displayed over time in the charts above, showing a slight contraction for both from highs a year back.

Splitting out by region, Americas was the leading contributor at 43%. That’s down slightly from 42% last year. Europe’s allocation remained consistent at 25% while Japan moved down from 23% to 21%. The remainder of countries outside these regions made up 10% of 2022’s total.

Nintendo shared insights into product category mix as well. Software sales contributed 52% of dedicated video game platform sales, while hardware made up the remaining 48%. That’s flip-flopped versus last year, when software was 47% and hardware comprised 53%. This shows the balance of Nintendo’s business exposure, plus a lean towards games in a time where console shipments lagged on the supply side.

Similar to my article on Microsoft’s latest financial report, here’s a rundown of how Nintendo stacks up to industry peers when it comes to the latest annual results. Tencent reports later this month, though most recently had an industry best $27 billion from gaming. Microsoft’s Xbox division posted $16.5 billion. Factoring the pending Activision Blizzard deal, it could be upwards of $23 billion to $24 billion depending on cost savings, etc. Unfortunately, both of these companies don’t break out profit from games. On the other hand, Sony also reported results today featuring $24.4 billion in revenue then $3 billion in operating profit. Thus, while Nintendo’s overall sales aren’t as much as these others, it’s currently more profitable than the PlayStation brand.

Digging into the aforementioned softening hardware sales, the Switch sold 4.11 million units during January to March which amounted to an annual total of 23.06 million. While that’s down 20% from the 28.83 million of fiscal 2021, it’s still the second best 12 months on record and exactly in-line with the company’s most recent guidance of 23 million. It’s worth noting this was revised downward twice from an original call of 25.5 million, signaling extended supply challenges.

Lifetime Switch console sales now stand at 107.65 million. An annual dip was expected given both the life cycle timing and global semiconductor shortage, it was just a question of how much. Tending to lean conservative, Nintendo’s initial guidance for the year ending March 2023 is an even lower amount of 21 million. That’s effectively returning to the amount of fiscal 2020, its third full year on sale.

Now that there’s three Switch models, Nintendo shares performance for all of them individually. The standard model is still the most popular of course, contributing 13.56 million to the year’s total. That’s down 33%, mainly due to the introduction of the OLED version which shipped 5.8 million boxes since hitting retail in October 2021. Finally, Switch Lite declined 57% to 3.7 million units in fiscal 2022.

Shifting into the Switch software category, Nintendo sold 235 million Switch games in the year ending March 2022. This is 2% higher than the almost 231 million of a year ago. First party games made up almost 80% of the platform’s annual software sales. Which essentially means 4 out of every 5 titles sold on Switch is published by Nintendo.

This sort of increased performance, happening as hardware sales slip, mainly proves how new and existing console owners keep buying games at a higher rate than even last year’s peaks. Which makes sense for a company known for its quality of output.

This annual growth led to lifetime software sales on the platform hitting 822.18 million. It was at 587.12 million back in March 2021.

Nintendo Switch ended fiscal 2022 with 39 “million-selling” titles during the fiscal year alone. This was at just 29 last quarter! For the year, 26 were published by Nintendo while 13 came from third-parties. Last year, Switch experienced 36 million-sellers: 22 from Nintendo, then 14 from external partners. A clear sign of catalog strength and what I call the “Switch Effect” on new titles in franchises normally considered as niche.

A couple headline releases during the latest quarter helped drive this consistency on the exclusive software side.

January’s Pokémon: Legends Arceus was the highest profile of the bunch, moving 12.64 million copies so far. That’s the third best start for a Pokémon game on Switch behind only 2019’s Pokémon Sword & Shield at 16 million and the nearly 14 million of Pokémon Brilliant Diamond & Shining Pearl last November. Truly an excellent beginning for Legends Arceus, which sold-through 11.4 million of those shipments, considering it’s a single release in a franchise that historically puts out two titles at a time.

Kirby and the Forgotten Land released towards the end of this period, rounding out the company’s first party slate for the fiscal year ending in March. It hit 2.65 million units shipped in those handful of days alone. Not only that, the cute 3D platformer sold-through over 2.1 million copies to buyers. This is undoubtedly the fastest-selling mainline Kirby in history; it will almost certainly pass the franchise’s best-seller of 1992’s Kirby’s Dream Land at 5.13 million last count.

Expanding to earlier catalog launches, Mario Kart 8 Deluxe naturally maintains the top spot on the all-time Switch best-sellers list. Bolstered by new downloadable content, the game originally out in 2013 shipped nearly 2 million in January to March alone! That pushes it above 45 million copies lifetime, 45.33 million to be exact, as one of only a few games ever to hit this milestone.

Animal Crossing: New Horizons moved an additional million copies in the quarter, no biggie, to continue as the second best-selling Switch title with 38.64 million to date. Super Smash Bros. Ultimate stays in third, selling 770K units to fight past 28.17 million in aggregate.

Since launching at that nearly 14 million copies mark in November 2021, Pokémon Brilliant Diamond & Shining Pearl extended to 14.65 million as of March. That makes it the 8th best-selling Switch game and 2nd best-selling Pokémon title on the hybrid platform. Exercise experience Ring Fit Adventure raced past the 14 million milestone to date, legging out an additional half million units and rounding out the Top 10 Switch best-sellers.

Speaking of milestones, Metroid Dread is already the top-selling Metroid game of all time. While it only shipped 160K units during January to March, combining that with the massive start last October puts it at 2.9 million copies or just above the 2.84 million of 2002’s Metroid Prime. Talk about having a ball!

Elsewhere, Mario Party Superstars shipped 1.45 million in the quarter, ending it at 6.88 million. The Legend of Zelda: Skyward Sword HD pushed another milly, now at 4.22 million lifetime. Both of these contributed to that ever-expanding million-seller list for this past fiscal period.

Wrapping up various miscellaneous indicators and tidbits of information, Nintendo indicated digital dollar sales rose 4.5% to $320 million. Downloads accounted for 43% of software sales for the year, same as during 2021. Its digital contribution is lagging the wider industry standard, which has been around 50% or more depending on the publisher or manufacturer, however that’s always been the case for Nintendo. It’s much more reliant on traditional retail sales than others.

In a bit of bad news for analysts, Nintendo still doesn’t report many player engagement statistics. The company has made up this statistics dubbed “Annual Playing Users” which really just means the number of accounts that logged into a Switch during a given year. Last year, this figure reached 87 million. It recently achieved management’s goal of passing 100 million by March 2022, ending at 102 million.

You’ll notice this isn’t the most descriptive of metrics. It’s very much a parallel to the number of Switch hardware units out there. It doesn’t reveal too much. I’d much prefer to know more about monthly active users or revenue per user. Wishful thinking in this context.

Another area with a distinct lack of information was Nintendo Switch Online, the company’s somewhat rudimentary online offering. There’s no update on subscribers, a figure that hit 32 million back in September 2021. All management said was sales of add-on content for Animal Crossing: New Horizon and Mario Kart 8 Deluxe “grew” this past year.

With Nintendo, I’ll take what I can get.

As Nintendo closes the books on another year, it’s clear there’s currently limited downside on financial performance because it keeps fans purchasing software even when hardware is taking a hit from international semiconductor shortages, limited part availability and higher cost to produce consumer technology. This is the sixth fiscal year for Switch after all, as it will end the 2023 period just after celebrating its 7th birthday.

Looking ahead, the company’s forecast is conservative. I think rightfully so, even with a slate of anticipated titles in successful franchises.

In fact, the forward looking guidance is quite familiar. It’s literally the same exact numbers as last year. Nintendo expects revenue to decline 6% to $14.2 billion, while operating profit should dip 16% to $4.45 billion. As displayed by my earlier charts, these will still be healthy numbers in the perspective of the last decade or more.

“If COVID-19 interferes with production or transportation in the future, this might impact the supply of products. Other unpredictable risks to the development and marketing of products and services also continue to exist,” the company’s press release read. “In addition, the production of products might be affected by obstacles to the procurement of parts, such as the increase in global demand for semiconductor components. The consolidated earnings forecast is based on the premise that we will be able to secure the parts needed for the manufacture of products in line with our sales plans.”

Starting with that hardware guidance for the 12 months ending March 2023 of 21 million, I believe it’s a reasonable expectation. It would be down 2 million from the 23 million achieved this year. Right now, based on chipmaker leaders globally and experts saying shortages may last until even 2024, I’m targeting 20 million to 21 million Switch shipments in my models.

The elephant in the room is: What about new hardware? Will there be an update? Could the company produce yet another revision?

Well, Nintendo’s upper management has made a slight yet important tonal shift on that topic. As recently as last quarter, President Shuntaro Furukawa hinted how there’s no successor in sight because the current Switch is mid-way in its life cycle. Today, during a question and answer session after the earnings press release, he declined to even comment on Nintendo’s next hardware.

Personally, as has been the case for a while, I’m not a believer in a Switch Pro or even any upgrade until the successor which I expect to be a “Switch Part 2” with the same fundamental features and various improvements. I believe Nintendo’s strategy will lean on new releases, catalog software and online packs for at least the next two years. Supply conditions alone mean console generations will be longer than ever, so my current forecast is January to March 2024 for the company’s next hardware.

I’m much more upbeat on the software slate and monetary contribution from this business segment going forward, as Switch owners keep proving they want to buy games. Especially given Nintendo’s track record of mostly quality titles, then partnering with others to enhance its platform especially via independent games. From a unit standpoint during the year ending March 2023, it expects software sales to decline 11% to 210 million. I believe it will be higher.

So, what are the flagship upcoming games that will drive this resilience?

First, those with dates. Nintendo Switch Sports kicked off a couple weeks back. Mario Strikers Battle League and Fire Emblem Warriors Three Hopes are scheduled for June, while Xenoblade Chronicles 3 moved up to July. Splatoon 3 is the latest with an actual date attached, launching in September. These all seem locked in, I’d be surprised if they shift.

Pokémon Scarlet & Violet don’t have a date, but rather “Late 2022” as the window. I’ll assume November, and GameFreak will certainly hit that given the franchise’s usual cadence. Bayonetta 3 is much more in flux with a nebulous 2022 window. I’d be surprised if that doesn’t slip to calendar 2023.

In what’s currently the biggest pending Switch game, and the most annoying to write, The Sequel to The Legend of Zelda: Breath of the Wild was recently delayed to Spring 2023. Could that make this fiscal year? I’m betting March 2023.

Then there’s the curious case of Advanced Wars 1+2: Re-Boot Camp, which was supposed to be out by now yet pushed back in light of the ongoing Russian invasion of Ukraine. That and Metroid Prime 4 are listed as “TBA” in Nintendo’s reporting. I expect the former might launch sooner than latter, while the latter won’t be for a while more and thus won’t contribute to the upcoming fiscal period.

There’s also how Shigeru Miyamoto told everyone on Twitter how the Mario movie was also delayed out of holiday season. Was the plan to have a counterpart mainline Mario release to coincide with the film’s marketing? If so, will that also be moved?

I’m wagering there’s definitely a surprise or two that no one knows about, except those working on them. I am betting on that new Mario title, likely 2D, plus a rejuvenated franchise that no one is expecting.

Well, that’s the rundown on Nintendo’s most recent fiscal year. It’s a lot to cover during an eventful time for the company. What stood out the most? Were you surprised by the results or any of its forecasts? What might management be hiding from us as part of its fiscal 2023 lineup? Is this the year it reveals the Switch’s successor?

I’m always available here and social media for discussion. Be well, and stay safe all!

Note: Comparisons are year-over-year unless otherwise mentioned. Exchange rate is based on reported conversion: US $1 to ¥112.34.

Sources: Company Investor Relations Websites, IGN, The NPD Group, Nikkei Asia (Image Credit).

-Dom

Xbox Hardware Market Share Gain Propels Microsoft Gaming Revenue to Best Non-Holiday Quarter in Company History

The ongoing Activision Blizzard deal isn’t the only thing making major headlines for Xbox lately.

Microsoft was the first of the “big three” console makers to report this earnings season, which I outline in my latest calendar post, this time sharing its fiscal year 2022 third quarter results covering the period between January and March.

During this time, gaming achieved its best non-holiday sales total ever. While certain parts of the industry cool off, Xbox is at least keeping the fire alive.

Driven by new generation hardware gaining market share plus growth in Xbox content and services, Microsoft generated $3.74 billion in quarterly revenue from gaming, up 6% since last year. That means Microsoft’s Xbox division secured its best revenue ever for a quarter that wasn’t October to December. The prior non-holiday record holder was $3.71 billion back in April to June 2021, a few months after the November 2020 launch of Xbox Series X|S.

This strength bolstered trailing annual sales to reach $16.5 billion for the first time since reporting began. That’s after a record holiday pushed it past $16 billion just last quarter as I wrote about then.

It’s even more impressive considering last year’s stricter pandemic restrictions leading to a strong comparable. According to its report, Xbox Content & Services moved up 4% while Xbox Hardware boosted 14%. Gaming as a whole rose due to growth in Xbox Game Pass subscriptions, first party software (like Halo Infinite and Forza Horizon 5) and Xbox console hardware revenue growth. Third party content was really the sole area of weakness, exhibiting declines year-on-year. What this says is the ongoing Xbox ecosystem play is paying off, supplemented by better inventories at retail.

CEO Satya Nadella even provided a more macro view for hardware right now. “With our Xbox Series S and X consoles, we have taken share globally for two quarters in a row,” Nadella said on the company’s conference call. “We are the market leader this quarter among next gen consoles in the U.S., Canada, U.K., and Western Europe.”

Based on supply driving the cycle due to a global semiconductor shortage, this sort of strength in hardware and market share implies Microsoft was able to secure more components than Sony producing its PlayStation 5. Note that Nintendo Switch was not a part of this statistic, since Nadella’s comments specifically cite the newest console generation.

While the numbers point mostly positive, I have to bring up the usual caveat that Microsoft unfortunately doesn’t share individual profit metrics for its Xbox division. That means purchasing those inputs to produce more retail units could very well have undercut profitability due to higher margins. I’ll shed more light on profit dynamics below the fold.

It’s now time to chart a course towards a more detailed analysis.

As the slides show, Microsoft’s gaming revenue increased 6% to that $3.74 billion during the quarter which was in-line with the company’s forecast. This quarterly result implies nearly $16.5 billion in trailing annual sales, an all-time high, shown via my chart in the above gallery. If combined with Activision Blizzard’s $8.3 billion annual sales and reduced by say $1 billion in double-counting and synergies, it would be between $23 billion to $24 billion.

To provide context, how does this latest top-line result compare to peers? I usually cite Tencent, Sony and Nintendo for these sections, all of which are reporting later in May so I’ll use the latest annualized figures for now. Tencent’s 2021 revenue exceeded $27 billion, maintaining its spot as largest gaming company in the world. Sony’s at $24 billion, suggesting its standing is probably just above Microsoft plus Activision Blizzard’s operations. Finally, Nintendo generated $15 billion.

The largest sub-segment for Microsoft’s gaming business was Xbox Content & Services, which improved a modest 4% to $3 billion in fiscal Q3. That means sales from Xbox Game Pass, software, cloud and any sort of add-on content via its digital storefront account for over 80% of quarterly gaming sales. This was just the second time ever it’s crossed the $3 billion threshold.

While Xbox Content & Services slightly missed the internal growth estimate of “mid to high single digits,” it’s still a success to grow versus a great result last year. I see it as a sign the Xbox brand strategy is stimulating a paying audience.

Disappointingly, Microsoft didn’t share an update on the exact number of Xbox Game Pass subscribers. The latest figure is 25 million from back in January. I’d imagine this was due to seasonality, where it picked up after the holiday and has grown only incrementally since then. Especially given a lack of major exclusives or even third party partnerships launching into the service other than Ubisoft’s Rainbow Six Extraction.

Instead, Microsoft highlighted new information specifically on cloud gaming usage. Nadella said 10 million people have streamed games remotely since the feature kicked off in beta during November 2019 then was formally introduced to Xbox Game Pass Ultimate subs in September 2020. While cloud is still niche in the scheme of things, hitting this sort of milestone shows there’s at least some level of growing interest.

“Our Game Pass library now includes hundreds of titles across PC and console, including more games from third party publishers than ever before.” Nadella noted. “Billions of hours have been played by subscribers over the past 12 months, up 45 percent.”

Lastly, he said Azure gaming revenue increased 66% during the current fiscal year to date. These sorts of statistics on service, cloud, streaming and the like fit with the company’s gaming mantra of allowing people to play on various devices. It eases the burden on hardware shipments, which I’ll cover next.

The second sub-segment within gaming is Xbox Hardware, which exhibited the better growth during January to March. Sales here moved up 14% to $728 million. That’s the second best non-holiday result since the company began reporting splits. Microsoft didn’t previously share internal guidance for hardware, yet CFO Amy Hood said on the call that it exceeded expectations.

Company slides highlight continued demand for Xbox Series X|S underlying this change, however clearly it’s capped by supply conditions. Based on evidence from both regional tracking firms and retail channel checks, Xbox Series S in particular is showing better availability at least.

Of course, the question on everyone’s mind is: how many units of Xbox Series X|S has Microsoft shipped now during its fifth full quarter on market? Last quarter, I mentioned the estimate from Daniel Ahmad, Senior Analyst at Niko Partners, being above 12 million. While revenue growth doesn’t directly translate to unit sales trajectory, I’d guesstimate the family at upwards of 14 to 14.5 million globally. As a reference, last count for Sony’s PlayStation 5 was 17.3 million.

We’d know for sure if Microsoft was more transparent. (Wishful thinking!)

Fitting with the theme of market share gains and increased inventories was The NPD Group’s recent monthly report on U.S. games industry spending. As I covered in my article, Xbox Series X|S was the leading console for both March and the first quarter domestically by dollar sales. It’s certainly attracting buyers, when there’s stock on hand.

“Coming to the end of a good week,” wrote CEO of Gaming Phil Spencer on Twitter. “Microsoft earnings were a nice moment for Xbox, it’s always great to hear Amy [Hood] and Satya talk about the progress.”

Now, here’s yet another important caveat related to profitability. We don’t know if Microsoft is making a profit on either model right now. In fact, last year during the Epic v. Apple trial, Head of Xbox Development Lori Wright specifically said the firm sells hardware at a loss. Which is consistent with historical data and anecdotes across the industry, as consoles are known as a loss leader and a means to have people spend on software, and now subscriptions or other content.

Comparatively, Sony said it’s now turning a profit on each PlayStation 5 standard edition it ships. Without a better indication of cost impact, it’s difficult to make a direct comparison.

Stepping back to briefly touch on Microsoft’s general results, the company generated over $49 billion in quarterly sales which is 18% higher than last year. Operating income exceeded $20 billion, up 19%. Both top-line and earnings-per-share came in above analyst estimates.

Intelligent Cloud as a segment showed the most growth, jumping 24% in Q3. Microsoft Cloud revenue improved 32% to over $23 billion. Office Commercial products and cloud moved up 12%, while LinkedIn sales rose 34%.

Gaming is part of the More Personal Computing business for Microsoft, which rose 11% to $14.5 billion. This means Xbox comprised 26% of quarterly segment sales, down from 31% during the holiday quarter between October and December 2021.

In terms of a glimpse into profitability for this segment, gross margin percentage declined “slightly” last period. That’s because of a 17% increase in operating expenses, attributed to gaming, search, news advertising and Windows marketing costs.

Essentially, gaming is less profitable than other areas when investing heavily in console manufacturing and external deals. This also reflects the broader trend of inflation, impacting input pricing. The more it takes to make a product, the lower its margins. Right now, the implication is there’s higher cost in both producing consoles and making the types of deals required for Xbox Game Pass. Without exact data on how much profit is made per retail unit sold or for gaming as a whole, I have to make these kinds of inferences.

Considering gaming sales rose 50% this time last year, beating total growth estimates in the latest quarter was a great showing on the revenue side. That $3 billion figure for Xbox Content & Services in particular supports the brand’s reinvigorated move towards keeping players in a more accessible ecosystem as opposed to a singular piece of hardware. There are still indications that profitability is being hit by input availability and cost, so that’s worth keeping in mind especially moving into the second full calendar year of Xbox Series X|S.

Looking ahead, next time Microsoft will report fourth quarter and annual results for fiscal 2022.

When it comes to gaming, CFO Amy Hood laid out somewhat bearish internal guidance for April to June as the company anticipates lower sales, echoing a trend seen industry wide as a reversion towards more normalized spending habits.

“We expect revenue to decline in the mid-to-high single digits driven by lower engagement hours year-over-year as well as constrained console supply,” Hood said. “We expect Xbox Content & Services revenue to decline mid-single digits though engagement hours are expected to remain higher than pre-pandemic levels.”

Note: She didn’t provide formal guidance on hardware results.

Digging into that first estimate, let’s assume an 8% decline. This would lead to fourth quarter gaming revenue of $3.4 billion versus the prior amount of $3.7 billion. When aggregating for the full year, it would still be an increase from $15.4 billion to $16.2 billion. That implies we’ll see a fiscal year sales record for Xbox despite anticipated weakness in the final quarter.

Then, if Xbox Content & Services dips say 5%, it would generated $2.8 billion in the fourth quarter which would be the lowest result since the pandemic began.

We’ll have to see how it plays out for Xbox over a three month span where it’s going to reveal a lot more about future titles than actually launch many on the first party side. On June 12th, Xbox & Bethesda will host its annual summer showcase where I expect to see more about Starfield, Redfall, Senua’s Saga: Hellblade II, Avowed and hopefully the Indiana Jones project.

Thanks everyone for stopping by and making it this far. Be safe and well!

Comparisons are year-over-year unless otherwise noted.

Sources: Company Investor Relations Sites, The NPD Group, Xbox Wire, Yahoo Canada (Image Credit).

-Dom