For Microsoft $MSFT, having one’s head in the Cloud is turning out to be a smart decision.
According to the company’s fiscal 2019 3rd quarter earnings results today, it reported revenue of $30.6 billion. An increase of 14% compared to the prior year, and a figure that comes in above analyst expectations. Operating profit jumped 25% to over $10 billion. Growth is mainly attributed to the firm’s cloud offerings and productivity suite.
Going further, how did the Xbox gaming division fare? The answer is that it broke yet another record.
As you’ll see in the above chart, Xbox gaming revenue exceeded $11.6 billion for the trailing 12-month period for the first time since the company began reporting this specific metric. This breaks the record of $11.5 billion set last quarter. In fact, revenue has been steadily growing for the Xbox business during the later part of the Xbox One generation of hardware, which began in late 2013.
Quarterly gaming sales eclipsed $2.36 billion, up 5% since this time last year. Attributed to 12% increase in Xbox software and services, which offset a drop in hardware likely due to both market saturation and discounting. Microsoft notes that software and service results were boosted by “third party monetization” and “subscriptions growth.”
Edit: While profit metrics aren’t shared for gaming itself, there is a small comment giving a bit of insight:
“Gross margin percentage increased due to sales mix shifts to higher margin businesses in Gaming and Windows.”
Translation: Gaming is shifting to higher margin businesses, which benefits profitability. Unfortunately, I don’t see much else on the profit side.
Allow me to translate that last part for you:
Xbox Live monthly active users totaled 63 million compared to 59 million last year. The more people subscribe, the more they become embedded in the ecosystem and purchase content on the digital store. Each online buy provides a revenue slice for Xbox.
Then, like so many parties involved, it’s making a boatload of cash as its players spend in online battle royale games Fortnite and now Apex Legends. This phenomenon is not only keeping players around, but more importantly attracting new ones. Which is especially key as the current hardware generation ages.
So. How is Xbox achieving milestones when it’s not selling Xboxes?
It’s the renewed focus on expanding player services and reinforcing customer goodwill. Xbox has fully established its Game Pass offering, where players pay a monthly fee for access to a library of digital titles. It’s attracting major publishers to participate, grabbing games like Capcom’s Monster Hunter: World and Square Enix’s Shadow of the Tomb Raider. While we don’t have statistics on how Game Pass did this quarter, there’s no doubt it’s bolstering the service side.
Another attractive offering is backwards compatibility, where titles from prior generations work on the Xbox One family of devices. It’s certainly not a deal-breaker or a system-seller, though it’s still a distinguishing feature.
Oh. And did I mention battle royale?
Now don’t get me wrong. The hardware decline is a moderate concern. However it’s not uncommon that a downturn happens when a console is approaching its seventh year on market. And revenue growth is still happening despite lackluster hardware results. I fully anticipate middling hardware sales in the foreseeable future, until next generation. The good news is that both battle royale and these various services aren’t going anywhere.
With all-but-confirmed rumors that the firm is building its next generation of gaming hardware for a potential 2020 launch, Microsoft’s gaming division is using services as a way to generate business and maintain its user base for the time being. And based on today’s report, it’s working.
Source: Microsoft Investor Relations & Press Resources. Xbox.com. Windows Central.