During Microsoft’s fiscal fourth quarter results presentation yesterday for the period ending June 2021, the massive American technology conglomerate shared how its gaming division is faring amidst the global pandemic and early in this latest console cycle. This presentation revealed how the Xbox team achieved a handful of impressive records.
First, Microsoft’s gaming revenue for the trailing 12-month period back from Q4 is its highest in reported history. The Xbox division generated nearly $15.4 billion in annual sales. That’s 33% higher than the same 12-month period this time last year, when it was almost $11.6 billion.
That makes this the second quarter in a row that annual gaming sales were above the $15 billion threshold for Microsoft, showcasing how both hardware momentum and subscription expansion are boosting results even as third-party software contributions slow from highs in 2020.
In terms of the new generation of Xbox Series X|S platforms that launched late last year, Chief Executive Officer (CEO) Satya Nadella said on the earnings conference call they are the fastest-selling boxes in the 20-year history of the Xbox brand. These have “more consoles sold life-to-date than any previous generation” according to Nadella. This led to Xbox Hardware growth of 172% during Q4, with the caveat being of course this compares to a low point at the end of a prior generation.
Which is notable especially in terms of the current hardware supply environment for all manufacturers. Xbox is selling every single box its suppliers can make, as consumer interest far exceeds production capabilities right now. I anticipate this will continue for the foreseeable future, at least through the next fiscal year ending in mid-2022.
Parallel to the hardware performance is that of gaming software and related services, represented by the Xbox Content & Services sub-segment. This is the one notable lackluster portion of the report, with a fourth quarter decline of 4%. Increases in Xbox Game Pass and first-party releases couldn’t outpace declines in third-party.
Speaking of the Xbox Game Pass service, unfortunately Microsoft executives didn’t share updated figures for its paid subscriber base. Last count it was officially 18 million as of 2020 year-end, though more recent media reports have estimated the figure at upwards of 23 million as of April. My current estimate is 25 million, though I imagine Microsoft would share that milestone so it might be just below it for now.
Knowing these records and high level performance, I’ll now dig a bit into underlying numbers and executive comments.
If you pop open these gallery images above, you’ll see a.. number of insights.
First, the annual revenue figures for Xbox based on reported growth. Overall, gaming revenue for Microsoft rose 11% in Q4 bolstered by a major contribution from hardware and subscriptions. Based on historical sales figures, this equates to roughly $3.74 billion in quarterly revenue. That’s the highest sales ever for Xbox during a fiscal fourth quarter i.e. April to June.
Aggregating this quarterly figure into annual results and you’ll see the trend line for 12-month revenue is at that record $15.4 billion level. Even if slowing its growth trajectory, there’s no denying Microsoft’s combination of hardware launch and ecosystem play are at least pumping up Xbox’s top-line.
One note. Technically the quarterly result for gaming revenue is currently an estimate based on growth figures reported in Microsoft’s earnings slides. The company hasn’t formally filed its 10K with the Securities & Exchange Commission (SEC) where it reveals exact gaming revenue figures. It should be very close.
(Update: Microsoft posted its annual filing on July 29th. 12-month gaming revenue reached $15.37 billion, essentially spot-on.)
For context here, how does this compare to peers in the industry?
Well, since I know you checked out my July to August 2021 earnings calendar, you’ll see both Sony and Nintendo report their respective first quarter results next week. So using recent annual figures from March 2021, Sony’s Gaming & Network Services segment reached over $24 billion while Nintendo’s overall sales totaled roughly $12 billion at the time. Essentially, Microsoft sits between the two other hardware manufacturers. And all of them are doing very well lately.
Unlike its competitors, Microsoft doesn’t reveal profit metrics for its Xbox segment. That doesn’t mean we can’t infer from what it does share. Might get technical here, bear with me. The broader More Personal Computing business unit, of which Xbox is a part, saw operating income of $4.87 billion in Q4, up from $4.09 billion. However, gross margin percentage declined 1% since last year due to a shift to gaming. Margin as a metric basically accounts for expenses deducted from total sales.
Now there’s a variety of factors impacting profitability within this segment. Suffice to say that a slight dip in margin percentage caused by this shift means gaming was a bit less profitable than others here which are Windows, Devices and Search Advertising. It’s impossible to back into exact numbers, unfortunately.
Xbox is selling every single box its suppliers can make, as consumer interest far exceeds production capabilities right now. I anticipate this will continue for the foreseeable future, at least through the next fiscal year ending in mid-2022.
When it came to growth during Microsoft’s latest Q4, Xbox Series X|S hardware was certainly the star.
The aforementioned 172% growth for Xbox Hardware is the result of simply high demand meeting limited supply. It’s effectively the best it can be right now, as Xbox consoles are consistently selling out.
With Xbox Series X|S being the fastest-selling in the company’s history, how does that translate to unit sales? Well, we don’t exactly know formally because Microsoft stopped sharing these a while back.
Still, there are estimates out there. Friend of the site and analyst at Niko Partners Daniel Ahmad attempts to estimate units shipped for Xbox Series X|S at roughly 6.5 million since November 2020. Aligned with Nadella’s comments, this figure would outpace the prior record holder of Xbox 360 at 5.7 million starting in 2005 plus 2013’s Xbox One with roughly 5 million shipments across the same 6-month span.
Which makes sense, especially given recent performance in its largest market of the United States. The Xbox platform had its best June month ever according to The NPD Group, as I wrote about recently. Definitely check out that piece to see more specifics.
The other sub-segment within gaming is Xbox Content & Services, which saw somehwat mixed results during the fourth quarter.
Revenue here was 4% lower than this time last year, mainly because of software published by third parties available on the Microsoft store or retailers. This makes sense because the prior four quarters all experienced growth above 30%. It was bound to revert from those prior peaks.
Amidst this decline, executive comments still indicate expansion in services and player interest in particular. Chief Financial Officer (CFO) Amy Hood noted the team saw “strong engagement across the platform” during Q4.
The management team said Xbox Game Pass is “growing rapidly” while referencing certain statistics, similar to those we’ve heard in the past about how subscribers play and spend more than their non-member counterparts.
There was specific mention of cloud gaming this time, a service that Xbox has embedded within its top-tier Xbox Game Pass Ultimate and expanded to more countries in recent months. While not specific, Microsoft said that “millions” are streaming to their various devices.
What this mix of results and comments around Xbox Content & Services tells me is that last year was really fantastic during the height of pandemic quarantine orders, the audience base is still there yet spending less than that time especially on software. Subscriptions are propping it up, which is exactly what the team wants from pushing ecosystem and its robust Xbox Game Pass library.
Growth could slow a bit near-term for the Xbox division. I do think the baseline has been reset by newer audience members plus lapsed gamers sticking around and spending lately, which will help comparing growth against those high points last year.
Taking a step back to the company overall, Microsoft posts some staggering results in the scheme of things. Over $46 billion in fourth quarter revenue, an increase of 21% and well ahead of analyst estimate of $44.2 billion. Operating profit of $19.1 billion is 42% higher than this time in 2020, leading to an earnings-per-share figure above consensus as well.
Then what’s next after this record year for Xbox? Beyond healthy guidance for the firm overall, gaming is expected to grow into the first quarter of fiscal 2022.
“We expect revenue growth in the low double-digits,” said Hood in reference to gaming. “Console growth will again be constrained by supply. And on a strong prior year comparable, Xbox content and services revenue should grow low single digits.”
I can see that, consistent with its release schedule and hardware inventory limitations. There’s no flagship first party launches until Halo Infinite, and even that has a nebulous holiday release at present. There’s higher profile third party multi-platforms like Madden NFL 2022 from Electronic Arts in August and NBA 2K22 in September, which will contribute on the content side. There’s also a slew of new versions, smaller or indie titles in the coming months. The Ascent. 12 Minutes. Psychonauts 2. Hades and Microsoft Flight Simulator on console.
It might be tricky for Xbox to match the sales highs of the last 12 months, given the previous global stay-at-home situations and leading into a new console generation. Growth could slow a bit near-term for the Xbox division. I do think the baseline has been reset by newer audience members plus lapsed gamers sticking around and spending lately, which will help comparing growth against those high points last year.
Xbox Hardware will be strong, even if supply increases at a slower rate than originally anticipated. I believe subscriptions will keep pace, though am tapering expectations on content and software spend until the quarter ending December.
All in all it’s big results for 2021, like we’re seeing most places in the games industry. The question becomes where will it go from here.
Feel free to reach out here in the comments or on social media with your reactions or questions. Thanks for visiting!
Sources: Microsoft Investor Relations, The NPD Group, Wu Yi (Photo Credit).