Sony’s PlayStation Group Delivers Solid Fiscal 2024 Q1 Despite Double-Digit Hardware Declines

As the earnings calendar dictates, here’s another recap incoming.

Today I’ll be rounding out the big three of gaming after my articles on Microsoft and Nintendo!

Sony Corp shared fiscal 2024 first quarter results in Japan. As usual, I’ll focus on its Game & Network Services (G&NS) segment i.e. the PlayStation business, which had a solid three-month period, boosted by services and add-on content, despite a distinct lack of catalysts especially for hardware.

Here’s the headlines from PlayStation’s April to June 2024 quarter.

  • Revenue increased 12%, albeit mostly due to yen weakness.
  • Operating profit moved up over 30%.
  • PlayStation 5 hardware unit sales declined double-digits.
  • PlayStation Network (PSN) saw comfortable user growth.

There’s significant impact from currency movements on a Japanese company that operates globally. Fluctuations have a major impact on sales, and to a lesser extent on profit. As I’ll show later, without exchange rate deterioration, PlayStation revenue growth would be a more modest 1%.

PlayStation 5 shipments appear to have topped off, at least for now and perhaps permanently, as it now trails its predecessor by an even wider margin than last quarter. The upward trajectory of financials here are being bolstered by PSN and downloadable content spend, not to mention savings from laying people off and closing studios.

Management pointed out an “increase in sales from network services, mainly PlayStation Plus,” which clearly benefited from recent price increases, while also noting the “decrease in sales of hardware due to a decrease in unit sales.”

Read on for a closer look at the group’s performance plus a set of near-term predictions.

As you’ll see in the gallery above, here’s the scoop on PlayStation’s quarter overall.

  • Revenue rose 12% to $5.56B.
  • This included $589M of currency impact.
  • Operating profit jumped 33% to $419M.
  • This included of currency impact.

Excluding currency movement, the top line (revenue) was a slight increase of 1% while the bottom line still generated an impressive 30% gain. Executives did call out first party software sales as one of the contributors, alongside impressive growth for services and add-ons.

The firm also mentioned peripherals. I’d guess partially the DualSense Edge controller and mostly the PlayStation Portal. I’d love if Sony shared more about how the cloud-based streaming handheld is faring. Indicators point to a good amount of demand, I’m just unsure about how many were actually produced for market. I also don’t think the gains were from PlayStation VR2.

There’s also the unfortunate impact of layoffs that are meant to reduce costs, which is one reason G&NS profit metrics are up. It happened after the quarter end, yet something like Bungie is an example that any subsidiary can be hit by layoffs or restructurings in the hopes that these numbers will look better for investors.

Underlying the sales movement were the following categories by dollar sales:

  • Add-On Content rose 37% to $1.87B.
  • Network Services increased 28% to $1B.
  • Hardware dipped 22% to $941M
  • Digital Software lowered 8% to $912M.

The G&NS segment is effectively being carried by its services and downloadable content slices, the knock-on from something like Helldivers 2 or MLB The Show 2024, those PS Plus price increases and the likes of June’s Elden Ring: Shadow of the Erdtree and, albeit to a lesser degree, Destiny 2: The Final Shape expansions.

Taking into account this latest quarter, I’ll now tally the trailing 12-month figures.

  • All-time high annualized revenue of $28B, up 14%
  • Operating profit 24% higher to $1.97B.

In both cases, the annual trend-line is quite positive due to some of the same aforementioned reasons as the quarter, while acknowledging sales are highly susceptible to currency fluctuations.

I’ll now expand on the hardware side, namely around units shipped to retail.

  • PlayStation 5 shipped 2.4M between April and June.
  • During Q1 last year, the console moved 3.3.
  • PlayStation 4 also had 3.3M in the same quarter.
  • PlayStation 5 lifetime sales are now 61.7M, behind PlayStation 4’s 63.5M.

While these numbers seem gloomy, I wouldn’t yet overreact on this console generation. (Not until next year’s Grand Theft Auto VI, at least.) PlayStation 5 is keeping up with or exceeding the sales speed of consoles historically. It’s trending 7% above PlayStation 4 in the United States, according to Circana, and will be the top seller in most key markets this year.

It’s no secret PlayStation 5 adoption is slower than the previous cycle. Sony also didn’t provide an update on sell-thru to consumers, which was at 50M back in December 2023. Based on this, I assume it hasn’t crossed the 60M milestone despite shipping nearly 62M to date.

Now, switching over to software unit sales stats from this latest announcement.

  • Game sales across PlayStation were 53.6M, down from 56.5M.
  • First party titles totaled 6M, compared to 6.6M.
  • Digital downloads contributed 80%. (Pretty sure an all-time high.)

Management attributed growth from software to first party sales, which I assume counts Koei Tecmo’s Rise of the Ronin and Shift Up’s Stellar Blade, both of which were published by Sony Interactive Entertainment. There was also May’s PC launch of Ghost of Tsushima, fitting with the firm’s strategy of diversifying beyond consoles.

Signs point to lower output on the third party side for Final Fantasy 7 Rebirth, compared to last year’s Final Fantasy XVI. These exist under a console exclusive relationship that will probably go away soon based on Square Enix’s decision to shift towards multiple platforms.

In terms of general engagement, which is often driven by evergreen games like Minecraft, Fortnite and Roblox in combination with newer experiences, Monthly Active Users (MAUs) across PSN jumped from 108M to 116M. It was down sequentially since the March quarter’s 118M.

It was a decent start to PlayStation’s 2024 fiscal year, featuring slight revenue growth excluding currency impact, a nice boost to operating profit and a great supplement from PSN alongside its subscription business. Publishing partnerships with Asian developers like Team Ninja and Shift Up appear to have appeal within Sony’s global user base, even if not directly driving console sales.

PlayStation 5 may have very well peaked, indicated by a couple quarter’s worth of lower unit sales, though we’ll know for sure if that’s the case within the next year or so between the potential for an upgraded model plus a massive Rockstar Games title that may well lead to widespread upgrades.

Progressing into the fiscal year, it’s time to review Sony’s increased annual outlook for PlayStation.

  • Now expects full year revenue up 1% to $27.8B.
  • It would be a new local currency record.
  • Operating profit guidance is now $2.1B, which would be up 10%.
  • PlayStation 5 shipment forecast remained at 19M, unless I hear otherwise.

I’d see this sort of slight upward revision in guidance as reassuring, especially since it happened in a first quarter, when companies are often unsure about moving around their expectations.

Especially with the yen’s continued weakness, the revenue number should be achieved. That level of profit is also reasonable, even if I see downside depending on how PlayStation navigates costs, for example if a new PlayStation 5 is in development and production.

It’s that hardware portion where I’m more cautious than management. I initially thought Sony might increase the forecast over the fiscal year. I’m now betting it remains flat into next quarter. Personally, I have PlayStation 5 units at 19M to 19.5M in fiscal 2024.

Sony needs a spark, and it doesn’t have much on the exclusive side as the commercial season ramps up. There’s live service shooter Concord, which has been praised during its testing phase though there’s questions around its broad interest. AstroBot is a near full-priced platformer, the closest thing to the brand’s true mascot. I’m not sure it’s blockbuster or system-seller material.

I see more impact from external titles, for instance Ubisoft’s double feature of Star Wars Outlaws and Assassin’s Creed Shadows. Electronic Arts has its sports franchises, including the likes of July’s EA Sports College Football 25 at 5 million players strong. Then there’s Call of Duty: Black Ops 6 from Activision Blizzard which might be hampered in this context by its inclusion on Game Pass.

The elephant in the room is how about that long-rumored PlayStation 5 Pro? The closer we get to the holidays, the more dubious I become it will both hit market in 2024 and have a notable impact outside of “enthusiast upgraders.” If a fancy model is going to be out by October or November, Sony’s running out of time to start up a big marketing push.

Thanks again to everyone who stopped by for my latest recap of a major player in the games industry. Be safe and take care, all!

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

Exchange rate is based on reported average conversion: US $1 to ¥155.6.

Sources: Circana, Company Investor Relations Websites.

-Dom

Nintendo Financials & Hardware Sales Drop Double-Digits as Switch Ages in Fiscal 2025 Q1 Report

I’m here with a rare Friday recap, as everyone knows because they have studied my earnings calendar, of course.

Today in Japan, Nintendo reported results for its first fiscal quarter of 2025.

Here’s the headline numbers, during a tricky time where its storied Switch console is entering its final days and management makes moves towards the transition to its successor.

  • Revenue and operating profit declined well into double-digit territory.
  • The same goes for Switch console shipments, across all versions.
  • Switch unit sell-thru to consumers did reach a new lifetime milestone.
  • Mario Kart 8 Deluxe sold less than a million units for the first time since 2017.

It’s a tough one all around for the Mario makers, mainly due to a comparison to the company’s best Q1 ever last year due to contributions from a blockbuster film and mainline Zelda launch. Plus, the firm’s expenses are up due to investment in its next generation.

“During the first quarter of the previous fiscal year, unit sales of both hardware and software were extremely high for a first quarter,” management wrote in prepared remarks. “When The Super Mario Bros. Movie energized our dedicated video game platform business and The Legend of Zelda: Tears of the Kingdom was released, together with specially designed hardware based on that title.”

I’ll now look at the figures in more detail then provide a look ahead towards the future, a crucial time for one of gaming’s biggest and most beloved producers.

Taking a broad perspective, the main performance indicators from Nintendo’s most recent quarter ending June 2024 are below.

  • Revenue dropped 47% to $1.58B.
  • Operating income declined 71% to $350M.
  • Research & Development (R&D) expenses rose 18%.

As displayed in the quarterly charts later in this article, this was the lowest Q1 output since fiscal 2020 for both sales and profit. As Nintendo executives alluded in their notes, it’s mainly because there isn’t much driving growth right now, with the main release slate as two legacy titles with a fresh coat of paint while the firm navigates towards a transitory period.

Across product categories, here’s the breakout measured by revenue.

  • Software dollar sales made up 50.8%, up slightly from 50.1%.
  • Within that, 73% were first-party sales. Last year, it was 89%.
  • Digital represented 59% of the total, compared to 47% prior year.

Now, the regional sales ratios for its largest locales.

  • The Americas made up 45%, about the same year-on-year.
  • Japan saw a sizeable increase, from 20% to 26%.
  • Europe dropped to 21%, from 23%.

Due to the massive success of the Mario film starting April 2023, quarterly sales for Nintendo’s mobile and IP-related segment dropped 54% to $94M.

The below charts show sales and profit metrics for both this latest quarter and on a trailing 12-month basis for broader context.

  • Annual revenue is currently $9.34B, down from $11.86B.
  • Operating profit over that time is $2.55B, compared to $3.95B.
  • Both of these are the lowest since late in Fiscal 2020.

I’ll now shift focus over to the Hardware part of the first quarter report, where Nintendo shares how many units shipped and gives insight into sell-thru to consumers as well.

  • Switch saw 2.1M units shipped between April and June 2024.
  • That’s down 46%, and the lowest Q1 output since Fiscal 2019.
  • OLED experienced the largest drop of 56% to 1.24M.
  • Its older Lite version sold 330K, a decline of 23%.

“There were no such special factors in the first quarter of this fiscal year,” executives said. “And with Nintendo Switch now in its eighth year since launch, unit sales of both hardware and software decreased significantly year-on-year.”

This quarterly total brings lifetime Switch shipments to 143.42M, maintaining its spot as the third best-selling console ever, and bringing into question its ability to surpass Nintendo’s own DS (154.02M) and Sony’s PlayStation 2 (155M).

Beyond units shipped, management shared some insight into consumer sell-thru of the hybrid console. Over its life span starting in 2017, Switch has reached an impressive sell-thru milestone of 140M units.

It doesn’t take an enthusiast analyst to explain why a console in its eighth year, without a system seller, is on such a downward trajectory to start this financial year. Even if Nintendo achieves its shipment target, this will be the lightest full year of hardware sales during the Switch era.

Let’s look at the software categories, including new title performance for Nintendo during the last three months.

  • Switch game copies shipped in this period reached 30.64M, down 41% from 52.21M.
  • There are currently three million sellers, two of which are Nintendo’s.
  • This pushes lifetime Switch software units to nearly 1.27B.

The first million-seller to highlight was Paper Mario: The ThousandYear Door debuting at 1.76M shipped during the quarter. As a remake, it’s tricky to make comparisons. The GameCube original sold 1.91M units in around three years. The other mainline series game on Switch, Paper Mario: The Origami King, started with 2.82M in 2020.

Luigi’s Mansion 2 HD was that second million-seller, moving 1.19M within just a few days in late June. The base game hit market in 2013 for Nintendo 3DS, selling 750K units in the United States alone within three months. The Switch title Luigi’s Mansion 3 released in October 2019 to 5.37M units its first quarter, albeit with a couple months on sale in that period.

Here’s an observation that shows how the Switch has saturated the market: Neither of those million sellers were called Mario Kart 8 Deluxe. This is the first quarter since back in July to September 2017 during which the console’s best-selling title didn’t hit a million copies sold. It did sell 930K all these years later, quite a strong Q1 compared to most games, and is now approaching 63M lifetime.

In terms of other lifetime milestones, The Legend of Zelda: Breath of the Wild trended above 32M, while Pokémon Scarlet & Violet became the third mainline franchise title to surpass 25M sold.

When it comes to units sold-thru to consumers (rather than shipments), Paper Mario: The Thousand-Year Door topped 1.3M units within six weeks of release, while Princess Peach: Showtime, which originally shipped 1.22M during the prior quarter, also moved past 1.3M by this metric.

Nintendo’s engagement statistics of Annual Playing Users hit a milestone at 128M, up from 121M a year back. The company didn’t share anything on Switch Online memberships, which were 38 million at last count in November 2023.

Nintendo suffered a double whammy as it entered fiscal 2025. This same quarter last year was massive on the strength of its biggest franchises and the Switch continues to show its age with a less compelling line-up than years past, featuring a portfolio titled towards refreshed older titles that aren’t as appealing as brand new entries. Combine that with a console that is present in many a household already, and there isn’t much upside on the financial side right now.

Speaking of that, management maintained its full-year outlook in these latest results. For now, at least.

  • Revenue expected down 19% to $8.7B.
  • Operating profit could decline 24% to $2.6B.
  • Annual Switch units off 14% to 13.5M.
  • Software units 17% lower to 165M.

These seem mostly reasonable to me, and I believe Nintendo can achieve all but one of them, even if barely.

It’s the hardware shipment figure where I remain skeptical. In order to hit a 13.5M annual target, Nintendo has to ship 11.4M more Switches over the next 9 months. Last year, when there was both a mainline Zelda and Mario among others to entice new buyers, it moved under 12M across the same nine month span! I’m maintaining a 12.5M to 13M forecast for the year, leaning towards the lower end.

Still, even assuming the lower end, that would put Switch around 154 million lifetime by March 2025. It’s going to be in contention at least for best-selling hardware of all time.

For a console in its home stretch, I’ll admit Nintendo is presenting an appealing line-up leading into the back half of its fiscal year. There’s The Legend of Zelda: Echoes of Wisdom in September, Super Mario Party Jamboree in October then Mario & Luigi: Brothership in November. Donkey Kong Country Returns HD is also slated for January 2025.

Plus, as we’ve entered the latter months of calendar 2024, might we hear about Super Switch? There’s a good chance, however I’m betting it happens right after the Switch’s final holiday season. Full reveal in January, launch April 2025 or later.

That ends the week, and another full recap on the earnings schedule. Hop over to social media for more coverage, and check back soon for more articles. Thanks for stopping by!

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

Exchange rate is based on reported average conversion: US $1 to ¥155.93.

Sources: Company Investor Relations Websites, Nikkei Asia (Photo Credit).

-Dom

Activision Blizzard Offsets Hardware Weakness During Record Year for Microsoft Gaming in 2024 Q4 Report

According to the earnings calendar, it’s time for another recap!

This time I’ll be covering both Q4 and annual results for Microsoft, with a specific rundown on the Gaming business, which is currently experiencing growth via acquisition and facing much uncertainty around certain elements of its current strategy.

As expected after spending nearly $70 billion on Activision Blizzard, the inclusion of this new revenue pushed Microsoft Gaming to double-digit growth and record highs for a fourth quarter and 2024, marking the first time this business generated over $21 billion in annual sales.

Well, what’s behind these juicy headline numbers? And how does it compare to my estimate of where I expected them to be? Well, there’s plenty of questions around the Xbox business, and revenue came in below my personal expectations.

Looking beyond the deal impact, there’s a stagnancy setting in for Xbox over the last year, mainly as Game Pass shifts to user retention alongside a hardware business that under-performed and hit its peak this generation with Microsoft’s shift away from the traditional console approach.

“Stronger-than-expected performance in first-party content was partially offset by third-party content performance,” said Chief Financial Officer (CFO) Amy Hood when discussing the core content and services business during Q4. Which somewhat confuses me, as this must be referring to legacy Game Pass additions as opposed to new published titles.

Check below for the numbers themselves, my reactions to them, updated estimates for hardware shipments and some discussion around future forecasting.

Here’s the reported numbers from the filing and slides above, starting with the broader Xbox division.

During the quarter ending June:

  • Quarterly gaming revenue rose 44% to $5.02B.
  • In-line with company guidance of low to mid-40s.
  • That’s an all-time high fourth quarter.
  • ActiBlizz impact was $1.68B, or 48 points.
  • Which means “all other Xbox” declined 4% to $3.34B.

Now for fiscal year 2024 revenue stats.

  • Annual gaming revenue totaled $21.5B.
  • That’s up 39% from prior year’s $15.5B.
  • Ended slightly below my expectation.
  • See the above chart for full historical context.

Underlying the dynamics was a boost in Xbox Content & Services, over 60% growth with most of the growth due to the acquisition, offsetting a substantial drop for Xbox Hardware well into the double-digits.

This certainly reflects the strategy of subscription and expansion beyond a retail box, plus the integration of a business that now has exposure to PC and mobile. Whether or not this is the right direction is the question, especially given how competitors still put a sizeable focus on the console business as a way to reach audience and sell their titles for full price at launch.

So far, I’ve talked about sales. While Microsoft doesn’t report profit for Gaming, we can infer from the broader More Personal Computing (MPC) segment’s movements.

  • MPC group operating profit rose 5% to $4.92B.
  • That’s after a 43% increase in expenses with 41 points from ActiBlizz.

The indication being that, for the time being, integration is dragging the bottom line and the core Xbox businesses might not be making up for it.

Now I’ll delve deeper into the individual product categories underlying its latest performance.

Starting with Xbox Content & Services, here are Q4 figures.

  • Xbox C&S revenue jumped 61% to $4.66B.
  • This represents 93% of total gaming sales.
  • Best all time by a wide margin, over $1B.
  • And that’s due to ActiBlizz contributing 58 points.

Here’s the content segment for the full financial year.

  • Gained 52% up to $18.55B.
  • Its contribution to the total was 86%.
  • It’s larger than total gaming revenue in FY 2023.
  • Last year Xbox C&S was $12.18B.

Then there’s the struggling Xbox Hardware category, with June quarter results detailed below.

  • Declined 42$ to around $345M.
  • The lowest Q4 result since FY 2020.

Again, now the annual figures for Xbox Hardware.

  • Annual console sales declined 13% to $2.86B.
  • Similar to above, the worse since FY 2020.

I’ll move on to a portion where estimates come into play, since Microsoft stopped reporting hardware unit sales ages ago.

  • Last quarter, my guesstimate was 29.7M to 30.3M Xbox Series X|S lifetime.
  • I have quarterly shipments again under a million, say 750K to 800K in the June quarter.
  • If so, I believe it would be the lowest quarter this generation.
  • Which means I have current Xbox Series X|S lifetime around 31M.

As part of the company’s conference call, Chief Executive Officer (CEO) Satya Nadella provided a couple breadcrumbs around engagement.

  • 500M monthly active users (MAUs) across all platforms.
  • Hour played on Fallout titles rose 5x quarter-on-quarter after Amazon Prime’s Fallout.
  • And, that’s pretty much it.

It’s difficult to even decipher the meaning of monthly actives in this context, other than that mobile is massive and Microsoft purchased an entry point into that audience base.

Oh, and what’s missing? Game Pass subscriber numbers! Last we heard, it was 34 million as of February, conveniently after converting people away from Xbox Live Gold.

I always say one can learn as much from what a company doesn’t say as what it does. The distinct lack of transparency is another indicator of potential stagnation and uncertainty around elements of the business model, at least to me.

Here’s an angle I’d like to take before concluding. What might revenue look like if aggregating Microsoft Gaming and Activision Blizzard historically, then using that to calculate growth stats?

Granted, I had to make some assumptions. Mainly around the double-counting and the move from third-party to first-party. I still think it’s illustrative of the true history for the now combined entity, which tells more than seeing huge increases from the pre-acquistion days..

  • My forecast initially put FY 2024 combined revenue upwards of $22 billion.
  • As a reminder, the actual result was slightly below that: $21.5B.
  • The key is that last year’s number, when combined, was $22.2B, implying a 3% decline.

I can attribute this to a few things. Either the revenue was lower, there were more synergies that impacted the post deal ActiBlizz portion, or my estimates weren’t as accurate as they could have been. Perhaps all of the above. Essentially, this isn’t bible. It’s illustrative and shows a more realistic barometer of the company’s recent trajectory.

Switching gears towards the future, here’s a look at Microsoft’s guidance for FY 2025 Q1.

  • Gaming sales growth expected in the mid-30s.
  • That includes 40 points of ActiBlizz Impact.
  • Yes, so “everything else” will be down around 5%.
  • The company anticipates Xbox C&S to rise in the low to mid-50s.
  • Hardware will be “down.” (My estimate is in the mid-40s yet again.)

Here are these in dollar amounts, for the 3 months ending September.

  • Q1 gaming revenue of $5.29B. Another record.
  • For comparison, last year was $3.92B.
  • Xbox C&S output would be $4.86B.
  • Which means Hardware down to around $410M to $430M.

“The real goal here is to be able to take a broad set of content to more users in more places, and really build what looks more like to us, the software annuity and subscription business,” Hood said in response to a question. “With enhanced transactions and the ownership of IP, which is quite valuable long term.”

This is all well and good on an analyst call. As they say, proof is in the pudding.

Why close a valuable studio like Tango Gameworks, among other layoffs, if a quality pipeline is the key? What about the immediate portfolio, and where is the upside? It’s a light quarter upcoming for first-party, even with ActiBlizz. (I will note October to December will be more active in this regard.)

It’s more about older titles being added to Game Pass, including Call of Duty: MW3 this month, that could move the needle. Note the service’s structure changes took effect in July, and a price increase for existing users hits in September. Without that, I’m not sure these numbers could be achieved.

There is the busy release schedule for third party ramping up starting in August, such as perennial sports titles from Electronic Arts, which already has a certified hit with EA Sports College Football 25, plus there’s Ubisoft’s Star Wars Outlaws which I expect will be Massive.

That said, I think Microsoft meets the mid range of its outlook, with a little bit of upside for consoles as bigger third party blockbusters hit market.

It’s officially now a wrap on my first earnings recap of the season. Bookmark that calendar and stay tuned for more coverage soon! Be well, and stay safe everyone.

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

Sources: Company Investor Relations Websites, Xbox Support.

-Dom

Earnings Calendar Jul & Aug 2024: Gaming, Media & Tech Companies

It has arrived.

No, not the 2024 Olympics. Although it’s arguably just as important. Earnings season is here!

Much like the Summer games, there’s a rich tradition around this time. It’s when I draft up and post a calendar with all the dates on which companies across gaming, media and technology provide an update on their businesses, and often look ahead to future prospects.

The list is a robust one, steadily approaching 120 companies strong. For added benefit, I’ve added the date and fiscal quarter associated with the latest report, along with investor websites for easy access. Note that all dates are listed in local time zones.

Quick note around the initial public offering of Shift Up, the South Korean developer of 2024’s hottest, and most controversial for certain crowds, titles Stellar Blade. I’ll have the company included next quarter since I didn’t see concrete info right now.

Check below for a full Google Sheets link, then descriptions of three key companies to watch in the upcoming weeks. Enjoy, and be well!

Working Casual Earnings Calendar Jul & Aug 2024: Gaming, Media & Tech Companies

Electronic Arts (EA): Tuesday, July 30th

The mention of the American publisher is mainly an excuse to talk about EA Sports College Football 25, which technically launched in July after its Q1 of 2025 time frame ended. This return to the glory days of college football video games, the first franchise game in over a decade, is showing great early success, selling-thru 2.2 million copies of its deluxe edition alone! I’d love if Electronic Arts shared more details around its kick-off, including overall unit sales or player stats, plus if there’s any upside impact to its current guidance. I’m estimating 7 million units, if not more, by the time the fiscal year ends in March 2025. Talk about a score.

Nintendo Co., Ltd (NTDOY): Friday, August 2nd

It’s a rare Friday announcement for Nintendo when it shares first quarter performance early in August. Sure, I’ll be interested to learn more about early momentum for new old games like May’s Paper Mario: The Thousand Year Door and Luigi’s Mansion 2 HD, a late June launch, or any updates around annual hardware guidance (which I don’t expect just yet). The Japanese company’s inclusion on this list is mostly obligatory in light of this year being the Switch’s swan song, and the impending reveal of its successor being firmly on the horizon. Last quarter, President Shuntaro Furukawa shared the sweetest of morsels that the Super Switch would be revealed by March 2025. Might he bless us with another taste this time as well?

Nexon (3659): Thursday, August 8th

The Seoul-based publisher, which reports second quarter 2024 numbers in a couple weeks, isn’t as widely known as certain peers, focusing more on regional PC and mobile titles. It’s one of many making big investments related to international expansion, an effort that has seemingly produced a breakout global hit with The First Descendant. The action shlooter attracted an impressive 10 million players during its first week earlier this month, and I assume a larger proportion of them are outside the Asia Pacific region compared to its other products. The question is how this translates to the bottom line, considering the title is free-to-play. Now, it also features hundred dollar cosmetics, and the model can be highly lucrative if the player base is engaged, which appears to be the case here.

Sources: Company Investor Relations Websites.

-Dom

Helldivers 2 Launch Pushes PlayStation to Annual Sales High & Profit Growth in Fiscal Year 2023 Report

As earnings season marches on, I’ll wrap up this week with my final recap of the big three gaming manufacturers.

Sony, the largest of the group by sales, has reported its fiscal year 2023 results. In this piece, I’ll cover mostly the annual financials to give a broad perspective of where the PlayStation division has been recently and will be soon.

If any of the data is quarterly, I’ll point that out.

That said, here’s the big headlines from PlayStation’s portion:

  • Achieved record annual revenue above $29B.
  • Reported double-digit operating profit growth.
  • Biggest year of unit sales for a PlayStation device despite missing target.
  • Breakout success of Helldivers 2 across both console and PC.

Underlying the record top-line and profit performance was a boost in third party sales, including downloadable content, headlined by the likes of surprise hit Helldivers 2 from Arrowhead Game Studios and Insomniac Games with Spider-Man 2, the former highlighting the benefit of adopting PC and the sizeable upside of live service risk.

Additionally, yen depreciation had a tangible impact on annual growth, as I’ll illustrate shortly. This currency effect is amplified for Japanese companies operating globally.

Throughout this time frame, PlayStation 5 hardware closed the lifetime sales gap with its predecessor and passed another milestone on the global best-seller list. On the software side, unit sales increased while shifting towards a digital split.

“During the PlayStation 4 generation, we were able to significantly grow profits in this segment thanks to rapid digitalization and the expansion of network services,” management wrote.

“In the PlayStation 5 generation, which has capitalized on the established PlayStation 4 user base, the trend is hard to see due to the impact of stay-at-home demand and acquisition-related expenses, but, since the launch of the PlayStation 5, we have continued to achieve a high level of, and more stable, profit growth.”

Read on for more detail around Sony’s latest numbers and predictions for the next year!

The above slides show Sony’s Game & Network Services (G&NS) division results for the year overall.

  • Annual revenue increased 17% to $29.55B.
  • This included $1.9B of currency impact.
  • Operating profit rose 16% to $2.01B.
  • This includes $267M of currency impact.

I’d point your attention to the above gallery, namely the operating income chart I compiled which illustrates the Helldivers 2 effect, and more broadly shows what happens when Sony’s live service effort pays off. Quite literally.

Until the final quarter of its fiscal year, operating profit was trending down 25%. After January to March, the year ended up as a double-digit increase!

Moving on to products categories within G&NS, here are select annual revenue and growth stats:

  • Hardware was $8.39B, up 8%.
  • Add-On Content hit $7.5B, up 26%.
  • Digital Software at $5.89B, up 29%.
  • Network Services reached $3.78B, up 17%.

On the strength of newer launches and evergreen titles, Add-On Content surpassed Hardware in Q4 alone, though the latter became the leading segment for the full year as PlayStation 5 reached the middle of its life cycle (yes, already!).

Within the console side of the business, it was a banner year for shipments even if Sony’s forecast was too ambitious (as I wrote since they first posted it). Hardware results were:

  • PlayStation 5 shipped 4.5M units in the March quarter, down from 6.3M.
  • This led to a fiscal year shipment total of 20.9M, compared to 2022’s 19.1M.
  • Slightly below Sony’s 21M target, and well below its original guidance of 25M.
  • Still, it’s above PlayStation 4’s 20M in the same year, which was its best.

Check out the image below for a full comparison of the last two Sony console generations, showing that PlayStation 5’s current 59.3M lifetime was less than a million off PlayStation 4 at 60.2M, much closer than other points in their launch-aligned history.

As for the broader industry, PlayStation 5 officially surpassed the lifetime unit total of Microsoft’s Xbox One, which launched in 2013 and ended at 58M. The next milestone will be Nintendo Entertainment System at 61.91M, which I’d imagine it might have already reached as I write this.

Here’s further insight into how software did for the G&NS segment during fiscal 2023.

  • Unit sales reached 286.4M, up from 264.2M prior year.
  • Sony-made titles made up 39.7M of that, down from 43.5M.
  • Digital downloads comprised 70%, up from 67%.

The clear winners were a pair of sequels in October’s Spider-Man 2 and February’s Helldivers 2, the latter being PlayStation’s fastest-selling game ever amassing 2M units in 12 weeks. For context, 2022’s God of War Ragnarök sold 10M in 10 weeks.

Can’t forget about the likes of Blizzard’s Diablo IV and Capcom’s Street Fighter 6, plus the continued benefit of annualized sports and shooter titles, even on an off year with the lackluster Call of Duty: Modern Warfare 3.

Then, to a lesser extent, there was contribution from Square Enix’s Final Fantasy titles. In recent investor materials, Square Enix pointed out Final Fantasy 16 and Final Fantasy 7 Rebirth, both PlayStation exclusives, missed expectations (what else is new). With Square’s move to multi-platform, the days of third-party exclusives are clearly dwindling.

We also heard a bit from Sony on engagement, driven a lot by evergreen titles that dictate the market leader’s success here. As I mention in recent Circana U.S. sales recaps, tons of people play console primarily for experiences including Fortnite, Roblox, Minecraft and Grand Theft Auto V.

Sony reported that Monthly Active Users (MAUs) across PlayStation Network ended the year at 118M. While that’s no longer an all time high, which was achieved the prior quarter with 123M, it was still up 10M year-on-year.

The final stretch of fiscal 2023 was a fantastic one for Sony, pushing it to all-time revenue and generating higher income when it seemed like the year might be a down one for profitability.

A surprise multi-platform hit and PC’s contribution bumped up that profit growth, along with an all-time year for hardware shipments plus ongoing engagement in various legacy games.

Sony has recently backed off its live service push, to focus more on fewer titles in the space. A game like Helldivers 2 proves that all it takes is a single game capturing the zeitgeist to drive financial growth and keep an audience coming back for more.

It doesn’t hurt to have a simultaneous PC launch, a platform with a notoriously passionate user base. (Better or worse.)

I’ll quickly look ahead to Sony’s expectations for the coming year. Here’s the PlayStation forecast:

  • Revenue will be down 2% to $29.1B.
  • Operating profit to increase 7% to $2.15B.
  • PlayStation 5 shipments of 19M, down almost 2 million.

“As we enter the second half of the console cycle, we expect the number of new PlayStation 5 units sold to gradually decline,” management wrote in its remarks.

“However, by steadily maintaining and expanding the consistently increasing number of active users and user engagement, while also strengthening control over business costs, we believe that we will be able to steadily increase sales and profits from the PS platform going forward.”

Overall, I’m guessing G&NS will achieve these goals, and perhaps even increase the console shipment guidance to 20M. I’m expecting a lot of consumers upgrading and new buyers for Grand Theft Auto VI, expected to launch in calendar 2025.

Executives also reiterated that its new sci-fi multiplayer IP Concord will be out in this same time frame, as it aggressively moves to improve margins and incorporate the PC market. Could there be others launching by the fiscal year end?

Speaking of executives, Sony announced the replacement for exiting PlayStation boss Jim Ryan. Or should I say replacements, and both are internal hires. Hermen Hulst (my prediction back when the Ryan news broke) and Hideaki Nishino be co-leaders, heading up new respective groups within Sony Interactive Entertainment.

With that done, this concludes my latest recap. I recommend checking out socials for more coverage of earnings season and everything across the games industry landscape. Thanks for reading, be well!

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

Exchange rate is based on reported average conversion: US $1 to ¥144.4.

Sources: Circana, Company Investor Relations Websites, Sony Interactive Entertainment.

-Dom

Microsoft’s Quarterly Xbox Sales Increase Only Due to Activision Blizzard in Fiscal 2024 Q3 Report

The start of a new earnings season, complete with my usual calendar, means it’s time to start up recaps as well.

I’m going to try something new and tighten up these recap articles!

More concise, same great quality. I hope.

Today, that means covering Microsoft’s recent 2024 Q3 results. I’ll focus mostly on Xbox during this January to March time frame, where there was major sales growth solely due to the impact from Activision Blizzard, as other areas within gaming declined including things like content, subscription and hardware offerings.

Still, Xbox segment sales outpaced guidance, mainly due to out-performance of Call of Duty.

Microsoft’s gaming division also hit a major milestone this quarter. Feeling the boost from the acquisition being included for two quarters now, annualized Xbox sales reached $20 billion for the first time ever.

I mean, this is why Microsoft spent all that dough. Plus, executives expect this to continue in the immediate future, according to guidance I’ll highlight later in this article, as that annual sales number is likely to move above $21 billion to close the fiscal year.

Now I’ll move right into a rundown of the numbers and a look ahead into the future of a somewhat shaky time for Xbox’s output.

Here’s a quick summary of Microsoft’s quarterly gaming sales, as shown in the slides above.

  • Q3 revenue rose 51% to upwards of $5.45 billion.
  • This was above management’s, and my, expectations.
  • It’s an all-time Q3 record, and Xbox’s second best quarter ever.
  • Out of that percentage gain, 55% was due to ActiBlizz impact.
  • Implies all other areas like Xbox, Bethesda etc saw a decline of 4%.

These quarterly sales move gaming back to fourth place in terms of Microsoft’s major product categories, trailing Windows at $5.93 billion.

Expanding now to current annualized Xbox revenue to get a broader sense of the business:

  • Overall annual gaming revenue is $19.97 billion.
  • Compare that to $18.13 billion as of last quarter.
  • The chart in the above gallery shows these in context.

I’ve long written about how this was the strategy around Microsoft’s merger and acquisition activity, to push past the $20 billion per year mark and approach its largest peers, like Sony and even Tencent, especially by leveraging ongoing services and breaking more into mobile.

Which is why I don’t think Microsoft is done buying, even after spending so much on the world’s largest formerly third party publisher.

Similar to my earlier coverage of Xbox, I’ll mention that Microsoft gives limited visibility into the profitability, or lack thereof, of its gaming business. Two points on that:

  • The More Personal Computing (MPC) segment saw operating profit rise 16% to $4.92 billion.
  • The ActiBlizz deal boosted expenses, as its net impact in Q3 was an operating loss of $350 million.

This implies that Xbox, despite seeing a big top-line boost, was likely less profitable this quarter.

Here’s where I’ll highlight the underlying dynamics, by way of discussing product categories.

First up is the larger of the two, Xbox Content & Services (Xbox C&S):

  • Q3 Xbox C&S revenue increased 62% to $5.03 billion.
  • Same as games revenue, this is also a Q3 record and second best ever.
  • ActiBlizz growth contribution was 61%, thus a 1% gain for everything else.

Then, on an annual basis:

  • Current annual Xbox C&S revenue is $16.86 billion, or 84% of the total.
  • That’s up from $14.86 billion last quarter, when it was 82% of the total.

On the flip side, Xbox Hardware had another tough time, without much to drive its fundamentals right now, as lower unit sales weren’t enough to offset gains from higher pricing:

  • Q3 Xbox Hardware revenue declined 31% to $350 million.
  • The lowest 3rd quarter dollar sales of the Xbox Series X|S generation.

Looking at the last 12 months:

  • At present, Xbox Hardware annual sales are $3.11 billion.
  • That’s down from $3.27 billion sequentially, and $3.37 billion last year.

Since Microsoft doesn’t tell us anything about lifetime Xbox Series X|S unit sales, I’ll keep up with my guesstimates.

  • I had the family at 29 million to 29.5 million last quarter.
  • It’s now likely hovering right around the 30 million milestone.
  • I forecast it moved 700K to 800K in the three months ending March.
  • Which lands it around 29.7 million to 30.3 million to date.

When it comes to supplemental stats like engagement, player counts etc, Xbox management didn’t have much to say.

Chief Executive Officer (CEO) Satya Nadella did note the following on the firm’s conference call:

  • Q3 records for “game streaming hours, console usage and monthly active devices.”
  • The first ActiBlizz title on Game Pass Diablo IV was one of the service’s biggest launches.
  • Players clocked over 10 million hours during its first 10 days.
  • This month, Xbox had 7 games among the Top 25 on the PlayStation store.

Which is a distinct lack of specifics, especially as it relates to Game Pass subscribers or total monthly active users, which unfortunately is a common theme here from management.

Before closing out, I’ll mention Microsoft’s overall results.

  • Company revenue jumped 17% to $61.9 billion.
  • Operating profit moved up 23% to $27.6 billion.
  • Microsoft Cloud sales increased 23% to $35.1 billion.

Slipping into the future, management provided guidance for the final quarter of fiscal year 2024.

Here are the expectations shared by Chief Financial Officer (CFO) Amy Hood for Q4 gaming performance.

  • Total gaming revenue growth in the low to mid-40s.
  • 50 points of that via ActiBlizz impact.
  • Xbox C&S expected to grow in the high 50s.
  • 60 points there from ActiBlizz, thus implying everything else will be down 10%.
  • Xbox Hardware will “decline again.” Based on my math, it will be down 24%.

Using these to make certain assumptions, that translates to the following in dollar terms:

  • Total gaming revenue around $5 billion.
  • Xbox C&S revenue upwards of $4.55 billion.
  • Xbox Hardware hitting $450 million.

These feel right to me, with upside for content based on Senua’s Saga: Hellblade II launching in May, certain games like Sea of Thieves accessing additional audiences and a good effect from Amazon’s Fallout show (which is awesome).

Really, it’s going to go as ActiBlizz games go, notably as they are added to Game Pass.

If Xbox hits these targets, it would shatter a record for fiscal year sales, approaching $21.5 billion. For comparison, this number was at $15.5 billion at the end of fiscal 2023!

I hope you enjoyed the new format experiment, where I’m balancing analysis with word count to make it easier to follow and fun to read.

I’ll be back soon with more articles, and feel free to reach out on social media in the interim. Thanks for reading. Until next time, be well!

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

Sources: Company Investor Relations Websites, Xbox Wire.

-Dom

Earnings Calendar Apr & May 2024: Gaming, Media & Tech Companies

I’m back, with a brand new season. Nope, I’m not referring to Spring, as it’s now here in the States. Though I’ll take the nicer weather, at least looking out my window while playing games.

It’s earnings season!

Which means I’m sharing what I like to call one of the most comprehensive lists of gaming, media and technology earnings dates on the internet. Now approaching 120 companies strong, it will give a sense of when companies are reporting, and where they are in their fiscal cycles. And when an exact date isn’t known yet, I try to estimate based on previous announcements.

As you’ll notice in the above image and the below Google Sheets link, the week of Monday, May 6th is going to have a lot action, including almost a dozen companies reporting on May 9th. Get ready, everyone.

In order to prepare for the next busy season, feel free to bookmark, save, share and post of course.

I also recommend keeping an eye out for my recaps both here and on social media. Plus, here’s three companies to watch over the next few weeks. Enjoy!

Working Casual Earnings Calendar Apr & May 2024: Gaming, Media & Tech Companies

Reddit, Inc: Tuesday, May 7th

After one of the biggest IPOs of the year, Reddit is poised to publish its first quarterly report as a public company when it shares fiscal year 2024 Q1 results. The “front page of the internet” saw its stock price jump in March, yet has cooled to settle below its listing price in April. Within its prospectus, the company boasted 73 million average daily active unique users and generated over $800 million in annual sales, however it’s also currently operating at a loss. I’m mostly curious to see if its business model will expand as the firm matures, and if executives expect to become profitable any time soon.

Capcom Co. Ltd: Monday, May 13th

I’ve been upbeat on Capcom for what seems like a decade now, and the Japanese publisher will report its latest annual results in a few weeks. Just today, the firm revised both sales and profit forecasts upwards, a rarity right before reporting. This signals management is even more optimistic as it’s on track for yet another year of growth, assuredly on the strength of March’s Dragon’s Dogma 2 shipping 2.5 million units right out of the gate. Between that and continued momentum for its Resident Evil and Street Fighter franchise sales, I’m guessing Capcom will beat even its updated guidance, then move into a year where we could see another flagship launch in Monster Hunter Wilds soon enough.

Ubisoft Entertainment SA: Wednesday, May 15th

It feels like Ubisoft, which also reports annual results in May, has been quiet lately even though it’s had a few releases and continues as the caretaker of a big intellectual property portfolio. It produced a couple commercial snoozers like Avatar: Frontiers of Pandora in December then February’s Skull & Bones. And while Prince of Persia: The Lost Crown is amazing, it’s not a blockbuster. So I’m cautious on its latest results. However, I’m quite upbeat on its near-term future as its slate for the upcoming year starts to take shape with Star Wars Outlaws, a game I believe will sell well, officially announced for August while the impending Assassin’s Creed Codename Red could also be out in the next six months or so, a nice one-two punch as far as triple-A tent-poles go.

Sources: Company Investor Relations Websites.

-Dom

PlayStation Sees Record Sales Alongside Profit Declines & Lower Forecasts in Sony’s FY 2023 Q3 Report

It’s already my third major recap of this latest earnings season! Time flies when we’re having fun. And earnings season is the most fun.

Now it’s Sony’s turn. The Japanese consumer tech maker reported fiscal 2023 third quarter results recently and PlayStation set yet another revenue record.

Of course, that’s not the whole story. It’s time to go beyond the “all-time high” headlines to talk about why it’s a really intriguing report and time for Sony’s gaming division, including how profitability is taking a hit even as sales soar, its supplemental material shared some updated stats and executives have again adjusted future expectations.

It’s true Sony’s Gaming & Network Services (G&NS) recorded a best-ever quarterly revenue in the period ending December 2023. Around $10 billion! As it has done a lot recently, driven not just by organic growth due to add-on content and digital downloads, but also continued impact of a weakening yen that works in favor of companies that mainly operate globally.

On the flip side, quarterly operating profit moved down over 25% during the holiday period and is trending towards the worst annual profit of the PlayStation 5 era. There’s both macro and micro reasons for this, including interest rates and high costs alongside weaker internal output and worse hardware losses.

During October to December, Sony shipped 8.7 million PlayStation 5 consoles. While that’s the best single quarter for the console, well above last holiday’s 7.1 million, it’s a million fewer than PlayStation 4 did at the same time and missed estimates enough for them to substantially reduce annual guidance. It’s hard to believe PlayStation 5 is entering the middle phase of its life cycle now trailing its predecessor by a wider margin than even last quarter.

The major story on the software side continues to be Marvel’s Spider-Man 2, which swung above 10 million units sold-through to buyers this month after reaching the 5 million milestone back in October. It carried first-party, and also helped drive Monthly Active Users (MAUs) growth even as PlayStation Plus memberships fell.

These led to management again revising its forecast, this time downward for both revenue and hardware. They even provided a look ahead to next fiscal year, clearly signalling PlayStation 5 annual sales are peaking and will shrink in the back half of its life. As far as games and its tent-pole studios, there are no plans for “major franchise” first-party launches until at least April 2025.

Addressing concerns of profit margins during the company’s conference call, Sony’s President Hiroki Totoki cited at least two reasons: difficulty in cutting prices for hardware and needing to create better opportunities for first-party software on more platforms, including PC.

“How can we, given the situation, put our product lines together to make it affordable, without relying on steep discounts, to reasonably sell them to continue our commercial journey on a sustainable basis?” Totoki said. “I personally think that’s important, and there is an opportunity in that.”

Now into the full rundown of numbers and my current predictions. Buckle up!

Sony’s total revenue moved up 22% in the quarter, to a record amount of $26.19 billion. Operating profit reached $3.24 billion, up 10% and the second highest in its history. Growth here came mainly from Entertainment, Technology & Services (ET&S), Financial Services and G&NS.

Zooming into the gaming division, sales rose 16% to a record $10.1 billion driven by third-party software, downloadable content and exchange rate movement. To illustrate the last point, the impact from yen fluctuation alone was $531 million. This implies “true” dollar sales growth around 10%.

Operating income declined 26% to $602 million because of worsening hardware losses and lower internally-published game sales. Across this most recent three-month period, the PlayStation business represented nearly 40% of Sony’s sales yet under 20% of its profit.

Most product categories within G&NS saw higher quarterly sales, including Hardware up 8% to $3.3 billion or 33% of the total. Add-On Content rose 33% to $2.44 billion, accounting for a 24% slice. Digital Software jumped up 16% to almost $2 billion, at 20% of the total. Physical Software and Other Software both declined, 7% and 30% respectively.

Expanding to the latest annualized numbers gives us a broader sense of where the business is at right now. For revenue, it’s the best it’s ever been at $29.65 billion. Compare that to last year’s $22.62 billion. On the other hand, PlayStation currently has the lowest trailing 12-month profit since Fiscal 2017. It’s at $1.56 billion, compared to well over $2 billion a year back. The size of this deterioration is truly evident when you view the the second chart in the above gallery.

Seeing as the “Big Three” have now all reported this season, it’s a good time to revisit our industry comparison. Using annual numbers, Sony’s massive $29.65 billion is tops across all players, above even Tencent’s $26 billion with the caveat that the Chinese internet conglomerate doesn’t report until next month. Microsoft’s $18.13 billion now includes Activision Blizzard, and Nintendo currently stacks up to roughly $13 billion.

Again I’ll mention that while Sony’s sales are soaring, PlayStation is not nearly as profitable as the likes of Nintendo which has more than twice as much operating profit (over $4 billion) on less than half the sales. And it’s not like this is a recent phenomenon. Even during Switch’s fourth fiscal year, a similar time period, Nintendo’s margins were better.

Want more stats? Well, either way, you’ll get them.

Taking the latest PlayStation 5 hardware shipments into account, its lifetime figure is now at 54.8 million. As you’ll see in the above launch-aligned chart, its predecessor was at 57.3 million at this time in the cycle. Not only that, the gap between the two is widening at the exact time when PlayStation 5 is hitting a plateau.

As for comparisons outside of Sony, the PlayStation 5 is steadily approaching the 58 million lifetime sales territory of Microsoft’s Xbox One and will likely surpass it by this fiscal year’s end in March. Next up will be Nintendo Entertainment System (NES) at almost 62 million, still a fair ways off.

Out of those 54.8 million shipped to market, Sony announced back in December that PlayStation 5 reached 50 million sold-through to consumers.

Unit sales for PlayStation software moved up slightly from 86.5 million this time last year to 89.7 million, an increase of 4%. The skew was much more towards those published externally, given that only 16.2 million or 18% were first-party games this time versus 24%, at 20.8 million, during last year’s fiscal Q3.

Most of first-party’s movement was due to Insomniac’s Marvel’s Spider-Man series, which has now surpassed a healthy 50 million units sold-through in aggregate, inclusive of sales from PC since the first entry back in 2018.

Engagement across PlayStation Network hit an impressive 123 million MAUs in the quarter ending December, an all-time high up from last year’s 112 million. The influx of active users, driven not just by Sony’s titles but also external free-to-play offerings like Fortnite, led to 13% more hours played across the ecosystem.

While the company hasn’t shared PlayStation Plus membership figures since the end of last fiscal year, management’s prepared remarks did point out that subscriptions declined since last year though service revenue did increase.

“Regarding network services, despite the impact of a slight year-on-year decrease in the number of PlayStation Plus subscribers, revenue increased 11% year-on-year,” the remarks said. “Mainly due to the impacts of a further shift to premium services and price revisions.”

Essentially, dollar sales from PlayStation Plus are going up for now because of users going to the premium tiers and the price increases the company has instituted. From my perspective, I would add that’s not necessarily sustainable and I see this as more of a temporary dynamic. It’s known that gaming subscription services are stagnating, and this is one such example.

Another area lacking in the report was any shipment figures for Sony’s latest product launch in PlayStation Portal, which hit market during November 2023. Anecdotally, it seems like supply was highly controlled. While we don’t know specifics, we can infer from category results. The segment called Others, which covers peripherals and PlayStation VR2, jumped up 60% to $698 million in Q3. While still a small slice at 7% of sales, that’s a sizeable bump I’d wager was caused directly by Portal.

When taking the full Q3 report into consideration, it shows PlayStation’s position as one of strength on the sales side, partially due to the yen, and an ongoing struggle for profit growth amidst ballooning development and hardware costs. Yes, there’s general inflation and interest rate impact. It’s also the case that rapid-paced triple-A game development and maintaining hardware pricing as a console ages is not sustainable.

The good news is that software demand and player engagement look healthy. It’s just harder to translate these things into higher margins, especially since attracting players to something like PlayStation Plus requires spending money on partnerships or launching first-party games simultaneously into the service, which Sony is not currently doing. At least management is expanding to platforms beyond console, thus spreading risk and boosting audience reach.

Before closing the books on another quarter, I’ll now looking ahead to the finale of Sony’s fiscal year ending March 2024 and beyond.

In a classic flip flop, after revising annual PlayStation revenue guidance up by 5% last quarter, it now backed that off and reduced it by that same amount. This still translates to an increase of 14% up to $29 billion, which would certainly be a record high and lead the industry. I believe this will happen.

Even with the double-digit decline for operating profit this quarter, management reiterated the annual profit guidance of $1.89 billion or up 7%. In order to get there, management said they are reviewing measures to improve profit. One of those could very well be more layoffs. This time, I’m skeptical and I don’t think it’s going to meet this target.

The holiday period was going to be a huge indicator all along for PlayStation 5 unit figures. Now that it missed, management revised annual guidance down from what I called an unrealistic goal of 25 million to now 21 million. This would still be a million above the PlayStation 4’s best year, and I don’t buy it. It’s at 16.4 million so far, leaving 4.6 million to ship between January and March to get there.

Back when Sony was signalling higher, my forecast was also higher. Now I’m at 19.5 million to 20 million, tops, if it can even replicate its predecessor’s success. the only way to get there is if Sony announces aggressive discounting as soon as possible, which again puts a strain on margins.

Finally, executives acknowledged that this will likely be the best year of PlayStation 5 sales, and it’s all downhill from here!

I know what you’re saying: What? Already?! Well, PlayStation 4 peaked in its fourth fiscal year, and PlayStation 5 will be entering its fifth financial year starting this April.

Software is where uncertainty continues, notably for internal studios. There’s no doubt Marvel’s Spider-Man 2 accomplished an incredible feat. That’s the outlier. Plus, the likes of Marvel’s Wolverine, a Ghost of Tsushima sequel and anything from Naughty Dog are at least a year away, if not multiple years.

While The Last of Us Part II Remastered launched on PC and Helldivers 2 is off to a fantastic start, partly because of Steam, Sony didn’t capitalize on the Palworld craze and has a sparse console calendar incoming. I do expect a live service title or two by March 2025, like Concord and Fairgame$, alongside select PC launches to hold software sales over until seeing heavy hitters again.

Development and marketing are as expensive as ever, and projects require increasingly longer timelines to complete. A steady cadence of blockbuster releases is tough if near impossible. That’s a huge part of why we see the current dynamics underlying Sony’s gaming business, and the team will have to navigate these treacherous waters.

As always, I very much appreciate you stopping by for my ongoing earnings coverage. Check in on social media for more and visit soon for future articles. Be well!

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥143.1

Sources: Company Investor Relations Websites, Sony Interactive Entertainment.

-Dom

Nintendo Nears 140 Million Switch Units Sold & Raises Annual Outlook Again in Steady Fiscal 2024 Q3 Report

Next up for this quarters’ recap series, as you clearly know from bookmarking my earnings calendar, is Nintendo. The gaming company that continues to delight audiences and defy expectations.

The Japanese console manufacturer and mega publisher reported figures for the nine months ending December 2023, the third quarter of its fiscal year ending March 2024. Which means I have plenty to break down including quarterly, nine month and trailing annual numbers. A little bit of everything!

Nintendo’s quarterly financial results were down slightly in Q3, however its 9-month figure remains trending upwards during this likely final full year of the Switch’s life cycle.

Super Mario Bros. Wonder was the big winner of the quarter, moving nearly 12 million units as the fastest-selling Super Mario title in series history. Over the April to December span, The Super Mario Bros. Movie and The Legend of Zelda: Tears of the Kingdom were doing heavy lifting along with additional content for its suite of legacy titles like Mario Kart 8 Deluxe and Splatoon 3.

Nintendo shipped upwards of 6.9 million Switch units during the December quarter, and without official discounting at market. While down a bit since last year, that’s a healthy result for a console that saw its first holiday season back in 2017. This pushed lifetime shipments to nearly 140 million, steadily approaching the realm of all time behemoths like Nintendo DS and PlayStation 2.

“When we look at the sales situation so far this fiscal year against this backdrop, we believe that hardware sales have held stable since the first half and that the holiday season results were steady,” Nintendo President Shuntaro Furukawa said in a Q&A.

“We want to maintain momentum in the business through a good balance of both first-time buyers and demand for multiple units. During the holiday season, we noted a particular rise in first-time buyers of our hardware, and we see this as a positive sign for the Nintendo Switch business going forward.”

All of this led management to raise full year guidance yet again, similar to last quarter, for a number of things: sales, profit, hardware and software, in addition to a dividend hike that will return more profits to shareholders. I’ll cover these in more detail in a later section.

Now to the question on everyone’s mind: Where’s that Switch Pro? (Oh no, not again.)

Really, check below as I’ll fully cover the company’s report then drop a set of predictions, including my latest forecast on when the Switch’s successor will be out. Let’s jump into it!

I’ll now dig into the above slides and below charts, which cover all of the numbers Nintendo released during its third quarter 2024 announcement.

Overall, the firm generated $4.18 billion in profit during the three months ending December 2023. That equates to a 6% decline. Operating profit dipped 3% to $1.29 billion.

Across the latest three quarters, net sales grew 8% to $9.74 billion while operating profit rose an impressive 13% to $3.24 billion.

These can be attributed to the yen’s continued weakness overseas, a higher proportion of Switch OLED model shipments compared to the broader family of devices plus add-on content for its more evergreen titles. Not to mention having one of 2023’s biggest movies based on a world-renowned brand, I might add.

Expanding to latest annualized figure, which ends up being the 2023 calendar year number, revenue moved up 7% to $12.53 billion. That’s the best calendar year revenue number for Nintendo since 2008! Operating income bumped up even more, settling at $4.09 billion or an increase of 10%.

These growth numbers are all fantastic for a company that will likely move into its next generation of consoles within the next six to twelve months, and highlights the smart move by executives to diversify into different areas like digital support, intellectual property (IP) adaptation, online services and post-launch content drops.

Moving onto product categories, Nintendo’s hardware and software each contributed exactly 50% during the third quarter. This split last year was 51% and 49%, in favor of hardware. Across the 9-month period, the software slice was larger at 55% of the total. At the same time last year, it was 54%. Not too much movement in either direction over the last couple years.

With respect to regional splits, the latest nine months continued a slight shift away from Japan and towards The United States and its neighbors. The Americas made up 44% of sales, up from 43%. Europe remained flat around 25%, while Japan declined from 24% to 21%.

The digital portion of Nintendo’s sales during Q1 to Q3 moved up a couple percentage points to 48%, fitting the industry trend towards downloads as opposed to retail buying. Digital came in around a quarter of the company’s revenue stream, growing 12% in the last nine months to $2.42 billion.

Here’s where Nintendo stacks up against the industry’s biggest players. First, yen weakness does have a positive impact on revenue in local currency for companies that mainly operate globally, like a Nintendo or Sony. However when converting from yen to U.S. dollar, it doesn’t appear as attractive because of the low rate. Sony, which reports gain next week, had PlayStation at $28 billion annually while Tencent stacked up to $26 billion. Microsoft’s integration of Activision Blizzard brought it to $18.13 billion this quarter, while Nintendo comes in under $13 billion. However, Nintendo’s operating margins are best in industry, even while developing a new hardware.

Focusing strictly on Switch hardware shipments, these totaled 6.9 million during October to December. Compare that to 8.23 million the prior year.

Which is excellent for a console that’s saturated its market as much as Switch has. For context, I estimated that Microsoft shipped 4 million max Xbox Series X|S this holiday. Sony moved 7.1 million PlayStation 5’s in the quarter ending December 2023.

That brought hardware units to 13.74 million during the first nine months of this fiscal year, down 8% from 14.91 million. Management noted this was mostly in-line with expectations for the time frame.

As has been the case for a couple years, the predominant model during this period was the Switch OLED. That version shipped 8.17 million between April and December, up 6% from 7.69 million. Next up was the base model at 3.4 million, down 25% from the prior year’s 5.22 million. Rounding out the list was Lite, which grew 9% year-on-year from 2 million to 2.18 million.

So, this all brings Switch lifetime sales to 139.36 million. Is there a legit chance it clears the Nintendo DS at 154.02 million to become the company’s best-selling device ever? The answer is: absolutely.

Switch is under 15 million away from Nintendo DS. If the company’s target holds this fiscal year, it would need 13 million more during the financial period beginning in April. I am betting that, by the end of March 2025, not only will Switch be Nintendo’s best-selling ever, it will surpass PlayStation 2 at 155 million to secure the top spot on the all-time top seller list. Even if Super Switch exists!

Back to the latest announcement, Nintendo did share some insight into hardware sell-through to consumers. Namely that it’s been steady for the console’s age, and that the OLED version saw increased demand, echoing the growth seen in shipments. And it wasn’t just first timers, there were plenty of people who double dipped or grabbed replacements, according to prepared remarks.

Now swapping over to Nintendo’s other bread-and-butter which is software sales, this is where the team has shined the entire back half of this generation with both new games and existing support.

For the holiday quarter, software unit shipments for Switch totaled 66.87 million. That’s down only 14%. Expanding to the April to December period, unit sales for software dipped 5% to 163.95 million. Considering the saturation and how many titles it’s already moved, that year-to-date figure showed great resilience.

The proportion of first party titles, those published by Nintendo, rose from 79% to 83% in the nine months ending December. That’s more than four out of every five games purchased in this period, namely due to flagship Zelda and Mario launches plus a mainline Pikmin.

How’s about yet another lifetime milestone for the Switch’s historic run? Just this quarter, lifetime unit sales on the platform surpassed 1.2 billion. The strength of its portfolio is unrivaled even compared to prior Nintendo generations, plus there’s the legacy library via Switch Online, broad attraction of franchises like Animal Crossing and third party offerings like Fortnite.

Speaking of big sellers, Switch now has 24 “million-seller” titles which shipped a million units or more in the latest nine months alone. Within that, 17 were first party and 7 were external publishers. Compare this to last year’s 27 overall, and it’s another example of the platform’s appeal.

The elephant in the room was Super Mario Bros. Wonder, not just shipping 11.96 million but also selling-through 10.7 million of those to consumers. For comparison to recent franchise titles in their respective first quarters: Super Mario Odyssey had 9.07 million in 2017, New Super Mario Bros. U Deluxe reached 2.5 million in 2019 and 2021’s Super Mario 3D World + Bower’s Fury saw 5.59 million. Keep in mind the lower install bases at this times, of course.

Elsewhere, new launch in Super Mario RPG Remake shipped 3.14 million since hitting market in November, another benefactor of the Switch effect. July’s Pikmin 4 also hit the 3 million milestone, moving up 720K units to 3.33 million.

After an incredible run since May, The Legend of Zelda: Tears of the Kingdom reached the 20 million milestone this quarter, settling at 20.28 million. While it’s slowed in recent months, it’s still a ridiculous feat to hit this sort of threshold in less than a year.

One one that seems to never slow down is Mario Kart 8 Deluxe, which zoomed past the frankly absurd 60 million milestone this quarter. After somehow shipping 3.57 million in the holiday quarter, it’s held pace at 60.58 million. That’s well above the second place on the platform in Animal Crossing: New Horizons at 44.79 million. I don’t know how Nintendo can top this latest Mario Kart entry, and I don’t envy the designers that have to make its follow-up.

The last statistic revolved around engagement, as Nintendo announced a record 122 million Annual Playing Users as of December, up from 114 million last year. While this isn’t as indicative of active players as something like monthly or daily active users, it does show that buyers at least login to their devices over the years. Separately, Nintendo didn’t share any updates on Switch Online subscribers, last reported at 38 million in September 2023.

Between a nice holiday quarter, the financial growth in the first nine months of fiscal 2024, the fastest-selling Super Mario ever, major milestones for its biggest franchises, diversifying into film and other media plus revitalizing classics to close the cycle, Nintendo’s latest run continued in this earnings report as Switch approaches its seventh birthday next month.

To say it’s exceeded all expectations, and continues to prove analysts wrong, is an understatement.

Before closing out, let’s look at that updated guidance and make a few predictions. Management revised a number of forecasts upward, including financial targets and unit sales expectations.

The firm now expects 3% more net sales and 2% better operating profit during the fiscal year ending March 2024. That translates to roughly $11.4 billion and $3.56 billion, respectively. This indicates Nintendo expects both of these to grow in the single digits, and I expect them to be achieved. If not exceeded by a decent margin.

On hardware, according to Furukawa commenting after the company’s announcement, the Switch will remain its “main business” through the end of March and into the new fiscal year. In fact, he called out internet rumors and asked people to “exercise good judgment” when hearing them.

Fitting with this sentiment, the company raised Switch unit guidance by 500K to 15.5 million. That implies the January to March quarter to have only 1.76 million shipped in order to reach this goal. Personally, I’ve been predicting the 16 million to 16.5 million range for this year. I see no reason to change that now, and I’m even leaning towards the upper end of this range.

The real question on everyone’s mind is the Super Switch! Mainly when, and how much. Executives are playing coy for now, as expected.

“We are unable to make any comments beyond saying that our company is constantly conducting research and development on new hardware and software,” Furukawa said.

There were some small hints in his latest Q&A series posted today. Furukawa pointed out the hybrid model is the “optimal way” to deliver Nintendo’s unique experiences. That all but confirms the successor will have both handheld and console functionality, consistent with recent speculation that’s pointed to a larger screen in portable mode.

I’ve written before that my forecast puts Super Switch in the fourth quarter this calendar year. I’ll also stick to this, expecting an initial announcement after Nintendo’s current financial year ends, so as to not jeopardize hitting that hardware target. This puts a reveal in April or May, then more details and presentations leading into launch around October.

Management also bumped up its software expectations by 3% for the full year, now guiding that Switch will have 190 million units shipped in that period alone. This feels on the money, with slight upside to beat it.

The current slate features one brand new title Prince Peach: Showtime!, a more niche title launching in March that I think will do alright yet not gangbusters. There’s also the remake of Mario vs Donkey Kong out next week. Between these and continued interest in Super Mario Bros. Wonder among others, I’m not worried about Nintendo reaching its more optimistic guidance.

Beyond that, it’s anyone’s guess because Nintendo hasn’t shared much for its offerings beyond a pair of revitalized old games in Luigi’s Mansion 2 HD, on the calendar for Summer 2024, and the pending Paper Mario: The Thousand-Year Door remake sometime this year. Metroid Prime 4 remains a mystery, the only title in its financial report listed as to be announced.

One title that probably won’t hit Switch anytime soon is Palworld, what with The Pokémon Company’s investigation into 2024’s biggest sales surprise so far for potential IP breach and asset usage. While I’m not sure that a legal battle will ensue, I’m sure it will remain on other platforms for the foreseeable future.

That does it for my latest earnings recap. I’ll be back soon with more coverage of the season and other topics as 2024 keeps it moving. Be well, all!

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥143.22.

Sources: Company Investor Relations Websites, Video Games Chronicle.

-Dom

Microsoft Posts Record Xbox Revenue in Fiscal 2024 Q2 Mostly Due to Acquiring Activision Blizzard

As you well know because you’ve seen my handy earnings calendar for this season, Microsoft reported its 2024 second quarter results earlier this week.

Only executives and literally everyone, including when I wrote about this very topic last quarter and predicted the revenue amount, expected the software tech conglomerate to post record gaming sales almost entirely becasue Activision Blizzard numbers are now included since closing the deal in mid-October 2023.

That’s precisely what happened.

Still, as I’ll illustrate shortly, I’d argue massive growth isn’t the whole story. I’m more interested in isolating Xbox’s organic performance, comparing post-acquisition to the sum of both entities before it happened and trying to determine how annual numbers will shake out. In addition, I’ll review the acquisition’s notable hit to profitability for the time being due to its cost and integration.

Essentially: headlines, even mine, never tell the whole story!

There’s also a divide happening right now with Microsoft. Just as the company closed above $3 trillion in market value for the first time, it announced big layoffs in its gaming division. Around 1,900 people across Xbox, Activision Blizzard and Bethesda, or 8% of the gaming workforce, were let go. I know there’s various factors behind this, including macro ones like inflation and interest rates. Plus, stock market valuations are determined by a collective set of investors rather than a company’s management.

Still, the optics and timing are tricky. The fact that job loss after the deal due to redundant roles and function overlap was inevitable doesn’t make it any less painful for the people involved. Especially as the broader company reaches record valuations and reports gaudy numbers.

Moving into those numbers, Xbox revenue totaled over $7 billion in the quarter ending December 2023. That’s up 49%. Within that, Activision Blizzard was responsible for contributing $2 billion. This makes Gaming the third biggest contributor to all of Microsoft’s sales at 11% of the total compared to 9% last year, right now behind only Server and Office.

It’s pretty clear what’s underlying this: Buying a massive third party publisher and integrating it within content and services figures. Even so, there was some organic Xbox growth in Q2. Under 6% to be semi-exact. I was also impressed that hardware was able to deliver solid performance during the holiday season, even if boosted by discounting.

“With our acquisition, we’ve added hundreds of millions of gamers to our ecosystem, as we execute on our ambition to reach more gamers on more platforms,” said Chief Executive Officer (CEO) Satya Nadella. “Great content is key to our growth, and across our portfolio, I’ve never been more excited about our lineup of upcoming games.”

Pretty standard corporate speak from Nadella, and I’d argue Xbox’s line-up this entire generation has been anything but exciting. In fact, management quotes around gaming on the earnings call were generally tame. The team did offer select insights that I’ll cover later, namely on cloud streaming and engagement across platforms including mobile, the latter of which hit record highs after the integration of Activision Blizzard players.

Read on to learn what the numbers truly look like, some estimates from me around a combined historical comparison, my guesses for hardware unit sales and then predictions going forward into 2024.

First thing to note when checking the above slides is Xbox, Bethesda and now Activision Blizzard are all accounted for within Microsoft’s broader More Personal Computing (MPC) segment.

Quarterly gaming revenue rose 49% in the three months ending December, up to an all-time high of $7.11 billion. This was exactly within the firm’s guidance.

What drove it? Well I’ll break that into two categories: Activision Blizzard and pre-acquisition Xbox. Here is where we talk the deal’s impact, which actually cost upwards of $75 billion based on the latest filing. During the second quarter, it contributed $2.1 billion to gaming division sales.

Essentially, Activision Blizzard was responsible for 30% of Microsoft’s second quarter gaming business at the top-line. Still, as I’ll get to in a second, its inclusion put major downward pressure on profit.

Separating that out, the $5 billion “organic” Xbox sales implied a growth rate of 5.7%. Much less than the headline suggests, right. Still, it’s certainly noteworthy for the important holiday time frame, notably while facing what executives called a “tough console market.”

Moving to the latest year, which happens to cover the 2023 calendar months, gaming revenue expanded 17% to rise above $18 billion for the first time ever. This particular figure, mapped out over time in one of the below charts, will only grow over time as more quarters take the acquisition into account.

I’ve also provided a new chart measuring Estimated Combined Gaming Revenue that, full disclosure, pulls in a few different assumptions to form a rough estimate of how annual figures compare when adding in Activision Blizzard’s historical revenue. I’ve summed up the two pre-deal entities going back for a few fiscal years then subtracted $2 billion per year in assumed overlapped sales.

What results is where I think Microsoft gaming sales could be when a year of Activision is considered: almost $22 billion, up a bit from the $21.6 billion a year back. That’s an upward trajectory of 1% as opposed to the 17% I just referenced. Good, yet nowhere near as wild as the headlines indicate.

While Microsoft is the first of the bigger gaming companies to report, I like to gather up a comparison to peers and update throughout the season in my articles. Sony’s latest annual PlayStations sales tracked towards a whopping $28 billion, with notable impact from the yen’s depreciation. Tencent was around $26 billion. This is where the current combined Xbox and Activision Blizzard slots, at $18.13 billion. Nintendo’s latest hit $13 billion. My usual caveat is that Nintendo is operating at higher profitability than at least PlayStation, and likely Xbox as well.

Speaking of profit, Microsoft gave us a bit more than usual this quarter! Partially because it had to illustrate the impact from Activision Blizzard, but I’ll take it. For the MPC group, operating profit jumped up 29% to $4.29 billion. Half of the “gross margin dollars” profit metric, a figure that moved up 34% in Q2, was contributed by Activision Blizzard as it helped up operating expenses at a higher rate of 38%. Focusing strictly on Activision Blizzard, its net impact was $437 million in operating income because of those higher costs. There’s also some accounting nitty gritty that I won’t include, for the sake of brevity.

What does this all mean? Well, record sales were mostly due to Activision Blizzard no longer being a 3rd party partner and becoming first party, however there was single-digit organic Xbox growth during the holiday season. Profit for the segment that includes gaming will take a short-term profit hit while integrating costs and following through with the deal’s financial accounting.

Here’s a quick dive into the two Xbox sub-areas, called Xbox Content & Services (i.e. software and subscriptions) and Xbox Hardware.

For October to December, the vastly larger Content & Services jumped up nearly 70% when measured by revenue. The first figure was above guidance, while the second technically under-performed at least based on what I calculated because Microsoft rarely, if ever, issues formal hardware forecasts.

The reason I say “nearly 70%” is because how Microsoft reported its numbers actually indicates that Content & Services moved up 68% to $5.69 billion, another best ever number, rather than the 61% in its announcement. From what other analysts and I can tell, Microsoft seems to have excluded Activision Blizzard’s eSports sales, for whatever reason.

This leads to my estimate of $16.5 billion for Content & Services over the last 12 month. That itself is above the $15.56 billion for all of Xbox in 2022 Q2. Separately, Hardware generated $3.27 billion in the latest annual period, slightly below the last couple years.

When hearing this numbers and looking at these charts, I’ve assumed all Activision Blizzard revenue is caught in the Content & Services pipeline because it doesn’t have anything to do with console manufacturing.

Underlying the best-ever figures for the software side was another all-time high, this time for engagement. Nadella noted that, now that Activision Blizzard players are included, Microsoft’s gaming division boasts 200 million Monthly Active Users (MAUs) on mobile devices. Prior to this, Xbox’s figure overall was 120 million. Activision had 92 million in September, while Blizzard was 26 million and King totaled 238 million.

Nadella also alluded to a double-digit jump in cloud gaming hours streamed, moving up 44% in the quarter. We don’t have specifics on the actual number of hours played by its active users, only the growth rate. Plus, unfortunately, there’s still no word on Xbox Game Pass subscribers. The last update was 25 million a couple years back, and I estimated recently that it’s likely approaching 30 million though has not eclipsed it. I hope Microsoft offers a new figure this year. Yet I’m not holding my breath.

Xbox’s Hardware segment had a solid holiday, even if the result ended up below my expectations.

Console dollar sales moved up 3% in Q2, to above $1.4 billion. This was spurred on by holiday discounting for the Xbox Series X|S family, and the appeal of something like Bethesda’s Starfield. In terms of number of consoles shipped to market, I believe it slightly increased although those units sold at a lower average selling price.

“In our consumer business, the PC and advertising markets were generally in line with our expectations,” said Chief Financial Officer (CFO) Amy Hood. “PC market volumes continued to stabilize at pre-pandemic levels. The gaming console market was a bit smaller.”

It’s a curious statement. Just because it was challenging doesn’t mean it wasn’t good. Any growth right now for Xbox console revenue, even in the lower single digits, is a positive sign. Echoing my past sentiment, and it’s something gamers need to get accustomed to, is that Xbox’s strategy has officially shifted away from consoles and towards offering services on various devices.

During the last year, Hardware reached $3.27 billion. That’s down 9% from the same time in 2022, though above pre-pandemic figures. Again, this tracks with the general theme.

Since Microsoft doesn’t provide global unit sales like peers do, I have no choice but to guesstimate where they stand. For the holiday quarter alone, I backed into 3.5 million to 4 million shipments for Xbox Series X|S. This would be in-line with last year, albeit below the roughly 4.5 to 5 million that its Xbox One predecessor was doing during its prime.

I put Xbox Series X|S lifetime at 25.5 million or so prior to this latest three month report. Which was below the 26 million of Xbox One. Adding on my estimated holiday shipments for the family, I believe Xbox Series X|S stands currently at 29 million to 29.5 million units lifetime since November 2020. Thus, it remains tracking below Xbox One by upwards of a couple million.

For comparison, Sony’s PlayStation 5 was the best-selling console in key regions during 2023, including the United States as I covered recently. The console reached 50 million units sold to consumers in December 2023, and the shipment figure will be even higher when Sony reports in a couple weeks.

Overall at Microsoft during Q2, revenue jumped 18% to $62 billion. Operating profit rose 33% to $27 billion. Microsoft Cloud grew 24% to 33.7 billion. Executives provided some color around how the Activision Blizzard deal affected the full firm’s financials.

“At a company level, Activision Blizzard contributed approximately 4 points to revenue growth, was a 2 point drag on adjusted operating income growth, and a negative 5 cent impact to earnings per share. This impact includes $1.1 billion from purchase accounting adjustments, integration, and transaction-related costs such as severance-related charges related to last week’s announcement.”

That’s referencing last week’s Xbox group layoff announcement, which came after a year of more than ten thousand people losing their jobs at the broader company.

To wrap up the latest quarter, it’s important to look behind the absurd 49% growth and big figures due to integrating Activision Blizzard. There has to be consideration for what numbers look like when combining the two historically, plus the notable downside profit effect for the time being. Not to mention the painful layoffs that happened mostly because of the deal taking place.

In terms of dynamics and future of the Xbox division, these don’t necessarily change with the latest new acquisition. The numbers are bigger, and the portfolio certainly has more brands especially on the mobile side with the unsung King division, while various challenges remain especially on the hardware front plus with industry-wide service stagnation and general costs rising.

I’m also lamenting the lack of details into Activision Blizzard’s underlying financials. We’ll never see them ever again. Pour one out, fellow business nerds and data transparency advocates.

Here I’ll take the chance to look ahead to the third quarter, and make some predictions on the immediate future of Xbox.

Management expects Xbox division sales growth “in the low 40s,” so between 40% and 44%. Out of that, management signaled 45 points would be due to Activision Blizzard. Yes, this means that Microsoft is saying its non-Activision Blizzard Xbox sales will likely decline in this current quarter.

Assuming say 42% growth, that puts Xbox sales at $5.12 billion in the three months ending March 2024. Which, you guessed it, would be a Q3 record. I believe this will be met, though on the lower end.

For Xbox Content & Services, Hood said to anticipate growth “in the low to mid-50s” i.e. around 50% to 57%. Most, if not all of that, will be Activision Blizzard causing a net impact of 50 points or 50%.

Let’s say it gets to 54%, that would elevate Content & Services to $4.77 billion in Q3. Again, I expect that to be achieved, and I think there’s a good chance it hits the upper end.

Finally, management actually provided Hardware guidance! Well, somewhat. They think it will decline. That will certainly be the case if the other numbers hold. As in, console sales could be down by as much as 30%. Based on how they presented numbers this time, I’m guessing around a 5% to 10% decline for console in Q2 which would equate to around $450 million to $480 million.

The early year release slate for Xbox is a tad light, so I’m thinking evergreen titles and the Call of Duty effect being first party will drive the business to hitting these forecasts. In terms of new games, Sega’s Like a Dragon: Infinite Wealth hit a million units yesterday. Warner Bros’ Suicide Squad Kill the Justice League formally launches today, and I’m skeptical on its commercial upside, just like I am for Ubisoft’s Skull & Bones this month. There’s titles like Tekken 8 from Bandai Namco, which I’m quite upbeat on, and Capcom’s Dragon’s Dogma 2 in March that should attract a cult following.

Will these be the biggest software contributors of the quarter? Nope. It’s Palworld, the surprise console exclusive that’s garnering a lot of attention from consumers and pundits alike. It’s much more than the “Pokémon with Guns” moniker, and has been a near unprecedented sales success. So far, Pocket Pair’s latest reached more than 19 million players, 7 million of those on Xbox alone. It’s the largest third party launch in Game Pass history, beating out 2022’s High on Life, and instantly shot to the top of the service’s most-played chart. I’m on record saying it will end the year as one of the platform’s biggest titles. Frankly, it’s absurd and I love it.

That ends the first massive recap of the latest season. Follow me on social for coverage in between articles, and check back soon for more here at the site. Be well!

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

Sources: Circana, Company Investor Relations Websites, Pocket Pair, Sega.

-Dom