Tag: Earnings

PlayStation Generates Record Q1 Revenue in FY 2023 Q1 Despite Slower-Than-Expected PS5 Hardware Shipments

DomsPlaying

As August rolls on, I’m back with my latest and likely last results recap of the season.

Earlier today out of Japan, Sony Corp released its fiscal 2023 first quarter announcement. Both the company at large and the PlayStation business experienced similar dynamics in that revenue grew in the double-digits, yet profitability weakened on higher cost recognition.

Focusing on its largest segment of Game & Network Services (G&NS), it was a gigantic first quarter on the revenue side for the PlayStation business. Quarterly sales reached over $5.6 billion, up 28%, which is a record high. Main contributors to this historic Q1 were better third-party software sales, console growth and exchange rate movement.

Sony saw steady engagement for active users and play hours in the three months ending June. Unfortunately, it no longer reports a key metric on the player side related to subscriptions.

The firm moved 3.3 million PlayStation 5 consoles to retailers in the quarter, pushing lifetime shipments to 41.7 million. That’s 38% higher than last year’s 2.4 million, as supply lines are now shored up and pumping out enough to satiate demand.

While nearly 40% console growth looks great on paper, the company’s management specifically said that PlayStation 5 hardware units came in lower than expected. Which will make working towards its massive annual target a bit harder than originally surmised. Plus, its gap compared to PlayStation 4 sales widened with this latest number.

“We have positioned the accelerated penetration of PlayStation 5 hardware as one of the highest priorities in this fiscal year,” executives wrote in prepared remarks. “And we will try to work steadily to implement necessary measures to achieve our hardware sales target of 25 million units.”

At least yen sales of the hardware segment were among the fastest-growing product categories within this division, behind only that of digital software, as I’ll detail later.

The other main down note for PlayStation during Q1 was profitability. Operating income came in 7% lower than the same time in fiscal 2022 plus it continues to trail one of its main local competitors in Nintendo. While partly due to where each is in their console cycle, it also reflects Sony’s big investment in studios and live services development.

One thing I’ll mention throughout is the impact of the yen’s standing on Sony’s results and my conversions from the local currency into dollars. I’ll point this out when it’s relevant, as there’s a material impact on a global business like this.

See below for more on the individual numbers and a look ahead to the next quarter!

For the overall firm, revenue grew 33% to $16.7 billion. While positive impact came from its gaming and music segments, plus exchange rate, the most substantial bump came from financial services which was affected by an accounting change around its Sony Life insurance business. On the flip side, Sony’s total quarterly operating profit dropped 31% to $1.85 billion, mostly driven by that same financial services segment.

Within the G&NS unit, revenue rose 28% to $5.63 billion. Based on this, gaming currently makes up a third of Sony’s total business. Top-line was bolstered by external partner game sales, additional content buying and improved hardware availability.

Keep in mind, the exchange rate impact was upwards of $300 million. Even accounting for that, PlayStation would boast best-ever Q1 sales. In fact, for more perspective, it’s a sizeable bump from the previous best of first quarter fiscal 2021 when revenue reached $4.5 billion based on the same exchange rate conversion.

Paralleling the overall firm’s scenario, G&NS experienced declining operating profit during the quarter ending June. This number went down 7% to under $360 million, where third party game sales weren’t enough to offset ongoing cost recognition from Bungie and other acquisitions, among other expenses.

I’ll say, for the accounting nerds, this does account for an increase in depreciation and amortization, which impacts traditional operating profit (as opposed to an adjusted figure that Sony reports, which did go up).

Underlying the revenue momentum were double-digit quarterly gains across every single product sub-segment. As you’ll see in the gallery above, somewhat surprisingly, the biggest contributor wasn’t Hardware. It was Add-On Content at 27% of the total, after experiencing a solid 15% growth in revenue. Next was Hardware at 24% of the pie, with sales jumping 42% since last year. Digital Software comprised 20% of the total and had the best year-on-year growth of 52%.

Sony also introduced a new product segment called Other Software, which accounts for first-party titles sold outside of the PlayStation family of devices. Thus, its PC offerings like Horizon Zero Dawn and The Last of Us Part 1. While it’s slight from a slice standpoint, only contributing 2% at present, it grew 17% since Q1 last year.

Right now, annual gaming revenue for Sony is a best-ever $27.83 billion. This is the first time it’s been above $27 billion, no doubt boosted by the yen impact I’ve already mentioned many times. However, annual operating profit is currently $1.8 billion, down from $2.3 billion this time last year. That’s a substantial change in profit margin, from 12% to 6%. Looking at annualized figures intensifies Sony’s predicament of expanding revenue yet deteriorating profit, which I believe is somewhat temporary as the console cycle matures.

How does that annual figure compare across the biggest industry peers? Well, Sony’s last 12 month revenue from gaming leads the pack as reported. Then there’s Tencent, which doesn’t report for a few more weeks, around $26 billion for now. Microsoft has $15.47 billion yet could see over $20 billion or better once the Activision Blizzard deal finalizes in the coming months. Nintendo’s big first quarter bumped it to $13.46 billion at the top-line, yet it has $4.49 billion in annual operating profit versus PlayStation’s $1.8 billion.

New chart alert!

Here I’ve presented launch-aligned unit sales for the last two PlayStation generations. It’s a simple, yet effective in my opinion, way to put PlayStation 5’s quarterly bounce-back in perspective. Notably since the PlayStation 4 is Sony’s fastest-selling console, one of the biggest consoles of all time, and its newest sibling is trying desperately to keep pace amidst a more challenging macro environment.

What stands out immediately is the gap between the two widened this quarter, moving from a 1.8 million divergence to now 2 million. That’s the wrong direction, and I’d bet why management said it missed expectations because it wants to cross that trend-line as soon as possible. Occurring during this fiscal year will be challenging, considering PlayStation 4 had its biggest holiday ever in the corresponding period, with nearly 10 million sold in the October to December period of fiscal 2016 alone. That year’s 20 million was the PlayStation 4’s best result; Sony expects PlayStation 5 to ship 5 million more than that!

Moving on to an even more important hardware metric, PlayStation 5 achieved 40 million in sell-thru to consumers right after the June quarter ended, as of July 16th. Like the above, its predecessor reached that same milestone 2 months faster. I probably sound more negative than I should, because in the broader context of the industry’s history, and its Xbox counterpart, PlayStation 5 is selling quite well.

Supplemental stats shown in the report include full game PlayStation software unit sales increasing from 47.2 million last year to 56.5 million in the three months ending June. First party sales were flat at 6.6 million. Which means third party games were responsible for all of growth, namely the likes of new launches like Diablo IV, Final Fantasy XVI and Street Fighter 6, all of which I covered in my recent piece on June’s U.S. sales report from Circana.

Contribution from digital downloads as a portion of total software sales declined in the quarter, shifting from 79% last year to now 72%. That’s still slightly above fiscal 2022, when downloads made up 67% of the total.

The main engagement metric that PlayStation shares is Monthly Active Users or MAUs. This figure, which is an estimate of how many people used PlayStation Network in the last month of the quarter, came in at 108 million. This is the same as last quarter, and up from the 101 million last year. Essentially, about the same amount of people have been active on the network throughout the first half of the calendar year.

“Total game play time during the quarter was only 2% higher year-on-year,” cited management. “And we see the year-on-year growth in software sales as being driven mainly by a considerable increase in spending per play hour by the expanding PlayStation user base.” This fits with the MAU indicator, in that engagement has been mostly consistent lately without growing substantially.

Here’s where another type if disappointment enters, mainly for those of us that want more transparency from companies. Apparently, this is the first quarter during which Sony won’t be reporting PlayStation Plus memberships anymore. It’s an odd decision to me, considering how much trouble it went thru rebranding the service and how it’s seemingly a core part of its future growth strategy to keep people engaged in its library of games. Hopefully this will be updated on an annual basis, or when it hits a fresh milestone.

Thus, the last number we’ll have for PlayStation Plus subscribers is 47.4 million as of March 2023.

Oh, and there’s no mention of PlayStation VR 2 at all. Not entirely unexpected, I suppose.

Just like last quarter, which ended its 2022 fiscal year, Sony’s latest result was mixed when considering both financial elements and expectations for hardware against what happened through June. The firm is generating staggering growth at the top-line, a ridiculous record first quarter with the bump from external partners launching huge multi-platform or timed exclusives. (Plus, don’t forget about that exchange rate benefit.)

Then there was the solid increase in PlayStation shipments, making up for lost time due to earlier chip shortages and pandemic hurdles. Still, last quarter’s number came in below estimate, and expense recognitions due to M&A and other expense types are hitting the bottom line. Hard.

An aspect that’s exceedingly important for PlayStation, as opposed to say Microsoft’s gaming business, is growth due to new exclusive games. Which, as I mentioned in the software section, was nonexistent this past quarter. While third parties like annual iterations from Madden and NBA 2K annual will drive the quarter ending September, first party will certainly pick up in the holiday quarter.

Here’s a look ahead to forecasts and the near future.

Sony raised annual guidance for full year 2023 revenue, both overall and for the PlayStation business, then maintained other forecasts around profit values.

The firm increased total annual sales forecast 6%, to over $89 billion. Similarly, revenue guidance for its gaming division was bumped up 7%, to roughly $30 billion which would be a record. Even with these, it kept forecasts for operating profit the same, and reiterated the annual PlayStation 5 hardware estimate.

“Although we upwardly revised the sales forecast for third-party software which is performing well, we have incorporated a deterioration in the profitability of PS5 hardware mainly due to changes in promotions by geographic region and the sales channel mix,” management wrote, explaining why it didn’t change the PlayStation profit estimate for now.

While I certainly think the top-line is achievable, I’m more skeptical on profit guidance and think it could miss depending on where expenses go in later months. Then, for console sell-in, I had my estimate at 25 to 25.5 million three months back. I’m shifting towards the lower end, now at 24 million to 24.5 million. Partially because I maintain hesitance on a model refresh happening this year, still targeting Calendar 2025 for a slimmer or more powerful PlayStation 5.

While it’s more relevant for the quarter ending December, I’ll go on record now that Marvel’s Spider-Man 2 will have a super start at market in October. It will outpace the 3.3 million copies at launch for its 2018 predecessor. Though with it only on PlayStation 5, I’m hesitant to claim it becomes the fastest-selling PlayStation exclusive ever, currently held by 2022’s God of War: Ragnarök at 5.1 million. I’m more in the 4 million range, which will beat the 3 million of June’s Final Fantasy XVI for the highest launch of titles exclusive to PlayStation 5 (of which there aren’t many).

How about that internal live services push? Well, it will certainly have an impact on costs and profitability towards the downside because of staffing, investment etc ramping up. I don’t foresee a big impact this fiscal year on revenue, unless perhaps Concord from Firewalk Studios sneaks into the January to March quarter. Even then, it won’t sell like its usual exclusives. The largest, most concrete first party release that we know about might be Destiny 2: The Final Shape, which will be around February 2024.

That brings me to the end of my “big three” recaps for this quarter, covering the main manufacturers across the industry. I recommend heading back to the earnings calendar for more events. 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 ¥137.

Sources: Bloomberg (Image Credit), Company Investor Relations Websites, Sony Interactive Entertainment.

-Dom

Zelda Tears of the Kingdom & Super Mario Bros Movie Catapult Nintendo Results to Record Highs in 2024 Q1

DomsPlaying

Here we dough!

Turns out, the Switch is still paying off during its twilight years. Quite literally, for Nintendo.

It sure doesn’t hurt to have a film based on one of the world’s most recognizable mascots either.

Yesterday in Japan, Nintendo reported fiscal year 2024 first quarter financial results. It proved to be a massive three months for the gaming giant, achieving all-time Q1 highs for both revenue and operating profit.

Underlying this record quarter was a historic start for The Legend of Zelda: Tears of the Kingdom and the blockbuster hit that is The Super Mario Bros. Movie. Nintendo shows, yet again, its brands are powerful and management knows how to deploy them, producing some of the highest quality content in games and beyond.

This combination led to Switch hardware output growing since last June. In impressive fashion, the system is steadily approaching 130 million units globally as its its seventh birthday approaches. After moving 3.91 million Switch in Q1, up 14%, lifetime shipments are now 129.53 million.

“In addition to the increase year-on-year in unit sales of both Nintendo Switch hardware and software, another main factor in this growth in net sales was the larger percentage of hardware sales accounted for by Nintendo Switch OLED Model, which has a higher unit price,” management wrote in the slide deck. “The depreciation of the yen also had an effect.”

Nintendo couldn’t have secured a best-ever Q1 without, of course, Tears of the Kingdom. It’s the premier open world adventure of 2023, an easy Game of the Year contender. Plus, unit sales are ascending faster than Link himself. After shipping 10 million copies during its first three days, a Nintendo platform record mind you, it finished the quarter with a staggering 18.51 million.

That’s easily the best launch quarter ever for a Zelda game, and second fastest-selling opening for a Switch title. In fact, the fastest is really two titles: Pokémon Scarlet & Pokémon Violet at a combined 20.61 million.

The real added boost mode, and a genius move by management, was The Super Mario Bros. Movie hitting at the ideal time as theatergoers are back in their groove and it targets such a wide audience. It’s already the second highest-grossing animated film of all time. It launched in April! As a result, Nintendo’s Intellectual Property (IP)-related income segment tripled in sales. Talk about a perfect supplement late in the cycle of Nintendo’s top-selling home console of all time.

Before dipping into the numbers, a quick caveat on the mentioned yen exchange rate: It’s still historically weak. This has an outsized impact on conversions for Japanese companies. Now, let’s see what’s behind Nintendo’s record performance.

I’ve displayed the most important slides from Nintendo’s latest report above.

Overall company net sales jumped 50% in the quarter, to $3.36 billion. Operating income skyrocketed 82% to upwards of $1.35 billion. The strength of Zelda and Mario were in full force.

For perspective, as you’ll see in the chart gallery below, the last time Nintendo’s revenue was anywhere near this high was back in the Wii days. The last time it generated close to this much profit was Fiscal 2021 due to the craze around Animal Crossing: New Horizons.

One notable mention on the profit side was the higher cost of OLED model limits margins, as did a higher portion of retail sales as opposed to downloads, since Tears of the Kingdom is a popular buy in physical form.

“Although the proportion of hardware sales declined and the proportion of first-party software sales increased, our gross profit margin remained at the same level year-on-year,” management wrote. “This was due in part to the lower proportion of digital sales and Nintendo Switch ‒ OLED Model, which has a lower profit margin than the other models in the Nintendo Switch family of systems, accounting for a greater percentage of hardware sales.”

In terms of product types, the company said 41% of sales were from hardware. Compare that to 44% in the same quarter last year, and 46% for last fiscal. This tells me that, while Tears of the Kingdom did push some new systems, most buyers already owned one or more Switches. Digital sales were less than half of Nintendo’s total revenue, at 47%, versus last Q1 at 53%. Digital split was much closer to the full FY 2023 number of 48%.

There’s an intriguing dynamic happening for regional slices. From an overall standpoint, Americas was nearly the same at 44% vs last year’s 45%. The main difference was a lower portion from Europe, which was down to 23% from 26%. The Rest of World segment accounts for the change, moving from 10% to 13%. Then when looking at strictly hardware unit shipments, it’s growth in Japan leading the charge. Unit sales in the Americas and Europe declined 7% and 15% respectively, while Japan rose a whopping 67%.

Even so, Nintendo did point out that console sell-thru was up in all its regions, even if shipments weren’t. Most importantly, total revenue from all sources did in fact move up across all locales. The Americas saw 40% growth, Europe increased 32% while Japan increased 49%.

Another growth vector, albeit to less an extent because it’s still a small portion of business, was the firm’s category of mobile and IP related income on the strength of its animated film division royalties. Dollar sales jumped 190% here, to $232 million. That’s 7% of quarterly net sales, compared to 4% a year back.

Zooming out to annualized numbers really drives home how substantial this latest three month period. Nintendo’s current trailing annual sales accounting for this record Q1 are $13.46 billion. As you see in the chart, based on current exchange rates applied historically, that’s the best annual sales for a first quarter in its history. And nearly the highest ever, behind only FY 2009 Q3. On the profit side, it’s almost there as well. The best trailing 12-month revenue for a Q1 since peaking back in FY 2009 Q1.

Essentially, the company is currently on track for the best annual financial results of the Switch era.

It’s also time to update my peer comparison within the industry, which I started annual in my latest Xbox results piece here. Sony’s latest annualized revenue was almost $27 billion, followed by Tencent’s 26 billion. Microsoft reported $15.47 billion from gaming, then there’s Nintendo here at $13.46 billion. I’ll reiterate what I’ve said before: Sales aren’t everything. Nintendo’s profitability outpaces Sony’s games division for now, at least as of last reported, mainly due to high costs associated with making the PlayStation 5 and related big budget software exclusives.

Total hardware shipments for Switch started the fiscal year at 3.91 million, up an impressive 14% from the 3.43 million last year.

It’s the third highest Q1 shipment number for the hybrid console, behind fiscal 2021’s 5.67 million and 4.45 million in 2022. Nintendo clearly intended there to be enough stock to satisfy that Tears of the Kingdom demand. Plus, it’s clear the market isn’t fully saturated.

From an individual model standpoint, it’s Switch OLED that’s growing. Sales catapulted 86% to 2.83 million. It made up 72% of the total. The other two, Switch base and Switch Lite, declined 51% and 27% respectively to comprise the remaining allotment. This is why management mentioned margins before, as the OLED is the main seller now as the older models phase out.

It’s an effective final push for Switch, which will be seven years old in March.

Switch’s lifetime of 129.53 million, while certainly near another major milestone, still has a ways to go to reach the highs of best sellers Nintendo DS and PlayStation 2. Thinking back to 2017, when I was upbeat about Switch yet never thought it would reach even Wii numbers, it’s pretty wild the hybrid console is even in the conversation for top hardware ever.

Beyond shipment numbers, the report highlighted some sell-through to consumers information. Just like shipments, Switch sold-thru more units to people than the comparable quarter last year. Unlike shipments, all regions experienced growth in sell-thru. Tears of the Kingdom having an OLED special edition bolstered this growth at the consumer level, leading to quarterly sell-thru that beat last year and rivaled the one prior.

As for software, Nintendo shipped 52.21 million units in the latest three months. Not only is that up 26% compared to last year’s 41.41 million, but it’s also the single largest Q1 in Switch history. Even above 50.4 million in Fiscal 2021 after Animal Crossing: New Horizons.

Lifetime game sales for Switch passed a billion back in March, an enormous feat. Now it’s at 1.088 billion.

Since it’s early in the fiscal and late in the console cycle, Nintendo had only two million-selling titles. One of them being Tears of the Kingdom, the other being the never-ending Mario Kart 8 Deluxe.

Based on the 18.51 million shipped for Tears of the Kingdom, it made up 35% of the overall Switch record-breaking unit shipment figure for period ending June. Think about that. More than 1 in 3 games moved for a console with so many epic sellers and this all-time audience base was the new Zelda!

With this frankly absurd start, it’s already 9th best-selling Switch title ever, knocking Ring Fit Adventure out of the Top 10. With less than a quarter on market. This parallels regional data, where it’s 2023’s 2nd top-selling game to date in the U.S, behind only Hogwarts Legacy, according to Circana’s latest monthly report. Oh, and that doesn’t even include digital.

Zelda will compete for best-selling title with multi-platform titles like the yet unannounced Call of Duty 2023, Hogwarts Legacy and Diablo IV plus PlayStation exclusive Marvel’s Spider-Man 2. I believe it could, even on a single platform, be the biggest premium title of 2023 if Nintendo shared its downloaded portion.

Continuing the record Q1 theme, Tears of the Kingdom sold-thru over 15.7 million in its first 8 weeks, immediately making up half of the year’s Nintendo-published software unit sales for 2023. That pushed sell-thru of 1st party Nintendo-published titles to an all-time best since Switch’s start. By a wide above the prior record holder, FY 2021, based on the graph provided.

Separately, one of the rare down notes of this report is the fact that the million sellers list only had two titles. This means the likes of Advance Wars 1+2 Re-Boot Camp, from April, and June’s Everybody 1-2 Switch both did not achieve a million sold. Not that I was upbeat on either of them, especially the latter which is probably the least I’ve seen the Switch audience excited in all its years.

The company also provided its usual updates to lifetime figures for existing titles. Mario Kart 8 Deluxe had yet another quarter over a million, bumped up by all those new Switch owners picking up Zelda, moving 1.67 million. It’s achieved the 55 million mark lifetime, settling at 55.46 million. The Legend of Zelda: Breath of the Wild benefited from the knock-on effect of a new series game, passing the 30 million mark to 30.65 million. And, while not part of this report, October 2021’s best-selling Metroid game Metroid Dread hit a new milestone: 3 million according to its developer MercurySteam.

While we see plenty of date on copies sold, there’s limited stats from the firm around player engagement. Its made-up term of Annual Playing Users, or the number of Nintendo Accounts that used the Switch in the last year, jumped up to 116 million from March’s 105 million. There’s no new data on Switch Online memberships, which totaled 36 million in September of last year.

In a new portion of the report, there’s details into the epic box office earnings of The Super Mario Bros. Movie. Since its theatrical debut in April, the film has attracted over 168 million viewers. Current global box office revenue of nearly $1.35 billion makes it the highest-grossing video game movie ever, and second most successful animated flick only to Frozen II’s $1.53 billion since 2019. Executives noted that its popularity was global, plus it drove sales of various Mario titles on Switch alongside the release.

This is something I’ve said a lot during Nintendo’s historic Switch era: how it’s hard to oversell how incredible of a quarter it was, and how deftly management continues to executive on its strategy, notably its focus on quality experiences and leveraging its legendary IP in smart ways. The fact that a movie led to Nintendo’s best Q1 to date, alongside its re-imagined Zelda approach, shows that the company continues to adapt while remaining true to its core identity.

“By expanding Nintendo IP in areas outside the dedicated video game platform we create new opportunities for consumers to encounter Nintendo IP, and this invigorates our overall business,” management wrote. “Based on the various effects that we have confirmed through the release of this movie, we will continue our efforts towards visual content-related initiatives.”

As expected early in the fiscal year, Nintendo maintained its financial and unit sales guidance for the 12 months ending March 2024. Management anticipates 10% lower annual net sales, near $10.56 billion, with operating profit in that same period declining 11% to $3.28 billion. I think there’s the potential for an upward revision soon, and I expect the company to achieve these. At least, right now.

On the hardware front, the team there anticipates shipping 15 million Switch units for the year. After the 3.9 million of Q1, that leaves only 11.1 million for the remaining three quarters. I expect a slight upward revision from the company in Q2 or Q3, to at least 16 or 16.5 million, which is right at my personal estimate of 16.5 million to 17 million.

Beyond that, it’s about time to be looking ahead to what’s next for Nintendo’s hardware business. It’s a major challenge for management, akin to moving past the Wii and we know how well that went with the disastrous Wii U. The company is in uncharted waters after Switch’s meteoric, historic success that rivals only the Nintendo DS in sales.

Just this past week, the rumor mill began swirling in earnest around a Switch successor, which I will continue to call the Super Switch until told otherwise. Video Games Chronicle and Eurogamer both claim they have sources indicating Nintendo’s next device will have a portable mode, a cartridge slot, could have an LCD screen (as opposed to OLED) in consideration of cost. No word on backward compatibility, which is a key feature question for the almost 130 million owners. Most importantly for yours truly, it’s likely targeting a 2nd half of Calendar 2024 launch. Studios making games for the device apparently have development kits as we speak.

When writing and chatting on social media, I’ve had Early 2025 as my estimate, lining up nicely with the anniversary of Switch’s March 2017 start. While I’ll keep that for the time being, it sounds like I might have to adjust that by a quarter, to Late 2024.

If that’s the case, we won’t have to wait long for more information!

As for software in the future, let’s take a glance at Nintendo’s upcoming lineup. Pikmin 4 hit stores in July, to a breakout start in Japan that points to a potential record launch for the franchise. That’s really all for its published exclusives in the quarter ending September.

October is when the product suite really ramps up, starting with Detective Pikachu Returns. Then it’s the standout title of Super Mario Bros. Wonder, scheduled for late October. Throw in WarioWare: Move It!, probably a premium Pokémon as usual, alongside a remake of Super Mario RPG in November, and these will provide ample momentum leading into the holiday months, and the latter parts of its financial year.

Both Luigi’s Mansion: Dark Moon and a new Princess Peach, yet untitled, have 2024 as the release timing in Nintendo’s material. Could they hit before the Super Switch reveal? Might they come out before fiscal year end in March 2024? Maybe. Then there’s the evasive Metroid Prime 4, still listed as TBA without any sort of information. I’m doubling down in saying that Metroid Prime 4 will be a cross gen title, launching on both current and Super Switch, alongside a premier 3D open world Mario title. Like Breath of the Wild hitting both Wii U and Switch, except with less commercial upside.

Well then, in the meantime until these new games release and Nintendo shares what it’s been cooking up for its console biz, check my earnings calendar and other recent articles for more coverage of the industry.

Thanks for reading my latest recap! It was a substantial one. Be safe, everyone.

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥137.34

Sources: Box Office Mojo, Company Investor Relations Websites, MercurySteam.

-Dom

Xbox Misses Quarterly Forecasts as Hardware Lags During Microsoft’s Fiscal Year 2023 Results

DomsPlaying3 Comments

That’s another year in the books for Microsoft, which reported its 2023 fiscal results earlier this week.

(Something you all knew already, naturally, because you have my earnings calendar bookmarked!)

Within this latest report, its Xbox division faltered in the home stretch to finish a down year, as it missed forecasts and experienced yet another decline in hardware sales during Q4. Still, in a historical sense, it’s maintaining solid footing and hopefully setting up a return to growth.

From April to June 2023, Microsoft’s gaming revenue rose a modest 1% to $3.49 billion. While that means it’s the second best Q4 for games on record behind 2021, it did miss the company’s forecast.

Executives cited weaker output from both first and third party content as main contributors to coming up short. The disastrous start of Bethesda’s Redfall took its toll, where one of the company’s biggest exclusive title launches of the 1st half also happened to be one of its worst from a quality standpoint.

Then, while hardware doesn’t drive the business as much as content does, it’s become the norm lately that console sales are lagging both peers and where they should be at this early point in the generation. The trend held in Q4, as hardware experienced declining revenue for the past three quarters, and during four of the last five. All of them down double-digits.

Microsoft themselves even used its “third place status” on the core console side (behind PlayStation and Nintendo) as support in a battle against the government to justify its pending purchase of Activision Blizzard. In fact, based on what Chief Executive Officer (CEO) Satya Nadella didn’t say on the conference call, the Xbox Series X|S is no longer the fastest selling Xbox to date. It’s trending below 2013’s Xbox One, a capitulation that may signal mismanagement, as I’ll expound later.

For 2023 as a whole, total games revenue trended downward. Annual Xbox sales dipped 5% to $15.47 billion, for familiar reasons like slow first party output and lower hardware contribution. Even as Game Pass, allegedly, continues to grow. By how much? Execs won’t say. What Nadella did claim is that the service set a record for “fourth quarter engagement.” However much that is.

Can you tell I’m souring in tone when writing about Xbox? Check below for a deeper dive into the numbers and details behind a somewhat shaky quarter to find out why.

The above gallery contains slides displaying the aforementioned 1% growth for Xbox during the quarter ending June 2023, to $3.49 billion. Leading into this quarter, management forecasted upward movement in the “mid to high single digits.”

While that’s the first “miss” against estimates that I’ll discuss, this figure is quite good when compared to comparable periods in the past. In fact, Q4 revenue hasn’t been below $3 billion since fiscal 2019, when the Xbox One was long-in-the-tooth.

For the full 12 months, Microsoft’s gaming revenue came in at $15.47 billion, down 5% from a record $16.23 billion. This is actually the first time annual Xbox business sales have declined since the company began breaking them out back in 2017.

Granted, 2022 was an all-time high, so it’s now normalizing from those lofty peaks. There are macro elements, like higher inflation and entertainment alternatives. Still, its competitors are facing those too. There’s plenty of, hm.. “Micro” aspects here specific to Xbox’s contraction. This includes a lackluster portfolio of new exclusive titles, poor performance from the likes of Redfall, stagnating demand for its consoles and a premature push into cloud that isn’t paying off yet.

Speaking of competitors, where does Microsoft’s latest annual results stack up in the broader sense (even if not a perfect comparison since it’s the first to report)? Up first is Sony’s PlayStation with nearly $27 billion, temporarily boosted by the yen’s drastic movement. Tencent is close behind, with upwards of $26 billion across its international and domestic gaming initiatives. This is where Microsoft slots in, with $15.47 billion. If accounting for Activision Blizzard’s latest trailing 12-month sales of $8.7 billion, then backing out a couple billion for overlaps and redundancies, Microsoft could see around $22 billion after close. Then there’s Nintendo at $12 billion, with the important point that it’s leaner and more profitable than its counterparts.

Speaking of profitability, as usual we don’t know much about Xbox’s income profile. Microsoft’s gaming segment resides within the More Personal Computing (MPC) reportable segment, which saw operating profit gain 4% in the fourth quarter to $4.68 billion. This was due to an operating expense decline of 9%, mainly attributed to Devices and Windows. Based on this, and soft top-line movement for Xbox in Q4, my guess is profitability remaining consistent, with some downside potential due to the marketing push start for Starfield and development budgets of 2024 projects.

It’s time to get my hands dirty digging into both sub-segments: Xbox Content & Services and Xbox Hardware. Stick around for some spice when I cover the latter.

Quarterly sales within Xbox Content & Services moved up 5% to $2.9 billion. That’s 83% of the total, compared to 80% last year, mainly because Hardware is even more lackluster. It’s a big miss against guidance, which was “low to mid teens.” Accounting for the full year, Xbox Content & Services revenue dropped 3% to $12.18 billion.

Chief Financial Officer (CFO) Amy Hood attributed the whiff to “weakness in first and third party content performance.” While that’s pretty standard CFO speak, the mention of Xbox Game Studios is notable. Minecraft Legends launched in April to 3 million players, which I’d call respectable. The obvious miss was May’s Redfall. While no one, not even Xbox itself, expected it to be a huge seller, it’s clear management was caught off guard by the dismal vampire open world game both critically and commercially.

Add this misread of a major Bethesda title by the current administration to the growing list of reasons why I’m becoming less confident in them as the quarters roll on.

On that list is a complete lack of Game Pass subscriber numbers, which were absent here yet again despite the consistent claims by management that it’s been growing. That’s a big deal for the final report of a fiscal period. It’s been literal years since any Game Pass figure, which Xbox wants us to believe is still at 25 million. There’s rumblings here and there, it could be upwards of 29 million or more. Who knows.

This is what happens when executives aren’t transparent about the main product that defines Xbox’s entire identity!

What management did share was, I suppose, some statements around player engagement.

“We set new fourth quarter highs for monthly active users, driven by strength off-console, as well as monthly active devices,” Nadella said (notice the “off-console” part!). “And we saw record fourth quarter engagement across Game Pass, with hours played up 22% year-over-year.”

It’s hard to be impressed or excited when we don’t have actual numbers, or anything against which to compare these so-called records.

As for Xbox Hardware, it isn’t just stagnating. It’s regressing. Console sales were 13% lower in Q4, to $595 million. Which, based on my math last quarter, was likely in-line with management’s expectation. This drop brought the full 2023 number down 11% to $3.29 billion. Prior year, it was growing in the double-digits.

In what’s become a worrying trend at this point in the generation, Xbox is seeing consistently declining hardware revenues even as broad supply concerns have dissipated. Looking at units that are mostly estimated, signs point to Xbox Series X|S now lagging Xbox One, which was at 24.7 million at this stage, implying between 24 million and 24.5 million lifetime for this latest family of devices. Xbox Series X|S is still above the Xbox 360, which was at 20.3 million launch-aligned before picking up steam as it matured.

Ironically, a mere day after Xbox’s report, Sony shared a milestone for PlayStation 5: it’s now sold 40 million units thru to consumers. Shoot, it had already passed the 30 million mark back in December, leaving Xbox in its dust long ago.

Considering Microsoft’s general gaming strategy, I’ve been wondering if the ecosystem shift was either too early, or too aggressive, because it’s been costly for goodwill and occasionally for its bottom line. I’d argue Xbox management isn’t doing right by core players, and not just because of the clear business mix shift away from consoles and towards support across devices and platforms. People aren’t spending on Xbox consoles at a time when the install base should be increasing at a healthier rate. Supply is no longer a concern like it was even a year ago. This is a consumer choice to avoid, and go elsewhere. Or access Game Pass via Samsung TV, PCs or whatever gadget supports it without having to spend bucks on an Xbox.

Of course, hardware regression goes alongside spotty software output this generation, because Xbox hasn’t done a great job giving people a reason to own an Xbox. Both Microsoft and Sony had the same release window, time to prepare and challenges faced by the pandemic. Nintendo studios put out chart-toppers and Game of the Year candidates, supporting the Switch over its years. Xbox’s hardware business is contracting, when it should be growing.

There’s certainly an engineering and manufacturing element, whereby hardware is usually not profitable. Yes, hardware is usually a loss leader, sold in the red to attract people to a system then recoup losses by selling a volume of games. I won’t get into the nitty gritty, because I know there’s engineering challenges and I’m no engineer. I’ll just pose a question: If Sony can make each standard PlayStation 5 version profitable less than a year after launch, why can’t Microsoft figure out the same?

If each Xbox isn’t profitable, and an exclusive portfolio isn’t attractive, is a hardware business sustainable? Many might argue this is what Xbox management wanted. Less reliance on consoles! More recurring revenue! Hook people via subscriptions! “When we all play, everyone wins!” While that’s a wonderful sentiment, this is business. If a portion isn’t doing well, and it keeps happening, there’s a question around it being a going concern. In capitalism, a product line can’t be justified if it isn’t growing, and right now, hardware is unfortunately going the wrong direction.

Maybe the best is yet to come for Xbox and it’s ramping up for a strong back half of the cycle when games and consoles will sell harmoniously. That’s part of why Nadella signed off on paying a premium for Activision Blizzard, because Xbox’s current studios aren’t outputting the types of games that sell systems or a brand. Or, perhaps this signals the new normal for gaming at Microsoft: no longer a console, instead a nebulous platform, whose higher-ups somehow aren’t phased by dreary hardware stats because Game Pass is the retention point, rather than Xboxes.

Well, then. Before I go, I want to talk Microsoft overall and some predictions.

During the quarter ending June, the company’s total revenue rose 8% to $56.2 billion. Operating profit jumped 18% to $24.3 billion. That means the annual revenue figure is a staggering $212 billion, up 7%, with 6% higher operating profit of $88.5 billion.

That’s right, Microsoft had a record year. It made almost $89 billion in profit. The same year in which it laid off 10,000 people, or almost 5% of its workforce at the time, put various pay freezes in place and reduced bonuses, as some employees pointed out during Nadella’s year-end update.

Within Xbox, the last quarter of fiscal 2023 was highlighted by missed sales estimates and a concerning hardware result, even if the business remains in a good position compared to earlier years. The problem is Xbox is missing out on upside, and fumbling opportunities to capture more buyers with a subpar portfolio almost three years into the current cycle.

The good news is that the future is looking up, both immediately and in the coming years, at least for software and content partnerships. I’ve been cautious on Xbox, and I’m remaining so. Even with Starfield on the immediate horizon, and other projects incoming into the back half of the new fiscal year.

In terms of financial forecasting, Hood said the company anticipates Xbox revenue to grow in the “mid single digits” during Q1 of fiscal 2024. Assuming that’s exactly 5%, quarterly sales would be $3.79 billion, or an all-time high for a July to September period.

Executives think Xbox Content & Services will grow in the “mid to high single digit” range, driven by 1st party content, 3rd party content and Game Pass (I mean, what else is there?). If that’s at 7%, this sub-segment would contribute right at $3 billion, yet another Q1 record.

Thing is, based on both of these assumptions, I’m looking at another down quarter for Xbox Hardware, although not in the double-digits. The numbers point to a modest 2% dip, putting it at $784 million-ish.

None of this accounts for Activision Blizzard, as Microsoft’s executives have noted since the deal was announced because that’s a standard disclosure. Still, this is the first time since that first announcement back in early 2022 where the deal might actually close in the respective quarter. The companies extended the deal finalization date to October 18th. Personally, I now anticipate a September closure.

As for a prediction, I’d still be protecting against the downside even with Starfield looming. I expect the targets to be met, although the upside isn’t as prominent as if Bethesda’s RPG was solely a full-priced offering and outright system seller like say its PlayStation counterpart Marvel’s Spider-Man 2.

That about does it for my coverage of Microsoft’s most recent financial announcement. Spicier than usual, right? Hope it was to your liking. Thanks for reading, and be safe all!

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

Sources: Bethesda, Company Investor Relations Websites, Getty (Image Credit), Sony Interactive Entertainment.

-Dom

Earnings Calendar Jul & Aug 2023: Gaming, Media & Tech Companies

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Seasonal update incoming!

Nope, I’m not referring to Diablo’s new Season of the Malignant. Or whatever season Fortnite happens to be promoting this time of year. And, while I’m enjoying Season 3 of Netflix’s The Witcher, that’s not it either.

I’m here for earnings season, of course!

Here I have the latest quarterly installment at the site, where I’m tracking earnings dates for over 100 public companies. It’s what I like to call one of the most comprehensive calendars covering gaming, media and technology sectors across the ‘net.

In the massive image above and the handy Google Sheets document below, feast your eyes on not just the date and fiscal quarter, there’s also investors relations links for easy access. Highly recommended for the dog days of earnings season.

Since gaming is indeed the most global of industries, note that all dates are listed in local time zones based on what the individual company announced.

Check below for a preview of three companies worth your special attention over the coming weeks, and hit that bookmark button before you go! Be safe, business nerds. (For the record, I’m one too.)

Working Casual Earnings Calendar Jul & Aug 2023: Gaming, Media & Tech Companies

Capcom (9697): Wednesday, July 26th

This might be cheating because at least I was anticipating Capcom’s first quarter fiscal 2023 results ahead of today today, to see how flagship franchise launches have fared. It’s been an exceptional run for the premier Japanese publisher, which refocused a few years back towards remaking and bolstering beloved IP, and this past quarter was no different. Revenue jumped 74%, while operating profit nearly doubled. It sold 15% more game copies than this time last year. Street Fighter 6 was a main contributor, at 2 million units sold since June’s launch, as was March’s Resident Evil 4 Remake which hit the 5 million milestone during the quarter. Surprise seller MegaMan Battle Network Legacy Collection is now at 1.32 million. While I’m not very upbeat on the likes of this month’s Exoprimal, I expect Capcom’s robust catalog to drive financial growth plus I have my eye on the launch of mobile title Monster Hunter Now in September.

Nintendo (NTDOY): Thursday, August 3rd

After another fantastic year, “earnings calendar post regular” Nintendo will be announcing its first quarter of fiscal year ending March 2024 next week. It’s always one of the most informative, especially lately given how much supplemental information the company posts. And I’m expecting a monster three months ending June. First, there’s The Super Mario Bros Movie, one of the highest grossing animated films of all time and the year’s big earner at the box office. That alone would catapult these results. Then, there’s the all-time fastest-selling Nintendo game The Legend of Zelda: Tears of the Kingdom, which sold a whopping 10 million in three days. It could be upwards of 20 million by now for all we know, and we’ll know soon. Also, having Nintendo on this list is an excuse to use a cover art image of Everybody 1-2 Switch, which launched in June to minimal fanfare, because its absurdity makes me both laugh and cringe every time. Even so, the one-two punch of Mario and Zelda will make this Q1 rival 2020’s height of Animal Crossing fever.

Nexon (3659): Wednesday, August 9th

Admittedly, I don’t track Nexon as closely as I do other companies across the gaming sphere. Founded in South Korea and operating out of Japan, it produces a variety of online multiplayer titles primarily popular in Asia. Lately, it’s aggressively investing across the globe, buying portions of Hasbro and Bandai Namco while signing deals with Microsoft and others. Future projects include ARC Raiders, The First Descendant and The Finals, although executives have been cagey on release timings. The reason I mention it here is, when the firm shares its second quarter 2023 report, I’m hoping we hear yet another milestone for Dave the Diver. The excellent underwater diving and sushi-serving RPG is from Nexon’s indie label Mintrocket, serving up a million copies within ten days of launch. It’s 2023’s industry darling, similar to Inscryption, Disco Elysium and Return to the Obra Dinn from years past. It’s been on Steam’s best-selling charts since debut in late June, and it should find success on Nintendo Switch later this year.

Sources: Company Investor Relations Websites.

-Dom

PlayStation 5 Q4 Unit Sales Record Drives All-Time High for Sony’s Gaming Division in 2022 With a Couple Caveats

DomsPlaying

Gamers should be happy, for once, because the PlayStation 5 has finally arrived!

At least that’s according to Sony’s 2022 annual financial results, which proved that any lingering supply issues for the newest console generation are now over.

The Japanese consumer tech giant reported earnings in Japan last week for the fiscal year ending March 2023. Within, its PlayStation division had an exceptional time as hardware inventories returned and people everywhere could buy PlayStations once again. Its Game & Network Services (G&NS) segment produced almost $27 billion in annual sales, an all-time best.

What’s the catch?

Well, a historically weak yen had an outsized impact and was responsible for a substantial portion of revenue growth. Gaming also proved less profitable because of higher development and acquisition expenses. I’ll cover that more later.

Still, that’s not to dampen what Sony is doing with its gaming hardware business emerging out of the height of pandemic times. During January to March, the PlayStation 5 had the best non-holiday quarter for a gaming console ever with 6.3 million units sold. For perspective, it had shipped 3.3 million and 3.9 million in the same quarter during 2020 and 2021, respectively.

This means Sony beat its ambitious fiscal year target of 19 million shipped, reaching 19.1 million. It also drove lifetime shipments to 38.4 million, moving past the 30.75 million for Sega Genesis and Nintendo 64’s 32.93 million.

On the content side for PlayStation, while yearly software unit sales declined, its services and engagement statistics showed progress as PlayStation Plus and Monthly Active Users (MAUs) either remained flat or gained ground.

“Distribution inventories have normalized, and we are now able to deliver PS5 to customers without waiting almost all over the world,” executives said in prepared remarks. “In addition, the positive impact of increased PS5 sell-in has begun to appear in engagement metrics, with dollar-based third-party software sales exceeding the same month of the previous fiscal year in February and March.”

Here’s a closer look at the numbers for 2022, plus a preview of the year ahead with my new predictions.

Starting with Sony overall, its Q4 revenue jumped 35% to $22.6 billion. During fiscal 2022, sales rose 16% to over $85 billion, slightly above its target. This benefited from contributions across a number of business lines, including G&NS in addition to Entertainment, Technology & Services (ET&S) and its Music segment.

On the other hand, quarterly operating profit suffered a 51% decline to $950 million. It was virtually flat for the year, at $8.92 billion, above estimate. Headwinds included currency impact alongside lower contributions from PlayStation and Sony Pictures.

Gaming is a major factor for Sony’s overall performance. Both Q4 and 2022 overall proved to be mixed, with excellent top-line growth yet a weaker profitability outcome. PlayStation revenue between January and March launched 61% higher, to an all-time Q4 record of $7.9 billion. That was over a third of Sony’s sales for the quarter. During 2022, PlayStation sales grew 33% to a record $26.9 billion.

Again, on the flip side was profitability. Fourth quarter operating profit dipped 55% to $287 million. This drove the annual figure down 28% to $1.85 billion.

There’s great top-line movement yet worsening profit tells a totally different tale. Part of the reason behind record sales was massive exchange rate impact. Over the course of 2022, currency effect was upwards of $3.1 billion. That’s 12% of the total! If backing out this portion, for illustration purposes, Sony’s annual revenue would have been virtually flat.

Profitability took a hit mainly due to higher costs associated with making blockbuster first-party games like God of War Ragnarok, which had a reported budget of at least $200 million, plus purchasing Destiny creator Bungie among other smaller studios. Sony is also investing in its services suite and cloud offerings, and rebranded its PlayStation Plus membership structure. And frankly, it costs money to supply more hardware.

A primary growth driver was, naturally, PlayStation 5 hardware shipments. As regional data came in from key markets, indicators pointed to a big quarter. I still didn’t know if it could be this massive. Sony just shipped the most PlayStations in any fiscal Q4. To put this 6.3 million in context, the biggest January to March shipment total was 3.1 million right after its launch in fiscal 2013. Last year, Sony moved a paltry 2 million.

Even more, I bet most if not all stock is selling-thru to customers. The supply and demand equation has equalized, and Sony is clearly making up for lost time.

While this is impressive stuff, the PlayStation 5 continues to lagging its predecessor, which was at 40 million shipped by the end of its third fiscal cycle. That’s currently the fastest-selling console in Sony’s history. We’ll see if PlayStation 5 catches up. (Tease: It should by next year).

This performance was reflected in its product mix, where Hardware made up 35% of the quarter’s sales after more than doubling year-over-year. Next up was 21% via Add-On Content as it benefited from spend on third-party software and downloadable expansions. Digital games comprised 16%, no doubt bolstered by a monumental launch for Warner Bros’ Hogwarts Legacy. And the Others category contributed 13%, moving up 176% since last year. This includes Sony’s games on PC, such as The Last of Us Part 1 which launched in March.

As I did during my Microsoft earnings reaction, here’s a quick rundown of where Sony’s latest annual output fits compared to peers. Tencent’s latest was nearly $26 billion, meaning that if we account for extreme exchange rate fluctuations, Sony’s $26.9 billion would be tops. Backing out that effect, Sony occupies the second spot again at $23.82 billion. This is where Microsoft’s Xbox sales sit at $15.43 billion. Activision Blizzard’s 12-month revenue was $8.14 billion, so the combined firm could be $22 billion to $23 billion, accounting for redundancies and sales overlaps. Nintendo previously produced $12.25 billion, yet the company is reporting more recent results next week.

Sony’s management also shared supplemental statistics, which give insight into the number of folks playing regularly on PlayStation, if those users actively sticking around plus how well are services being received.

To keep it simple, I’ll focus on annual figures. Intriguingly, full game software sales across the PlayStation family took a substantial hit during 2022, moving down 13% to 264.2 million. Out of that, 43.5 million were from first-party titles published by Sony itself. That number is down only marginally from last year’s 43.9 million. In fact, Sony claims that dollar sales of first-party software rose 41%, including the impact from Bungie. The bulk of the unit drop was external games.

Digital represented 67% last year, up slightly from the 66% of fiscal 2021. That means more than two-thirds of games purchased for a PlayStation platform are via download. Digital’s slice didn’t dip below 62% during any quarter over the past two years.

It appears that, for now, the refurbished PlayStation Plus service is attracting and retaining users. There were 47.4 million memberships at the end of March, the same exact figure as the prior year and up 1 million sequentially since the holiday season.

Reflecting a similar engagement theme was active users on PlayStation. MAUs, defined as the “estimated total number of unique accounts that played games or used services on the PlayStation Network during the last month of the quarter” rose from 106 million in March 2022 to 108 million now.

Thus, while software sales declined for Sony this fiscal year, just as many people are subscribing to its catalog of older titles on PlayStation Plus and even more people are active on the ecosystem, which contributed to its elevated financial results.

“The number of monthly active users for PlayStation as a whole increased 2.3 million accounts compared to the same month of the previous fiscal year in March,” management said on its conference call.

There’s two sides to Sony’s story last year, and I’ve fully delved into both. To summarize, it was one of the best years gaming has ever seen. Albeit with the caveat of revenue benefiting greatly from a weak local currency and profit facing hits from big costs. There’s macro elements like supply lines being shored up that greatly benefit, and even though people are buying less games, perhaps partially due to inflation pressure, they are playing the games they bought.

One disappointing element of Sony’s announcement was nothing much on PlayStation VR2, which launched in February. For such a major product launch to receive zero airtime is concerning, and reinforces my viewpoint that its launch isn’t moving the needle for PlayStation or virtual reality as a niche.

Looking ahead, Sony has set a rather ambitious target for its gaming division in fiscal 2023. Namely, it expects the best year ever for PlayStation hardware, even with a single system-selling title on the docket for the upcoming 12 months.

“We are planning to release a major title, Marvel’s Spider-Man 2, this fiscal year, and we aim to continue creating new IP, rolling out catalog titles for PC and strengthening live game service development.”

Starting with hardware guidance, executives anticipate shipping a staggering 25 million PlayStation 5’s between April 2023 and March 2024. That would be the single best year of PlayStation console sales in its three decade history. If this happens, lifetime PlayStation 5 sales would reach 63.4 million, thus blowing past PlayStation 4’s 60 million on a launch-aligned basis.

I believe Sony will in fact meet this mark. I’m forecasting 25 to 25.5 million in annual PlayStation 5 shipments. I don’t expect any sort of new enhanced version, despite what “insiders” claim. Sony doesn’t need one right now. Supply has caught up to demand and it will milk the current devices until there are more games available solely on this generation.

Effectively, I’m targeting calendar 2025 for a PlayStation 5 model refresh.

Unlike Sony’s overall guidance expecting lower results in fiscal 2023, the firm is upbeat on the gaming segment. It anticipates 7% higher revenue and 8% better operating profit for PlayStation, to $28.8 billion and $1.99 billion respectively. The former would be another all-time best.

Will it hit these? I’m hesitant, not because of games or hardware, mainly because of exchange rate uncertainty plus cost upside. I’m expecting a more modest rise in the low single-digits, and operating profit to be flat or down slightly.

I’m expecting a great upcoming 12 months for software on PlayStation. Marvel’s Spider-Man 2 is undoubtedly a system seller. Square Enix’s Final Fantasy XVI and Capcom’s Street Fighter 6 will attract audiences. Activision Blizzard will launch Diablo IV to critical and commercial acclaim, and will have some sort of premium Call of Duty to sell. MLB The Show is a quiet success every year. Even Ubisoft will, allegedly, launch some games.

There’s also the transmedia portion and PC sales, incorporating brands like The Last of Us and Twisted Metal, which can provide upside if costs are kept in check. The great unknown is Sony’s live services push because it’s still in the ramp-up phase, where it generates expenses long before revenues and I remain a skeptic on just how many players will obsess over ongoing games exclusive to a single platform. At least Naughty Dog should share more on The Last of Us multiplayer this year.

I’ve come to the end of another fun rundown, within what’s already been a busy season. Next up will be Nintendo next week. Thanks for hanging out. Until then, take care, and be well everyone!

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥135.4.

Sources: Ariana Ruiz/Picture Alliance (Image Credit), Circana, Company Investor Relations Websites, The Guardian.

-Dom

Microsoft’s Xbox Division Posts Second Best Q3 Sales Ever & U.K. Regulator Blocks Activision Blizzard Deal

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As earnings season officially kicks off, displayed by my quarterly calendar, it’s a big week for Microsoft.

Like many things in life, there’s good and bad.

Yesterday, the Washington-based mega-corp reported its fiscal 2023 third quarter results. This proved to be quite the time for its Xbox division, achieving its second best Q3 ever behind only last year’s all-time highs.

Overall, Xbox revenue declined 4% in the latest three-month period. The Xbox Content & Services sub-segment, which include software and subscriptions, provided a welcome boost as output from hardware sales slumped in the double-digit range.

“We are rapidly executing on our ambition to be the first choice for people to play great games whenever, however, and wherever they want,” said CEO Satya Nadella on the firm’s conference call. “We set third quarter records for monthly active users and monthly active devices.”

Now, less than a day later, we have a huge update around its pending acquisition of Activision Blizzard. The United Kingdom’s Competition & Market Authority (CMA) pushed back against the proposed deal in its final report, citing competition concerns mainly in the cloud gaming space. Thus, the CMA did not approve the acquisition and has blocked it from taking place locally.

At least for now.

“We took the view that the merger would be harmful to competition,” the regulator wrote in its document available here. “And that the best way to address this would be to allow existing drivers of competition to continue to deliver for the benefit of UK consumers.”

This is a major blow to Microsoft’s shot at broadly closing the deal anytime soon, if at all, especially since it has yet to receive approval in the United States or European Union. And it’s a surprising development to me, considering the CMA recently expressed that it didn’t see concerns on the console side which is exponentially larger than the cloud market.

At the start of this year, I predicted that regulatory delays might push the deal to calendar Q4. Now, I’m on the fence as to whether it will even happen!

Understandably, Microsoft executives aid they will be appealing this decision.

Here’s a rundown of the underlying financials from Microsoft’s latest announcement showing a very good quarter for gaming. Then, read on for commentary around where I think the Activision Blizzard deal goes from here.

First let’s talk general gaming numbers. During January to March, Xbox generated $3.61 billion in revenue. That’s down 4% since the same time last year, which was a record $3.74 billion. This is only the second time Q3 Xbox revenue has surpassed $3.6 billion.

Expanding to consider the most recent 12 months, Microsoft’s gaming segment has produced $15.43 billion in sales. You’ll see this comparison over time in the graph above. Compare that to the $16.49 billion generated a year ago, and the current yearly figure is down 6%.

Even so, annualized Xbox sales have been above $15 billion for eight straight quarters.

This illustrates a few important factors impacting the top-line of Microsoft’s Xbox business. Mainly how its subscription business is proving resilient even when there aren’t many major exclusives and hardware isn’t growing.

It reflects a shift of spending for consumers coming out of the heights of coronavirus lock-downs, moving towards different purchasing decisions when it comes to entertainment. There’s also the inflation element, which continues to rear its ugly head at a macro level. Still, it’s lagging where it should be at this point in a new console cycle. If it wasn’t for Xbox Game Pass, the business would look a whole lot different.

While it’s still early in the earnings season, I like to run an annual sales comparison across industry peers whenever we get new results from the biggest players. Tencent is currently the world’s largest gaming company by sales, eclipsing upwards of $25.6 billion in fiscal 2022. Sony’s impressive $22.84 billion from PlayStation is up next, bolstered by an exceptional holiday quarter. This is where Microsoft slots in with $15.43 billion. Note Activision Blizzard reported its fiscal 2023 Q1 results today, wherein its 12-month revenue is $8.14 billion, thus the combined entity could be roughly $22 billion to $23 billion, accounting for redundancies and sales overlaps. Lastly, Nintendo saw $12.25 billion in annual sales.

As I say every time when Microsoft reports, we have limited visibility into profitability for the Xbox brand. The gaming segment is part of the More Personal Computing (MPC) business unit, which experienced a 12% decline in operating profit during Q3. This was mainly driven by 9% lower revenue, since operating expenses declined 5%. It’s impossible to know how gaming contributes, so all we have are metrics from the broader business.

I’ll now break out the performance of each underlying segment within gaming, to illustrate how each contributed to the whole.

Sales from Xbox Content & Services rose 3% in Q3, well above the company’s forecast. This equates to $3.1 billion in sales, or 86% of Xbox’s total, which is a record third quarter dollar amount passing last year’s $3 billion. On an annualized basis, sales from Xbox Content & Services reached $12.06 billion or 78% of the total. The company attributed this upward movement to Xbox Game Pass growth.

As part of this, subscription revenue reached almost $1 billion in Q3 according to Nadella. Thus, 28% of Xbox revenue right now is via Xbox Game Pass and related subscription revenue across its various devices.

Speaking of the service, management still hasn’t shared any new subscriber numbers. The last update was 25 million back in 2021. It seems like every quarter, executives say that Xbox Game Pass is growing and yet we don’t know by how much. I’m still banking that it publicly hits the 30 million mark this fiscal year.

As for other metrics of engagement, I mentioned the quote from Nadella earlier in the piece that said Xbox set Q3 records for monthly active users (MAUs) and “monthly active devices,” whatever that means, without placing actual numbers on either. For reference, last quarter Xbox attracted 120 million MAUs, so it’s probably below this number (I’d imagine he would have said otherwise).

The last random statistic provided by executives was its first party passed 500 million unique users to date. Since the inception of the Xbox brand in 2001, I assume? That’s certainly a lot, albeit inclusive of Bethesda titles which only recently came under the company’s umbrella.

Moving over to Xbox Hardware, revenue declined an astonishing 30% in the quarter ending March to around $507 million. That’s the lowest dollar amount since 1st quarter of fiscal 2021. Annual sales from Xbox’s console business are currently $3.37 billion. Compare that to $3.79 billion around Q3 last year.

This reflects what regional data was saying in recent months, as Microsoft’s peers notched wins in key markets. Management said this was due to “a prior year comparable that benefited from increased console supply.” In that case, why the heck is Sony signalling its best year for PlayStation 5 and crushing it when it comes to inventories? There’s a disconnect between the two current gen manufacturers, and I can’t tell if it’s because of Microsoft’s ideological shift away from consoles and towards services, or if its suppliers aren’t doing as well as peers?

This is one reason why it’s so hard to talk about lifetime hardware shipment comparisons this generation. I had Xbox Series X|S around 21.5 million to 22 million last quarter. Maybe it has passed 23 million by now, which I believe would be lagging even the lackluster Xbox One generation. For comparison, PlayStation 5 is at 32 million and will be even higher when Sony reports its results later this week.

Closing out the Q3 talk, Microsoft’s overall revenue rose 7% to $52.9 billion. Operating income moved up 10% to $22.4 billion. Microsoft Cloud revenue alone jumped 22% to $28.5 billion. The firm beat analyst expectations for both sales and profit.

Really, this past quarter perfectly encapsulates Microsoft’s evolved gaming strategy. Ecosystem and subscription contributing to ongoing revenue, which offsets times when console sales are lackluster or it doesn’t have a big exclusive software launch. I’ve said for years that Microsoft’s biggest exclusive is Xbox Game Pass, not any of its first party brands like Halo or Forza.

The results for Xbox’s subscription offering speak for themselves, at least at the top-line. Whether it’s sustainable over time is another question that’s hard to answer without more transparency. If my prediction of a price hike in the next year or so comes true, that’s another piece of the profitability puzzle.

Looking ahead towards the final quarter of Microsoft’s 2023 fiscal year, the firm expects gaming revenue to grow in the “mid to high single digits.” If I assume 7%, that would be $3.7 billion. Just below the all-time high of Q4 2021’s $3.71 billion.

For Xbox Content & Services, management forecasts an increase in the “low to mid teens.” Assuming it could be around 12% growth, that’s a Q4 result of $3.1 billion which would be the best Q4 for this software sub-segment to date. And while Microsoft doesn’t provide guidance for its Xbox Hardware business, I’m looking at around a 13% decline if the other numbers hold.

This fits with my expectation that 3rd party software will carry the quarter, with the likes of Star Wars Jedi: Survivor, Diablo IV (ironically from Blizzard) and Street Fighter 6 hitting market. Internal studio titles like Minecraft Legends and Redfall will contribute, though I wouldn’t dare call them blockbusters. Either way, I’m expecting Microsoft to meet these forecasts, leaning more towards a slight beat.

That brings me to my reaction to the CMA’s decision to block Microsoft’s intended purchase of Activision Blizzard in its native United Kingdom. While I’m still digesting it, and I’m far from a legal expert, the overall point remains that cloud gaming seemed to be the tipping point for the regulator, and the main reason why it thinks the deal could stymie competition.

I can almost see the CMA’s argument, as Microsoft purchasing all these properties will certainly beef up its already leading market share in cloud. Even as the company threw around 10-year licensing agreements like Oprah does cars. It’s still a ridiculous reason to block the purchase, considering it will continue to be a niche portion of the industry now and in the medium term. To me, King is the real prize of the deal with its exposure to behemoth mobile titles like Candy Crush. There seems to be an outsized focus on cloud services, which will remain a small complement to traditional and mobile gaming for many years to come.

It’s a cop out, I know, yet I’m officially undecided as to when, or even if, the deal will close. Originally I expected it by year-end. With Microsoft appealing the CMA’s decision, plus without approval yet from the United States and European Union, my prediction is this legal ordeal might drag well into 2024.

Apologies to everyone who thought the story would be over sooner than later!

What is over is my first big recap of video game earnings. Check back in the coming days for more games industry coverage, and bounce back to the calendar for a rundown of the schedule for gaming, media and tech companies. Thanks for visiting! Be well, everyone.

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

Sources: Company Investor Relations Websites, The Competition & Markets Authority (CMA).

-Dom

Earnings Calendar Apr & May 2023: Gaming, Media & Tech Companies

DomsPlaying1 Comment

Ready for a brand new season?

Nope, I’m not talking about your favorite show or streaming service offering. (Though how about that epic third episode in the final season of HBO’s Succession, huh?) It’s earnings time!

In what’s become a quarterly tradition dating back as long as the site has existed, here’s a massive calendar of earnings dates for key public companies across the games industry, media sector and technology space.

I like to say this list of 100-plus companies is the biggest and best place to keep organized during a busy time for business. Over the coming weeks, I hope it’s helpful as various companies report numbers behind their recent performance. I use it myself to stay up-to-date.

Check the above image for a rundown of the full list. There’s also a handy Google Sheets link below, meant to be an easy way to visit investor sites.

As an added bonus, read on for a preview of three major earnings results incoming this quarter. As always, I’ll be writing articles about some of these soon.

Thanks as always for visiting, and have fun!

Working Casual Earnings Calendar Apr & May 2023: Gaming, Media & Tech Companies

Sony Corp (SNE): Friday, April 28th

This is an easy one, as Sony’s PlayStation division is one of the hottest stories in all of gaming. Especially as hardware supply lines come back online in a big way. The Japanese consumer conglomerate reports 2022 results later this week, which could be excellent after a record holiday for gaming. Within this annual release, I’ll be closely monitoring hardware and engagement. Will it achieve the lofty 19 million annual PlayStation 5 unit sales figure? This is a big expectation, considering it totaled 12.8 million through the first 3 quarters. I’ve been a vocal skeptic. However, the more I’ve seen recent regional data, I’m thinking it might actually hit the estimate. Upwards of 6.2 million consoles in a three month span would be one of the best non-holiday quarters for a PlayStation. In addition to the usual PlayStation Plus and monthly active user figures, I’d like to hear anything on PlayStation VR2. If Sony is silent there on its latest virtual reality launch, that would be deafening. Overall, I’m way upbeat on PlayStation’s 2022.

Nintendo (NTDOY): Tuesday, May 9th

While we won’t quite hear about the commercial success of The Legend of Zelda: Tears of the Kingdom when Nintendo reports its latest yearly result in May, we will hear plenty about the Switch and The Super Mario Bros. Movie breaking all sorts of records. Even if the film won’t contribute to what I expect will be a solid fiscal 2023 result. By then, the Mario Bros will have etched their name into the annals of box office history by generating over $1 billion in ticket sales. (At present, it’s approaching $900 million.) On the gaming side, I want to see if Nintendo achieved its lowered 18 million annual Switch hardware unit target and where it guides for the current fiscal year, which is the hybrid console’s seventh on market. Plus, the evergreen Mario Kart 8 Deluxe will probably sell another few million units, as it often does.

Capcom (9697): Wednesday, May 10th

When Capcom REports its REsults for fiscal 2022 next month, I expect it to be REally good. Maybe even REmarkable. Why am I typing like that? Because its bread-and-butter approach of remaking mainline Resident Evil games continued through this latest year with a modern version of Resident Evil 4 launching in late March. It was the 2nd fastest-selling title in franchise history, moving 3 million units in 2 days then another million in the week or so after. Last quarter, the Japanese third party publisher said it’s on target to achieve its full-year guidance driven by digital performance, Monster Hunter Rise: Sunbreak and the aforementioned Resident Evil boost. Beyond that, I’m looking forward to forward-looking targets considering it has a busy year incoming. Street Fighter 6 hits in June and what I think can be a surprise IP in Exoprimal launches in July. The firm also has the Monster Hunter Now mobile game in September, then a live-action Street Fighter movie is in the works as well.

Sources: Company Investor Relations Websites.

-Dom

Nintendo 2023 Q3 Report Shows Switch Lifetime Sales Passing 122M to Become 3rd Best-Selling Gaming Hardware Ever

DomsPlaying

It’s time for the last holiday recap of the big three gaming console makers, as I’ve previously covered a shaky quarter for Microsoft and Sony’s record-setting result.

Nintendo posted its third quarter fiscal 2023 announcement in Japan today. The company’s still exhibiting strength when compared to most recent years, though exercising caution going forward into the same tricky macroeconomic environment that many consumer tech firms are facing.

While hardware shipments are slowing as Switch moves towards its sixth birthday next month, the hybrid reached a new milestone this quarter and passed the sales of two legendary devices in the process.

The company shipped 8.25 million Switch units in the three months ending December, now achieving 122.55 million across its lifetime. That moves it above Sony’s PlayStation 4 and Nintendo’s own Game Boy/Game Boy Color which reached 117.2 million and 118.69 million, respectively.

It’s now behind only PlayStation 2 and Nintendo’s DS handheld line on the all-time list, making it the 3rd best-selling gaming hardware to date. It’s technically 2nd on both home console and portable lists if breaking them out individually. I don’t remember anyone saying this would happen when it launched back in 2017. I was among the most upbeat on its prospects. This is the type of monumental run that’s near impossible to predict.

Also contributing to Nintendo’s solid quarter was the historic launch of Pokémon Scarlet & Violet. After shipping an unreal 10 million units during its first three days on market, it’s now crossed another milestone at 20.61 million shipped between its November start and year-end.

Not only is this the fastest-selling Pokémon release ever, it has better initial sales than any game ever released on a dedicated Nintendo device. This monstrous start makes it already seventh place on the Switch best-sellers list, outpacing huge catalog titles like Super Mario Party and Ring Fit Adventure.

“For the months of October through December 2022 which encompass the holiday season, the effects of shortages of semiconductors and other components was largely resolved, and shipments generally went according to plan,” management said in prepared remarks. “However, unit sales were down compared to the same period last year, when Nintendo Switch – OLED Model was released.”

“Shipment volumes for software generally went according to plan. The release of new titles including Pokémon Scarlet and Pokémon Violet contributed to unit sales, but overall software unit sales declined year-on-year, affected to an extent by the decline in hardware sales.”

Even with generally softer hardware output, Nintendo’s top-line is proving resilient when scanning the past decade. Especially considering the sort of inflationary pressures facing consumers and a lineup lacking major titles outside of Pokémon. I’ll now move into the underlying numbers, then a look ahead to guidance and predictions for the months ahead.

I pulled the above gallery of slides from Nintendo’s Q3 report, where it showcases 9-month performance in the period ending December. I’ll back into the quarterly figures, then illustrate trends over a longer period of time as well.

Revenue for the three months ending December 2022 came in at $4.68 billion, down 8% since last holiday. Operating profit experienced a more precipitous dip, moving down 25% to $1.39 billion. Two of my charts in the next section map out movement over time.

Taking this into account, sales for the fiscal year to date have declined a modest 2% to $9.5 billion. Income from operations is trending down 13%, to $3 billion.

Executives said sales dipped slightly despite the yen’s depreciation, primarily because of semiconductor shortages in the earlier quarters and component parts impacting hardware supply. Still, that top-line figure is more resilient than expected, achieving the second best Q3 sales since back in fiscal 2010. Even quarterly operating profit is the third best since that same year, despite the recent double-digit decline. Demand for a spanking new Pokémon generation certainly helped.

I’ll now dig into the current product category mix that impacted last quarter. Leading the charge was Hardware, at nearly 51% of the split. Compare that to 54% this time last year, when Nintendo was shipping more units to retailers. This means software moved from 46% during last year’s December quarter to 49% now, bolstered by the proportion from first-party being 85% of the total. From a geographic standpoint, Americas is 43%, the same as last year. Nearly 25% of Nintendo’s sales came from Europe, down from 27%. Japan made up most of the difference, contributing 24% versus last year’s 21%.

Expanding to see how the latest quarter affects annual sales, check out the second set of charts in the next gallery. Nintendo’s annual sales are currently trending towards $12.25 billion, effectively flat year-on-year. It’s been hovering around a similar value since mid-fiscal 2021. Which proves that, even with a down quarter, annual revenue has been consistent. On the other hand, annualized operating profit dipped to its lowest level in ten quarters, at $3.9 billion. Higher expenses and the yen’s movement are its biggest headwinds.

Similar to recent articles, I’ll list a quick comparison to industry peers. Tencent is the world’s biggest gaming company by sales, currently at $25.8 billion. PlayStation’s record holiday led to $22.84 billion in annualized revenue, its best to date. Microsoft ranks next at $15.56 billion, though could be upwards of $19 billion to $20 billion if it acquires Activision Blizzard this year. That’s based on the latter’s $7.53 billion annual figure reported yesterday, accounting for overlap and redundancies. Nintendo slots here at $12.25 billion, noticeably hamstrung by recent exchange rate shifts. However, Nintendo is currently more profitable than Sony’s PlayStation division when using the latest 12 months, earning $3.9 billion compared to $2.11 billion. Likely due to the cost of producing more PlayStation 5’s and developing AAA titles like God of War Ragnarök.

On the hardware front, this segment continues to cool. Although Switch is showing its age from both a commercial and spec standpoint, it’s still not quite near the end of its life just yet. Nintendo is committed to this device, and is still planning out its transition to the next one.

Unit shipments for Switch during the three months ending December totaled 8.25 million, compared to 10.67 million last holiday, or 23% lower. That brought the current 9-month total for this fiscal year to 14.91 million. At this same point in fiscal 2022, the figure was 18.95 million which implies a 21% decline. Interestingly, that’s the same percentage decline between 2021 and 2022.

Out of the units shipped through Q3 this year, 5.22 million were base model Switch. That’s down a whopping 56%, mainly because of the shift towards the OLED model being the standard version. The OLED model shipped 7.69 million in the last 9 months, nearly double the 3.99 million of its debut year since it started in October 2021. As for the Lite counterpart, sales through the third quarter declined 37% to 2 million units.

Referencing the aforementioned lifetime figure of 122.55 million, it’s approaching all-time best-selling gaming console territory. Can Switch really become the top seller? Well, it would have to beat out two devices in order to earn the crown. Which is a tall order.

After launching in 2004, Nintendo DS ended its life years later as the best-selling handheld device ever, achieving 154.02 million in sales. Almost two decades later, no portable has even come close. Then, the all-time leader right now is Sony’s PlayStation 2, which hit stores in 2000 and skyrocketed to 159 million throughout its tenure. Thus, Nintendo has to ship between 31.47 million and 32.45 million more Switch to reach these heights. If Switch’s successor launches in Late 2024 or Early 2025, that leaves seven to eight quarters for this to happen. An average of 4 to 4.5 million per quarter. While I do think it’s probably attainable, I don’t think I’d bet on it.

Shifting back to this recent report, Nintendo shared insight into numbers around Switch sell-thru to consumers. (Until now in this article, I’ve been talking about units shipped to retailers.) Executives say that people continue to have a “diversification of motives” for purchase, which includes first-time buyers or upgrades to OLED. Even so, sell-thru declined compared to last year, as it did in 2022 as well since it’s been trending downward after peaking during quarantine days.

It stands to reason that, while there’s still an appeal to grab a Switch especially at a retailer discount, fewer people are doing so which signals a nearly saturated market. Combine that with inventory difficulties and a lower average selling price, and we’re seeing a natural downswing in units produced plus revenue generated.

Software shipment data held stronger than hardware for Nintendo, mainly because of just how much demand there was for Pokémon and certain legacy titles reached new sales thresholds.

During the quarter, Switch software sales totaled 76.71 million. Compare that to 85.41 million units last year, thus a 10% decline. Across the three quarters ending December, software units were 172.11 million, down 4% against last year’s 179.29 million.

Software sales over Switch’s lifetime are drawing toward an incredible milestone. Last quarter, overall Switch software was at 917.59 million. Now, it’s 994.3 million. Nearly one billion games sold for the device since 2017! It’s likely cleared that by now, and we’ll know by exactly how much when the company reports next quarter.

During the latest 9-month period, the hybrid featured 27 titles that have sold a million units or more within that time period. Out of that, 19 were published by Nintendo. The remainder were third-party titles. Over the same length of time in fiscal 2022, the amount was 29 in total, 22 of which were Nintendo. Quality software remains the major appeal for Switch, even if existing users are purchasing them as opposed to new console owners.

November’s Pokémon Scarlet & Violet drove today’s results, as mentioned. It’s sold-thru 18.2 million copies to consumers over seven weeks. As if it wasn’t clear how ridiculous its start was, this stat will really put it into perspective: After mere weeks on sale, these are already the fourth best-selling titles ever in the franchise. That’s across all releases since Pokémon Red & Blue kicked things off in the mid-90s! I expect by the end of Switch’s time, it could be the best-selling Pokémon to date. We’re talking one of the biggest entertainment franchises in history! Truly unreal.

Bayonetta 3 hit stores in October as the other new release, and it’s officially a million seller. Developed in conjunction with Platinum Games, the action title started at a hair over 1 million, reaching 1.04 million during the period. That’s equivalent to lifetime sales of its predecessor’s port onto Switch, which hit the platform in February 2018.

Beyond the brand new games, Nintendo provided updates to those launched in earlier quarters during fiscal 2023. Splatoon 3, which splattered series records with its 7.9 million unit start back in September, has since passed the 10 million milestone, settling at 10.13 million. June’s Nintendo Switch Sports sold-in an additional 2.46 million units in the holiday months, scoring 8.61 million to date.

Additionally, the best-selling racing game ever in Mario Kart 8 Deluxe sped past yet another mile marker this quarter. This time it’s the 50 million mark! Shipping 3.59 million units in Q3, it’s now at exactly 52 million lifetime. Two other high sellers achieved new milestones as Super Smash Bros. Ultimate smashed 30 million and Super Mario Odyssey jumped past 25 million, to 30.44 million and 25.12 million respectively.

Beyond software sales numbers, Nintendo tends to give tidbits around engagement and user base statistics. Back in September, Nintendo Switch Online reached 36 million paid members. I’ll update this section if the company shares an updated figure. Otherwise, the “statistic” of Annual Playing Users, which measures the number of accounts that have opened a single Switch game over the past 12 months, rose to an all-time high of 112 million in December. It was 106 million in Q2. So, the vast majority of Switch owners still use it at least once a year. Shocking revelation!

Despite the outlined financial and unit sales reductions, Nintendo had quite an impressive third quarter as compared to recent years. Especially for revenue. Nintendo Switch beat out two iconic gaming device families for lifetime sales and Pokémon Scarlet & Violet had a frankly ridiculous performance. No doubt there are signals that parts of its business are coming down off recent highs, yet Nintendo has the sort of quality software lineup to soften the blows of hardware slowdowns.

Moving into the final quarter of its fiscal 2023 period, management shared updated guidance in today’s announcement. This is where a bit of nervousness creeps in, yet I’m not as concerned for the overall health of Nintendo’s trajectory. Especially given where it was during the dire straits of the Wii U years, this looks almost as rosy as ever.

Intriguingly, just after raising financial targets last quarter, executives reverted back to lower estimates this period. They adjusted their revenue forecast down 3% to $11.73 billion, implying a 6% decline since last fiscal year. Similarly, operating profit guidance was revised downward 4% to $3.52 billion. Even so, these updated figures would be the third best annual results since fiscal 2010.

Then for the second quarter in a row, Nintendo reduced annual Switch shipment guidance. Management now anticipates 18 million shipments, down 5% from Q2’s 19 million. That means the firm has to produce 3.09 million between January and March to end the fiscal period. Personally, I think it’s now a bit too conservative. My bet is it beats the target, moving upwards of 19 to 19.5 million, which is slightly below my target from three months ago.

Along the same lines, Nintendo lowered its annual software estimate 5 million units, or 2%, to 205 million. This is where I’m more skeptical, mainly because of a light slate in the three months ending March. A good portion of the 32.89 million needed this quarter to achieve that target has to be follow-on sales of things like Pokémon and Mario Kart. New releases that will also drive this include Fire Emblem Engage, which launched a couple weeks back, Kirby’s Return to Dream Land Deluxe later this month then March’s Bayonetta Origins: Cereza and the Lost Demon. These aren’t chart-toppers or anything.

One lingering question of course is might Advance Wars 1+2: Re-Boot Camp launch in the coming months? While Nintendo still has it as TBA in its reporting, alongside the likes of Metroid Prime 4, there’s speculation recently based on retailers that it could hit market soon, which could bump up software results. I remain cautious, the same way I’m thinking Nintendo will narrowly miss its latest annual software sales guidance.

“Sell-in of hardware units during the third quarter was generally in line with expectations,” management said. “However, hardware sell-through during the holiday season did not perform as expected, and therefore the unit sales forecast for the fourth quarter has been modified. The software unit sales forecast has been modified as well, largely due to taking into consideration the modification of the hardware unit sales forecast.”

Near the beginning of next fiscal year, May’s The Legend of Zelda: Tears of the Kingdom is clearly the biggest launch for Nintendo in quite some time. It will be a massive success and compete for best-selling premium title of the year globally and in areas like Japan, though perhaps not domestically on The NPD Group’s lists since Nintendo doesn’t share digital sales here.

In an exceptional bit of news that bucks the industry trend lately, as many firms are laying off workers, Nintendo plans to raise employee salaries by 10% for those that work in Japan. Reuters reports this decision by management as inflation grips the local economy. While it will certainly increase costs, it’s the right way to maintain talent that drives its best-in-class output.

To showcase that output, the company is hosting its first Nintendo Direct of 2023 tomorrow. The 40-minute long presentation will primarily focus on Switch titles launching in the first half of the calendar year. I’m looking forward to seeing what’s there for Zelda, which ports Nintendo announces and any indication of future first-party announcements in what might very well be the final year of Switch.

Time flies!

Speaking of having fun, thus ends my latest big results recap of the season. What is your initial reaction to Nintendo’s results? Have you bought a Switch and contributed to that lifetime total? Will it reach that annual target? Are you betting it will be the best-selling console of all time eventually?

For now, feel free to leave a comment or hit me up on social media. Remember my earnings calendar thread for companies reporting this quarter across gaming, technology and media. Thanks as always for reading! All the best.

Note: Comparisons are year-over-year unless otherwise mentioned. Exchange rate is based on reported average conversion: US $1 to ¥136.39.

Sources: Company Investor Relations Websites, NBC News (Image Credit), Reuters.

-Dom

PlayStation Achieves Record Holiday Sales & Profit in 2022 Q3 & Raises PS5 Annual Hardware Target

DomsPlaying2 Comments

What a quarter for PlayStation. Talk about bucking the trend!

I’ve been writing recently how this past holiday will be a mixed bag for many consumer technology firms, including gaming hardware manufacturers and software publishers. Sony is both of these things, and management is masterfully navigating the murky waters of our economic environment.

This fact is clearly illustrated when it reported third quarter fiscal 2022 results earlier today in Japan, in which the overall business grew double-digits and the PlayStation business unit achieved record Q3 sales and operating profit. The prior record-holder was this same quarter last year.

Within the report, it showcased growth across all PlayStation product categories. Hardware output more than doubled since last year, as did retail software, and digital content rose substantially. As I’ll show in a later chart.

PlayStation 5 (PS5) hardware had its best quarter to date measured by shipments, by a wide margin. Sony shipped 7.1 million PS5 units between October and December, up a whopping 82% compared to last holiday’s 3.9 million. That brings lifetime PS5 unit sales to 32.1 million. It’s now outsold the Sega Genesis, which peaked at 30.75 million overall.

Not only that, Sony actually increased its annual hardware guidance! While PS5’s better availability is impressive given higher input costs and supply chain disruptions of calendar 2022, it’s worth noting the console is still tracking below PlayStation 4 (PS4) at this same point in the early life cycle.

Partially driving demand for the new console was a suite of AAA games around this time. Third-party hits Call of Duty: Modern Warfare 2 and annualized sports games plus a system-seller like God of War Ragnarök alongside a supplementary title like Gran Turismo 7 significantly bolstered software, as both physical units and digital downloads soared.

“We are seeing steady results from the various measures we have taken in terms of both hardware and software,” management said in prepared remarks. “And we believe that we have created positive momentum to re-accelerate the growth of the game business centered on the expansion of the penetration of PlayStation 5.”

Here’s a deeper dive into the numbers behind this all-time holiday season, then a look at the company’s guidance and my predictions. Including a new chart format for the category mix!

Across the broader corporation, as shown in the above slides, Sony generated 13% more revenue this quarter up to $24 billion. Operating profit however declined 8%, to $3 billion. That second figure was the second best result in company history in local currency, behind only Q3 last year.

Shifting focus to the PlayStation segment alone, which is called Game & Network Services (G&NS) in Sony’s reporting. Sales increased a staggering 53% to $8.8 billion. Operating profit rose a more modest, yet still impressive, 25% to $820 million.

PlayStation exhibited exceptional top-line and profit growth that led to both of these figures being all-time records. Now it’s partially due to foreign exchange movement in a volatile rate environment, yet it’s mainly due to improving underlying fundamentals in its gaming business. Better hardware sales due to supply being there and demand staying strong, plus a big boost from first-party software. Even rising costs related to network business and acquisitions couldn’t hold profit back.

This was an astounding quarter. Looking at product category sales, nearly all of them moved up double-digits in Q3. Quite literally off the chart, as shown in the last one in the above gallery. Hardware was the biggest contributor at 35% of the total, since it more than doubled since last holiday. Add-On Content was the next biggest segment at 21%, even if it “only” increased 5%. Digital software comprised 20% of the PlayStation business, improving its sales 35% year-on-year. Physical Software proved to be the biggest mover from a growth standpoint, more than tripling.

Factoring in this latest record quarter, annualized revenue for G&NS is upwards of $22.84 billion right now. That’s the highest in history, tracking towards a best-ever year of sales. In fact, it’s $3 billion more than it’s ever been. I can’t overplay how well gaming is doing from a revenue standpoint, approaching a ridiculous $23 billion.

Profitability over the last 12-month period is a bit more tempered, as annual operating income totals $2.11 billion at present. It’s certainly recovering from where it was last quarter, trending towards pandemic highs.

Running down a quick comparison to industry peers, Sony is still in second place from a revenue standpoint. Tencent reports in March; for now, its annual sales are around $25.8 billion. PlayStation slots in here at the $22.84 billion. In Microsoft’s report last week, which I covered here, revenue over the last 12 months equaled $15.56 billion. Lastly, Nintendo is at $13 billion, though it has also yet to report and will do so next week. Keep in mind that a combined Microsoft and Activision Blizzard entity could eventually compete with Sony for second place, though I’d estimate it’s not above $20 billion to $21 billion just yet.

Now I’ll dig more into additional info from Sony on unit sales, network results and engagement stats for its gaming vertical.

Full game software sales declined in Q3, from 92.7 million to 86.5 million. That accounts for both internal teams and external publishers, including bellwethers like Call of Duty, Madden NFL and FIFA.

For first-party titles, this is where the real boost occurred. It nearly doubled from 11.3 million last year to 20.8 million. The bulk was, of course, driven by God of War Ragnarök which started at 5.1 million units during its launch week in November and has since reached the 11 million milestone. It’s the fastest-selling platform exclusive in PlayStation history across both of these time periods, a ridiculous result for the sequel to God of War (2018).

Within software, digital downloads compromised 62% of total game sales on PlayStation. That’s the exact same figure as last year, and only down slightly from 63% last quarter. The aforementioned growth of retail sales certainly affected this split.

Sony’s rebranded PlayStation Plus service now has 46.4 million subscribers, down compared to last year’s 48 million. Still, it’s higher than the 45.4 million last quarter thus showing sequential growth.

The other major user stat of Monthly Active Users (MAUs) edged up a million in Q3 to 112 million. It’s also 10 million higher than Q2, since the holiday season tends to attract new users and returning players alike. Sony also cited the transition to current generation hardware as a reason for user acquisition. The percentage of that 112 million that were solely on PS5 moved up to 30%, or roughly 33.6 million individual accounts.

“Engagement metrics of users who transitioned from PS4 to PS5, such as their PS Plus subscription rate, gameplay time, and average spending amount are significantly higher than those when they played on PS4,” executives said. “So we will continue to focus on accelerating the transition of PS4 users to PS5.”

Sony points out that almost 30% of MAUs on PS5 are users that never had a PS4, thus it’s attracting various new players, and payers, to the ecosystem. An essential part of any console business.

Intriguingly, for PlayStation players, total gameplay time declined 3% versus last Q3. Compared to the quarter ending September, it was up 6%. Focusing strictly on the month of December, hours jumped 14% compared to November.

“We believe that user engagement is on a recovery trend due to the penetration of PS5 and the contribution of hit titles,” management said. Based on the way hardware is trending, how high revenue has grown and its excellent title lineup last year, I certainly see that same trend.

It’s hard to overstate how exceptionally PlayStation performed in the months between October and December 2022.

To secure record revenue and profit during this macro environment, when people are facing inflation and returning to other activities, it’s truly the exception within consumer tech and gaming. Quite literally moving the opposite direction of a major peer like Microsoft. Even Apple is facing revenue challenges as it reports 5% decline in sales just this afternoon. Related publishers around the globe are struggling to outpace last year’s results. I’m supremely impressed with the leadership executing on its strategies, namely how it secured enough consoles to satiate pent-up demand.

Moving into the last quarter of its current fiscal year, management provided updated guidance for a variety of numbers. It slightly reduced total sales guidance down 1%, then bumped up operating income by 2 percentage points. These now imply around $81.2 billion in revenue and $8.33 billion in profit for fiscal 2022.

As for PlayStation, management reiterated its annual sales forecast which would be a record of $25.6 billion. It also raised guidance for gaming operating profit by around 7%, now expecting $1.7 billion for the year mainly because of currency movement. I think the top-line figure is fine for PlayStation as a segment, though firmly believe that operating profit forecast will be easily achieved. It feels too conservative given the latest holiday performance.

On the flip side, management is being even more aggressive on its PS5 unit sales outlook for the year. It’s raising the already high forecast by a million units, up to 19 million. Which would bring lifetime shipments to 38.3 million. All I can say is: Wow. Talk about upbeat! Right now, PS5 sales for fiscal 2022 are at 12.8 million thru 3 quarters. Sony needs to ship a massive 6.2 million in the 3 months ending this March in order to accomplish this target.

Now, I thought they were out of their collective mind last quarter. And I remain my usual skeptical self, considering 6.2 million is more than literally any other quarter in the PS5 life cycle other than this past holiday season. Management’s confidence must be rubbing off on me, as I think Sony will get close: I’m bumping my annual forecast to 17.5 million to 18 million.

What else could drive results into March? Well, PlayStation VR2 launches in a few weeks though I’m tepid on its commercial upside. Virtual reality remains a niche market, and the cost to entry is high for a peripheral that requires a pricey base console. I expect 1 million units to ship in the quarter ending March, yet a marginal impact on the bottom line considering it’s also costly to make headsets.

There’s also Sony’s transmedia push, which is paying dividends for both gaming and its Pictures division. In particular, the collaboration with HBO on The Last of Us is a smash hit and having broader audience appeal beyond any expectation. It’s attracting massive viewership and driving sales of September’s console release of The Last of Us Part 1, which is also launching on PC before fiscal year-end, and June 2020’s The Last of Us Part 2.

Well, talk about a lot to cover! It’s been a busy season already. Thanks for checking out another recap. Head on over to the latest earnings calendar for more dates to come, and I’ll have a full rundown of Nintendo’s results after the company publishes them next week.

Until then, be safe everyone!

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥141.7.

Sources: Company Investor Relations Websites, HBO Max (Image Credit), USA Today (Image Credit).

-Dom

Microsoft Gaming Sales Decline in 2023 Q2 Despite Xbox Monthly Active Users Reaching Record 120 Million

DomsPlaying2 Comments

First up on the new year’s earnings calendar is Microsoft, which reported its fiscal 2023 second quarter results last week.

Results were mixed in the holiday period for the software giant and its Xbox business, mostly expected coming off last year’s all-time highs. Just last quarter, gaming had its best Q1 ever.

That’s not the case for Q2, where normalization towards pre-pandemic levels has started in earnest. Even so, it was still one of the best quarters in Xbox history, which is important to keep in mind as headlines are often gloomier than reality.

In the three months ending December, Microsoft’s gaming revenue showed a double digit decline for the first time in three years. Mainly due to a sparse exclusive game slate, lower third-party monetization and ongoing hardware challenges. From a dollar standpoint, it was still the third best Q2 ever for Xbox, as I’ll illustrate soon. The sky isn’t anywhere near falling.

Executives tried to paint a picture around engagement and Xbox Game Pass while not providing any updated subscription numbers for its flagship service. On the bright side, they did share an updated figure for Monthly Active Users (MAUs) across the Xbox ecosystem as it passed a major milestone by year-end.

“In gaming, we continue to pursue our ambition to give players more choice to play great games wherever, whenever, and however they want,” said CEO Satya Nadella. “We saw new highs for Game Pass subscriptions, game streaming hours, and monthly active devices.”

I’ll now move into the underlying numbers for the latest quarter, then provide a look ahead to the back half of Microsoft’s fiscal year.

Between October and December, Xbox generated $4.76 billion in revenue which is 13% lower than the same time last year. That was in-line with guidance. While this number is the lowest it’s been in three years, it’s the third best Q2 in history only behind the latest two.

This historical context really illustrates the sort of impact quarantine spending had on the industry, as just last year Xbox recorded an all-time second quarter revenue high of $5.44 billion.

Executives pointed to this strong comparable as the main reason Xbox suffered declines across first and third-party content plus lower hardware sales output. I wouldn’t necessarily call it an outright disappointing holiday season; it’s just not nearly as good as last year.

One caveat is currency impact on this figure. You’ll see in the above slides that total gaming sales were down 9% in “constant currency.” This implies a 4% impact from exchange rate movement. I tend to report the overall figure because global companies must navigate these shifts, while also noting this particular point when fluctuations are especially drastic.

Taking into account the latest quarter, current annual gaming revenue stands at $15.56 billion. As shown in my chart, Xbox segment sales have been slowing lately after peaking around a year ago. It was bolstered by last holiday’s record quarter until now. This chart also keeps quarterly movement in context as it smooths out the results, displaying how well gaming has been faring versus the Xbox One generation.

Within these articles I like to run a quick comparison to industry peers, even this early in the season. Tencent currently has the most annual revenue from gaming, at upwards of $25.8 billion. Sony reached $20 billion. Here is where Microsoft’s $15.56 billion slots in, while Nintendo rounds out the list at $13 billion. If accounting for Activision Blizzard’s latest $7.4 billion in annual sales and assuming roughly $2 billion in redundancies and overlap, the combined entity could have between $20 billion to $21 billion in annual gaming output, potentially matching PlayStation depending on where exchange rates go.

Now, revenue isn’t the sole metric by which a division’s health is measured. Microsoft doesn’t share specifics on Xbox’s profitability, so we’re left to infer here based on its More Personal Computing (MPC) business segment results. Gross margin dollars reduced by 29%, driven by a mix towards lower margin businesses that include gaming. Expenses rose 6%, thus segment operating income dropped 47% to $3.32 billion. All of this implies profitability dropped in the quarter for Xbox, consistent with its lower sales output.

Moving over to category mix to show the underlying dynamics. Within the Xbox business, both sub-segments of Xbox Content & Services and Xbox Hardware experienced comparable double-digit declines as the business cooled.

The larger contributor Content & Services, which includes software and subscriptions, lowered 13% in the quarter. Right at company guidance. It accounted for $3.38 billion in sales, or 71% of Xbox’s total. Nearly the same contribution as last year, and lower than recent quarters since its hardware counterpart has been inconsistent.

During the last 12 months, Content & Services has generated $12 billion in revenue, making up 77% of annual gaming sales. It’s been at that same exact percentage for the last six consecutive quarters.

As has been tradition, Microsoft yet again didn’t share an update on Xbox Game Pass subscription figures. The latest of 25 million is way outdated, from back around September 2021. I often say that we learn just as much, if not more, from what a company doesn’t share. This is one of those cases. I assumed Microsoft would boast when it passed 30 million subscribers, so I assume it’s below that right now. In my predictions piece for 2023, I said it could reach that threshold by Microsoft’s fiscal year-end in June and move higher in the back half on the strength of new releases. I just hope Microsoft is more transparent, at some point.

Thankfully executives did provide another engagement stat: MAUs for the Xbox network overall. Finally. Two years ago, this figure crossed the 100 million user threshold. Now, according to Nadella, it’s at a record 120 million. Thus recently averaging 10 million per year in user growth and nearly double the 65 million achieved back in fiscal 2019. It makes sense that management would point to this within its strategy that emphasizes ecosystem over hardware, expanding its offering to more devices than ever and making a play that stacks up accounts as opposed to unit sales.

Rounding out the category mix with Xbox Hardware, this segment declined 13% to $1.38 billion. The slides cited both a lower average price and number of units sold compared to last holiday, which I’d call somewhat of a concern at this early life cycle stage. Also concerning is the dollar output, which is less than the second quarter in both 2018 and 2019 during the middle of last generation. It shows a few things: hardware is less important to the overall Xbox business than ever before, the lower-priced Xbox Series S is contributing a substantial share plus supply constraints continued into the quarter as competitors were able to better navigate the cost environment.

On an annualized basis, Xbox Hardware is tracking at $3.6 billion in sales right now. The lowest in six quarters. It bucks the trend of a traditional console cycle, where sales should be increasing in the early years. Note that the Xbox Series X|S family of devices launched in November 2020.

It begs the question: How many Xbox Series X|S consoles have shipped to date? Last quarter, I estimated between 17.5 million and 18 million. Given the revenue indicators and supply situation, I guess it’s approaching 21.5 to 22 million at this point, implying around 4 million shipped in the holiday quarter. This would be virtually in-line with Xbox One at this point in the life cycle (22.1 million). My estimate is partially because I notice Nadella is no longer boasting the family as the fast-selling in Xbox history. And it’s nowhere near its current generation counterpart. Sony’s PlayStation 5 recently passed 30 million sold-thru to consumers, and was already at 25 million lifetime shipped in September, showing strength in availability towards the latter parts of calendar 2022.

Fitting the general themes of macro pressure on tech in particular, Microsoft overall had its slowest quarterly growth in six years and missed analyst estimates. Top-line sales rose 2% to $52.7 billion, while analysts thought it would be above $53 billion. Microsoft Cloud alone increased 22% to $27.1 billion in sale, which met expectations. MPC was the only segment to decline, moving down almost 20% to $14.2 billion on PC market weakness and high output last year.

On the profit side, operating income declined 8% to $20.4 billion. Profitability was impacted by a $1.2 billion charge related to laying off 10,000 employees, or 4.5% of its workforce, which the company announced earlier this month. That’s a lot of talented people losing their jobs, notably in a shift towards artificial intelligence businesses, and I hope they are able to find success elsewhere.

General slowdowns hit both Microsoft and its Xbox division during the holiday period, even if it was still one of Xbox’s best quarters when compared to recent history. Higher Xbox Game Pass subscriptions propped up weakness elsewhere, especially the first-party game lineup, and hardware results reveal that the Xbox Series X|S family needs to ramp up supply as soon as possible.

I’ll finish up here with guidance for the next quarter, ending this March, according to Chief Financial Office (CFO) Amy Hood.

Management expects gaming revenue to decline in the “high-single digits.” Assuming it’s down 8%, that implies quarterly Xbox revenue of $3.44 billion. Its lowest in three years.

Xbox Content & Services revenue will decline in the “low-single digits.” Hood claims Xbox Game Pass user growth will outpace “lower monetization per hour” in both first and third-party games. It’s a corporate way to say subscriptions will rise while active engagement, and thus spending, will be down. Let’s assume the decline is 5%, implying Q3 sales of $2.86 billion from Xbox Content & Services.

Microsoft didn’t actually provide an outlook for Xbox Hardware. Based on the above, signals are pointing to another double-digit drop that might be upwards of 20%. The current quarter is a continuation of last year, where first-party output is light and the supply of Xbox Series X in particular will be hamstrung.

Still, the calendar will pick up soon as Xbox Game Studios will publish Minecraft Legends in April then Redfall in May. Thing is, I’m not expecting either of these to move the needle in a major way on the financial side. Certainly not as much as something like Starfield or Forza Motorsport, both of which are slated for this year without a concrete window. Personally I’d be surprised if Starfield makes it out by the fiscal year-end in June.

Speaking of June, Microsoft management reiterated on the conference call that, while its guidance doesn’t include any impact, they continue to anticipate the $69 billion Activision Blizzard deal will close by then. I’m way more skeptical on that front, as displayed in my aforementioned predictions article.

Thus ends my first big recap of 2023, in what will be a shaky quarter for many public companies across the games industry and related sectors. Check back soon for more analysis and a full rundown of results for platform holders Sony and Nintendo. Thanks for reading! Be well, all.

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

Sources: Company Investor Relations Websites.

-Dom