Tag: Earnings

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

DomsPlaying

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

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

That’s precisely what happened.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-Dom

Earnings Calendar Jan & Feb 2024: Gaming, Media & Tech Companies

DomsPlaying

Here we go, the first earnings seasons of 2024!

I want to acknowledge my anticipation while also tempering excitement, mainly due to the difficult situation for people working across all industries right now where many people are finding themselves out of work.

It’s been an especially tough time within gaming, media and technology, the exact sectors I cover here at the site. I’m again sending my best to everyone impacted by layoffs and I hope you’ll bounce back soon. Don’t give up on your dream just because of a company’s decision!

That said, we’re here to cover companies and the dates on which they report their latest results. I’ve gathered up my usual quarterly list, now including well over a hundred companies. I do my best to track down individual dates however, as you’ll see, not everything is available at the time of publishing so I’ll give a range based on historical timing.

Note that the dates themselves are added according to each company’s announcement in their local time zone. Say a Japanese company announces results on a Wednesday, it might still be Tuesday in your location.

I recommend saving as a bookmark, copying the image and visiting the link below to track everything during a busy time for tracking trends and performance. Plus, read on for three companies worth watching over the coming weeks. Thanks for stopping by!

Working Casual Earnings Calendar Jan & Feb 2024: Gaming, Media & Tech Companies

Microsoft Corp (MSFT): Tuesday, January 30th

It made the list last quarter, and it’s here this time around because when Microsoft reports its third quarter fiscal 2023 results later today, it will be the first operating period where numbers will account for Activision Blizzard. After laying off tens of thousands last year and starting 2024 with almost 2K jobs lost in the Xbox department, Microsoft has also hit a $3 trillion market capitalization and expects massive double-digit growth for gaming due to the integration. There’s a clear dichotomy between its job situation and ongoing hardware issues, losing in key markets to competitors, compared to expected revenue growth and consumer sentiment on its future slate of titles. I believe its results will fall within forecasts, and that gap between labor and performance will continue, albeit without visibility into profit dynamics or Activision Blizzard’s underlying financials, which is a pity.

Warner Bros. Discovery, Inc. (WBD): Mid February

It was a banner year for Warner Bros’ gaming division, now boasting four billion dollar franchises including Harry Potter, on the strength of last year’s best-selling Hogwarts Legacy, and Mortal Kombat in addition to Game of Thrones and the DC universe. I’m expecting a potential record result when it reports fiscal year 2023 results in mid February, as its gaming success will supplement its various media and content businesses. I also remain incredibly curious about how Suicide Squad Kill the Justice League will start on the commercial side and if we’ll hear anything from executives after a gloomy marketing period and a shaky early access start this week.

Embracer Group (EMBRAC B): Thursday, February 15th

One of the biggest and most disappointing stories in the games industry has been Embracer Group’s over-expansion and restructuring, now resulting in job loss for thousands of employees. The Swedish firm, which reports third quarter 2023 results soon, has shuttered games and laid off people as recently as yesterday with news of a killed Deus Ex project and layoffs at Eidos Montreal. CEO Lars and the executive team is in the midst of a restructuring program that began when it lost a deal where Saudi Arabia’s Savvy Games was going to invest $2 billion, resulting in massive debt and a bloated list of operating groups. I expect we might hear about a divestiture or intellectual property sale around the time of its earnings report, and almost certainly more closures and cancellations unfortunately.

Sources: Company Investor Relations Websites.

-Dom

PlayStation Hits Its Best Second Quarter Sales Ever as PS5 & Third Party Games Lift Sony’s FY 2023 Q2 Report

DomsPlaying

No rest for the writer!

Today continues an especially busy stretch of this latest earnings season, as Sony Corp just reported its fiscal 2023 second quarter results today out of Japan.

During this three months ending September, both the firm overall and the PlayStation division experienced revenue growth. And while profitability declined at the company level, the amount earned by Sony’s gaming business moved up double digits.

In fact, PlayStation just generated its best ever Q2 revenue in history.

That marks multiple record-breaking quarters in a row for Sony’s Game & Network Services (G&NS) segment, since Q1 hit its own all-time high as I covered a few months back. This past second quarter saw sales zip past $6 billion for the first time, jumping up more than 30% since last year.

Plus, unlike back in June, PlayStation has bounced back to profit growth this time. I’d argue this is even more substantial than record revenue because it accounts for expenses and really gets to the core of its ongoing health amidst a most turbulent of industries.

Underlying momentum was a higher PlayStation 5 contribution alongside better third party and add-on content performance. On the profit side, signs point to the Bungie acquisition costs being fully recognized, since there’s no longer a mention of the deal. Caveat being, similar to Nintendo, we can’t forget about the yen’s weakness on results for these kinds of Japanese companies that have a ton of overseas sales.

One major component is how PlayStation 5 shipped 4.9 million units between July and September, notably more than this time last year and the corresponding quarter for PlayStation 4. This figure was within management’s forecast, pushing lifetime PlayStation 5 sales to 46.6 million and closing the gap with its predecessor when launch-aligned, as I’ll dig into later.

As for the group’s forecast, executives increased guidance for annual gaming revenue across fiscal 2023 while maintaining guidance for operating income and PlayStation 5 hardware shipments at 25 million, which would be the single best year ever for the brand’s console output.

“We recognize selling more than 25 million PlayStation 5 units this fiscal year remains a challenging goal,” said Chief Financial Officer (CFO) Hiroki Totoki when talking to the media. “It will depend on how sales do in the year-end holiday season. We won’t pursue expanding the PlayStation 5 installment base alone, but will keep profitability in mind.”

Scroll down for a swing through the numbers then a set of my own predictions alongside Sony’s future forecasts.

Total revenue for Sony as a whole rose 3% to $19.6 billion, with the biggest growth contribution from G&NS, Sony Pictures and Music, offset by declines in other areas. However, operating profit at the group level declined 24% to $1.82 billion. This was led by quarterly declines for Financial Services, Imaging & Sensing Solutions and Entertainment, Technology & Services segments.

Focusing strictly on PlayStation during the three months ending September, revenue jumped up 32% to $6.6 billion. That’s an entire third of Sony’s overall business. It’s what I call a massive all-time number, considering last year’s $5 billion or so was also a Q2 record at the time.

A crucial note both in the broader context and at the PlayStation level is the specific impact of currency movement. Out of the $1.6 billion growth, upwards of $410 million is strictly because of foreign exchange rate changes. This helps understand how much of the trajectory is organic, compared to an economic market force like yen weakness.

Reversing its fortune compared to a decline in Q1, operating profit for G&NS moved up an impressive 16% to $340 million. That’s 19% of Sony’s group total. Affecting the plus side were both third party content sales and currency movement, plus there’s no longer any mention of certain acquisition costs that were dragging down profitability. I believe the $3.6 billion purchase of Bungie has been fully recognized now and will no longer affect the bottom line. On the downside, management cited how hardware has produced increased losses, I’d imagine due to higher manufacturing costs.

Checking out product category splits, which are shown in the last graph above, Hardware sales grew a whopping 60% since last year and contributed 30% of PlayStation’s total. The next largest segment at 23% of the pie was Add-On Content, moving up 18% in dollar value. Digital Software produced 39% growth, settling at 21% of the total. In fact, the only product type to decline was Physical Software, down a modest 4%.

Annual PlayStation revenue is tracking towards $28 billion. As you can see in the gallery above, on the revenue graph, this is well above the highest it’s ever been, over a billion more than last quarter. Essentially, if this keeps up, Sony’s gaming unit will have its best year of sales ever. On the other hand, annualized operating profit is at $1.75 billion, which compares more to the late days of the PlayStation 4 life cycle. Still great in a historical context, just not as strong as the past three years or so.

As of this week, the “big three” console manufactures have all reported their latest results. The sole remaining biggest player is Tencent, which will be later this month. Right now for comparison purposes, Sony’s $28 billion is tops for the industry. Even if backing out currency impact, it’s well in the lead. Tencent generated $25 billion as of last quarter, and Microsoft’s Xbox segment saw almost $16 billion (though that’s before accounting for anything from Activision Blizzard). Nintendo’s at $13 billion, albeit with more than twice as much annualized operating profit than PlayStation: $4.2 billion compared to $1.75 billion, respectively.

Heads up: enhanced launch-aligned PlayStation console sales chart is live!

This fancy visual aid gives more context to PlayStation 5’s improving shipment numbers. The console’s 4.9 million units sold-in last quarter is an increase of 48% compared to the 3.3 million in Q2 last year. Plus, it’s 26% higher than the PlayStation 4’s 3.9 million in the corresponding second quarter of fiscal 2016.

It’s the fourth quarter since PlayStation 5’s release in November 2020 that it moved more than 4 million units in a quarter, and one of those was that launch period.

Which means that PlayStation 5, at 46.6 million lifetime, has reversed course and narrowed the gap against its predecessor this quarter. It’s presently only a million units away from reaching PlayStation 4, boosting its trajectory since the supply challenges of yesteryear.

This latest lifetime figure means it’s also passed another gaming device on the all-time best-sellers list. That would be Nintendo’s 1980 handheld the Game & Watch, of course, which ended its tenure at 43.4 million. Next up will be Nintendo’s classic Super NES, which sold 49.1 million globally.

One statistic that Sony didn’t update was console sell-thru to consumers. Probably because it usually waits until a big milestone in order to do so. Earlier this year, the PlayStation 5 reached 40 million sold-thru as of July 16th. I’d bet it’s a bit higher now, maybe in the 45 million range, especially ahead of a system-seller like Marvel’s Spider-Man 2. I don’t see a reason demand would have fallen off.

Digging more into the supplemental stats present in PlayStation’s presentation, full game software unit sales stood at 67.6 million in Q2, up from 62.5 million last year. However, due to a lighter calendar, the proportion of first-party published games was lower, making up 7% of that total as opposed to 11% a year back.

Digital versions accounted for 67% of PlayStation game sales, up from 63% in September 2022. This means that 2 out of every 3 premium games purchased for Sony’s platforms were downloadable.

As for player engagement, Monthly Active Users (MAUs) across all of PlayStation Network totaled 107 million as of September month-end. While this is down a million from the June quarter, it’s up 5 million since last year’s Q2. Management also said that total hours played moved up 4% in the latest three months.

Here is where I’ll continue to lament the loss of PlayStation Plus membership numbers, which Sony stopped reporting earlier this year. It will forever, at least for the foreseeable future, remain cemented at 47.4 million as of March 2023.

It’s been a historic run lately for Sony’s top-line gaming numbers, pumping out multiple quarter’s worth of record revenue and generating more than $6 billion in second quarter sales for the first time. PlayStation is the premier industry player by revenue right now, even if backing out the impact from the yen’s depreciation.

Profitability has certainly been more questionable, partially because of temporary factors like studio investments, acquisition expenses and hardware manufacturing costs. Still, it achieved a double-digit income boost in Q2 on hardware units ramp up and software support from external partners like Electronic Arts and Take-Two Interactive with their respective sports titles, plus something like Diablo IV from Blizzard Entertainment and the Warner Brothers Mortal Kombat 1.

Which is why it’s even more painful to hear about layoffs at various PlayStation studios, including Media Molecule, Visual Arts and Bungie. There continues to be a disconnect between executives and everyone else. It’s not just at Sony, this is just one of the more glaring examples especially as its profitability gets back on track.

Impossible as it is to follow that up, I’ll take a look now at the company’s forecast and make some quick predictions.

The firm revised its fiscal year 2024 PlayStation revenue upwards by 5%. Management now thinks gaming sales will surpass $30 billion when the 12 months end in March 2024, in what would be an astonishing finish and record-breaking result. It then reiterated operating profit guidance of $1.87 billion.

In order to hit the 25 million PlayStation 5 hardware unit target, it still needs to ship almost 17 million units across the next two quarters. 16.8 million to be exact. Even with new PlayStation 5 slim models and the PlayStation Portal, this remains a staggering target that will require an absurd holiday number then a miraculous January to March. For context, the largest holiday season ever for PlayStation 4 was 9.7 million in fiscal 2016, and its largest March quarter was 3.1 million right after launch.

Yea, I’m still not a believer. In that overly ambitious forecast or the over-priced peripheral that is the PlayStation Portal. I’ll keep my same prediction as back in August: 24 million to 24.5 million, leaning more towards the lower end.

With respect to software, note that Marvel’s Spider-Man 2 launched after the three months covered here. Still, Sony shared a sales update for Insomniac Games’ latest open world adventure, selling-thru 5 million copies to consumers after 11 days. It had previously started with the best first 24 hours in PlayStation history, at 2.5 million copies. It’s since fallen behind God of War: Ragnarök at 5.1 million in 3 days, nearly a year ago to the day. The Last of Us: Part 2 moved 4 million copies during its opening 3 days back in June 2020.

All in all, it’s a fantastic launch for Peter Parker and Miles Morales considering the size of the PlayStation 5 install base, clearly bolstering the company’s expectations for the back half of this year.

The final bit of relevant news from Sony’s earnings was a comment around its live service strategy, moving into next fiscal year and beyond. As reported by Video Games Chronicle, CFO Hiroki Totoki mentioned that out of its previously-planned 12 live service titles originally scheduled for launch by end of Fiscal 2025, only half of them are on target. Considering how much time and money Sony is putting into this effort, moving them out is a big deal for its financial future and resource allocation. Personally, I remain skeptical that all of them well actually hit market at any point.

Whew. Well, that’s a wild week of coverage coming to a close. I hope you enjoyed this latest recap. Thanks much for hanging around during this season. I’ll have more coverage here and on social media as another eventful year approaches its inevitable end. Take care!

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥144.4.

Sources: Company Investor Relations Websites, Yahoo Finance, Video Games Chronicle.

-Dom

Nintendo Achieves Best 1st Half Sales of Switch Era & Raises Financial & Software Forecasts in 2024 Q2 Report

DomsPlaying

It’s a busy week here at the site and on socials, partly because the earnings calendar is packed. So, there’s no time to waste, I’ll get right into the topic at hand.

Nintendo reported its second quarter of its fiscal 2024 yesterday, which showcased a fantastic first six months. With sales rising more than 20%, this time frame ended up being the single biggest first half of a fiscal year for revenue since the Switch launched back in 2017.

With a couple of caveats. As always.

First, the results were mostly driven by the record first quarter that I wrote about in August. When focusing strictly on the April to June period, revenue and operating profit declined 4% and 20%, respectively due to a relatively light launch schedule and lower quarterly Switch hardware output than a year ago.

Beyond these dynamics, Japan is currently seeing its worst local currency depreciation in decades. Which is always worth mentioning in this context, and Nintendo specifically cites the yen movement in its report, because it has a notable effect on Japanese companies that operate globally.

Echoing this, Switch hardware unit shipments totaled 2.93 million in the quarter. That’s off 10% from the 3.25 million this time last year. Still, it pushed Switch lifetime shipments to 132.46 million, making it only the third gaming hardware ever to pass the 130 million mark.

In terms of new games, Pikmin 4 was Switch’s big title during the quarter, and has shipped 2.61 million copies since June. This amount means it’s already the highest-selling game in the franchise to date. Add it to the list of titles impacted by the Switch effect, which often boosts new titles in existing series to all-time sales records.

The Legend of Zelda: Tears of the Kingdom also contributed to software and continued its monumental run, now approaching the 20 million unit milestone in just its second quarter. The latest mainline Zelda is a smash hit, already at almost two-thirds of 2017’s classic Breath of the Wild lifetime sales!

In what I’d argue is the most important part of the report, and something I predicted would happen during my Q1 article, Nintendo raised most of its guidance for the full financial year. Management now expects higher revenue, operating profit, software unit shipments and will pay a higher dividend to shareholders. The only thing it didn’t raise was Switch hardware shipments, which it “only” reiterated at the current level of expectation.

“For hardware, by continuing to convey the appeal of Nintendo Switch, we try not only to put one system in every home, but several in every home, or even one for every person,” the company said related to its forecast. “Another objective is to continually release new offerings so more consumers
keep playing Nintendo Switch even longer and we can maximize hardware sales.”

Here’s quick bonus for something that happened after this financial period: Nintendo announced today that Super Mario Bros. Wonder sold-thru 4.3 million units to consumers during two weeks on sale. This makes it the fastest-selling Super Mario title, at least since the firm began tracking this stat in 2004. No wonder execs are more optimistic after yet another historic Switch launch.

Just like Drill Mario would, I’m now going to dig deeper into the numbers.

I’ll first address its quarterly earnings then expand to the 1st half and annualized figures for greater context on how Nintendo’s business is faring over time.

For the second quarter alone, revenue came in at $2.38 billion or 4% lower than a year back. Operating profit dropped 20% to $670 million. Which checks out, due to the big release of this period being Pikmin 4 plus Switch has almost achieved hardware saturation in its likely last year.

Taking the full six months into account, Nintendo achieved $5.65 billion in sales and $1.99 billion in operating income, increases of 21% and 27% respectively. That sales number is above even Switch’s best year in 2020, and operating profit is not far off from that year’s high either.

While this is certainly bumped up by out-performance of Tears of the Kingdom and the Super Mario Bros. Movie, slightly higher hardware units and early upside from Pikmin 4, there’s also the element of yen depreciation. While currency movement is usually more temporary, Japan’s currency weakness has been ongoing for many quarters now.

Taking a look into product categories, Nintendo’s hardware business accounted for around 41% of sales during both the first quarter and six months. That’s relatively constant since last year, when it was at 40%. Software accounted for the remaining 59% this time around, where it was 60% last year. A system-seller like Zelda plus certain bundles continue to prop up console sales this late in the cycle.

From a regional perspective, sales shifted out of Japan and into other territories. Both the Americas and Europe stayed the same since last year, contributing 44% and 23%, respectively. Japan declined from 24% to 21%, while what Nintendo classifies as Other jumped up from 9% to 12%.

Both digital and Intellectual Property (IP) related sales experienced the most growth during Nintendo’s first fiscal half, even if these areas still don’t represent a major portion of sales. Digital revenue output moved up 16%, and accounted for exactly half of the company’s Q2 dollar sales, virtually the same as the 51% a year ago. The mobile and IP-related category more than doubled, jumping 133%. Growth came more so from the IP side than mobile, as The Super Mario Bros. Movie stands at over $1.36 billion in box office earnings.

Combining the last four quarters, the company’s trailing 12-month revenue is currently at $13 billion. While down slightly since last quarter’s $13.12 billion, it’s up 6% year-on-year. Annualized operating profit is tracking towards $4.2 billion, down only slightly compared to both Q1 and last year’s second quarter.

If the revenue number holds, and the firm hits its latest target, Nintendo could achieve the highest annual sales since Wii’s massive popularity in 2008, even with the Switch hanging on during its twilight years.

Pulling a similar passage from my last Microsoft write-up, I’d like to compare industry peers to get a sense of where all of them stand right now. Sony, which reports results tomorrow, had PlayStation revenue upwards of $27.8 billion at last count. Tencent came in next at $25 billion, then Microsoft generated $15.78 billion before the Activision Blizzard deal closed. This is where Nintendo slots, at $13 billion. One thing to note is that Nintendo is more profitable than Sony, which is the only firm out of these four that reports profit numbers for gaming, and I’d imagine it has better margins than Microsoft’s Xbox business with its big investments and product expenses lately.

I mentioned a bit about Nintendo’s hardware results up front, I’ll now get into a more detailed breakdown of this product category.

The second quarter saw those 2.93 million Switch shipped to market, compared to 3.25 million a year ago. This tracks, notably after just how many units moved during the prior quarter, including a desirable special edition for Zelda.

Now, during the first six months of fiscal 2024, Switch sales moved up 2% to 6.84 million. While not quite at the highs of the Switch’s glory days in 2020 to 2022, it is above earlier shipments figures before 2019 during the corresponding time frame.

This shows the utter resilience of Nintendo’s hardware appeal, and making games that translate well from console to handheld. Plus, it highlights how the move to an OLED model replacing the base model drives people to picking up multiple devices for themselves or household members.

Out of those 6.84 million for the first half, 4.69 million were OLED versions. That makes up 69% of the total, and it’s 32% higher than last year’s figure. In fact, it’s the only model to grow over this time frame, considering the base model dropped 44% to 1.25 million units and Switch Lite moved down a more modest 2% to 900K.

This continues to life the lifetime Switch hardware figure, now standing at that 132.46 million. Which is still wild to write, mainly because of how it’s outpaced all expectations. Even mine and Nintendo’s itself. Thing is, while it’s secured a Top 3 spot on the all-time best-selling console list, I don’t see it moving up any further assuming Super Switch is out within the next 12 months. There’s still a 21.56 million gap between Switch and Nintendo DS at 154.02 million.

Then again, the Switch has exceeded all expectations thus far. It might surprise me.

One additional item that I found disappointing from Nintendo’s report is there wasn’t any further detail on console sell-thru to consumers, which it has recently added to its explanatory material. This is likely because it’s trending downward. Still, I’d rather the more data, the better. Maybe next time.

I’ll now take a similar look at the current software dynamic for Nintendo, the segment that makes up the majority of its business right now.

Overall Switch software unit sales in the quarter totaled 44.87 million, down 14% from 54 million. On the flip side, 1st half game sales rose 2% from 95.41 million to 97.08 million. It helps to have one of the highest-rated titles of all time launched in this period in Tears of the Kingdom.

These results drove lifetime software sales for Switch to pass yet another major milestone, this time surpassing 1.1 billion copies sold. It’s now upwards of 1.13 billion, an astonishing result. For perspective, the DS and Wii never reached a billion, even with the former selling many more hardware units. The sheer number of games that Switch owners buy, especially first party, is higher than any Nintendo device in history.

Speaking of big sellers, the number of games that have shipped over a million units during the current fiscal year jumped up a sizeable amount. There were only two back in Q1, just Tears of the Kingdom and the ever-present Mario Kart 8 Deluxe. The Q2 number was 16. Out of these, 12 were published by Nintendo while 4 were produced by third parties.

Chief among them being Pikmin 4, hitting that all-time high for a Pikmin franchise game of 2.61 million units in a single quarter. The previous record holder was Pikmin 3 Deluxe, another Switch title that has moved 2.4 million copies since October 2020.

I will point out that while the latest title has the best lifetime unit sales already, it currently has a lower attach rate than its predecessor partially because of just how many Switch have flooded the market. Pikmin 3 sold 1.28 million, or 9% of Wii U console sales, while Pikmin 4 stands at a 2% attach rate. For the time being.

Separately, it’s hard to overstate the pure magnitude of Tears of the Kingdom. The title sold another million units in the quarter ending September, bringing lifetime sales to 19.5 million. It’s not often that a game approaches 20 million units in a couple quarters. Thus, the title held its position as the 9th best-selling Switch title and will easily surpass Super Mario Party‘s 19.66 million next quarter.

I can’t write about Nintendo earnings and not mention Mario Kart 8 Deluxe, the game that never stops selling. It sold more copies than the brand new Zelda title last quarter, moving over a million and a half in Q2 alone. This game is almost a decade old, people! After this latest boost, the Switch version has officially passed 57 million sold to date.

Elsewhere in terms of new milestones, 2022’s Nintendo Switch Sports scored a new mark, passing 10 million to settle at 10.77 million.

While Nintendo usually reports on shipped numbers, it did share some insight into sell-thru to consumers. In addition to the aforementioned record launch for Super Mario Bros. Wonder, Pikmin 4 has sold-thru 2.5 million units globally as of last week, the largest start in series history.

As for engagement and player stats, Nintendo hit us with an update on Switch Online memberships and (its made-up stat of) Annual Playing Users, both of which are growing at this time as the user base expands. Switch Online subscribers now stand at 38 million, up from 36 million as of September 2022. Annual Playing Users, which is the number of people who have played a single game on Switch in the last 12 months, moved up to 117 million. It was 116 million in Q1, and 108 million last year.

Even considering the latest quarter trending down a bit, Nintendo bucked the trend of an aging console during the first half of fiscal 2024, turning it into a historic one for top-line sales compared to all others since the Switch first launched. It certainly helped to have a blockbuster movie to supplement traditional revenue streams, capitalizing on the quality of its big brand identities.

For a console manufacturer, this highlights the need to diversify. Especially when deep into a hardware cycle at a time when investment is ramping up for the next big device and its corresponding launch lineup.

Nintendo has mixed success in the past leveraging IP in various types of media. The last few months show it’s possible, between theme parks and film, proving there’s major upside as long as they instill that magic that has defined the company for generations and appeal to a multi-generational audience. Cross-media is a core factor behind what’s becoming a banner year for the publisher. And now with the announcement of a live-action Zelda flick in development, it will shape the company’s future income as well.

Here’s where I’ll look at that updated forecast, moving into the pivotal back half of the 2024 fiscal period.

Executives increased annual guidance for overall revenue by 9% to $11.2 billion. Operating profit guidance rose 11%, now expecting $3.55 billion. Additionally, it now expects to sell 185 million units of software during the full year, 3% higher than its initial forecast.

I honestly think the financial targets are still too conservative, based on the annualized numbers I referenced earlier. I think management will slightly increase revenue and profit estimates in its next report.

The firm also confirmed annual Switch hardware unit sales guidance at 15 million. That means between the holiday quarter and the first calendar year quarter, it needs to move 8.16 million more units. For context, last year’s December quarter alone saw sales of 8.23 million. While the Switch is a year older, I believe Super Mario Bros. Wonder among other title launches, a new Red Mario OLED model and a Super Smash Bros. Ultimate bundle can produce enough sales to beat the current estimate.

Even though I’m bullish, I’m slightly less upbeat than I was three months ago. I will slightly reduce my target, now expecting between 16 million to 16.5 million in the year ending March 2024.

2023 has been a huge year for Nintendo’s first-party lineup, across mainline Zelda and Mario titles alone, and I believe it has a decent supplemental slate for the holidays that can lead to financial targets being beat. Detective Pikachu Returns, WarioWare: Move It!, a remake of Super Mario RPG plus more content for Mario Kart and Pokémon titles will act as a second helping to the ongoing main courses of Zelda and Mario.

As for what’s ahead in 2024 and beyond, notably for the console transition, I’ll address those in a future article. For now, that does it for Nintendo’s latest quarter. Stay tuned this week for Sony’s results, and hop over to the earnings calendar to track everything this season.

Thanks for reading! Take care, all.

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥140.96.

Sources: Bloomberg, Company Investor Relations Websites.

-Dom

Earnings Calendar Oct & Nov 2023: Gaming, Media & Tech Companies

DomsPlaying

Here it is, the final earnings season of 2023!

Which means it’s time for my usual quarterly post outlining earnings dates for companies all across gaming, media and technology.

It’s been a tricky year to cover these sectors. There’s a divergence between labor and product output. Companies are laying people off, dealing with a contraction since the pandemic when money was more free-flowing. On the flip side, many product releases have been massive and of high quality, especially in the AAA games space.

I recommend using this calendar to track everything as the numbers come out and pundits react. I’ve highlighted three companies below, from the list of over a hundred I might add, that are worth keeping an eye on when they next report.

There’s also the usual Google Sheets link containing a spreadsheet for easy usage and quick access to respective investor sites.

Check the site again soon and follow me on social media to see more coverage of earnings season. Be well everyone.

Working Casual Earnings Calendar Oct & Nov 2023: Gaming, Media & Tech Companies

Microsoft Corp (MSFT): Tuesday, October 24th

It’s done! As of earlier this month, Microsoft officially owns Activision Blizzard. The consumer software conglomerate reported September quarter earnings moments ago, so I’m still digesting the news and will have a more thorough deep dive at the site this week. Suffice to say it was an outstanding quarter at the top-line for the Xbox division, achieving its highest first fiscal quarter revenue ever on sales growth that came in above guidance on the strength of Starfield and Microsoft’s Game Pass subscription service. Even as console sales declined, which signals a clear shift this generation away from reliance on that portion of the business. Check out my article for more, including a full reaction and detailed forecasts.

Sega Sammy (6460): Wednesday, November 8th

The big news out of Sega recently was its restructuring of European consumer operations, which resulted in the cancellation of Creative Assembly’s multiplayer title Hyenas even after its beta phase, a somewhat rare occurrence in an industry where projects are becoming much more expensive and companies want to see a return on their big investments. The Japanese publisher also killed multiple unnamed projects and has laid off people at Creative Assembly. It’s still unclear if Hyenas was part of the firm’s “super game” initiative, as there’s been conflicting reports. Either way, I can’t say I’m upbeat on this latest quarter or its general outlook. I’ll be looking for any sort of update on that growth plan, the Like a Dragon franchise, early indicators on this month’s Sonic Superstars, expectations for Football Manager and anything around its ongoing platform partnerships.

Starbreeze Studios AB (STAR): Thursday, November 16th

It’s been a while since I highlighted Starbreeze in this context, if ever. The Swedish developer and publisher was on shaky ground for a while, propped up by external deals and a dedicated yet impatient Payday franchise audience. Finally, just last month, it launched Payday 3 as its first major title in a while. Throughout the heist game’s first weekend, it stole the attention of over a million players despite having technical issues and an iffy online infrastructure. I expect really big upside when the company reports next month. It’s also publishing first-person shooter RyseUp Studio’s Roboquest next month, and while I don’t see it having a lot of commercial upside or impact on its financials, it’s good that the company is diversifying rather than continuing its reliance on a singular brand.

Sources: Company Investor Relations Websites.

-Dom

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

DomsPlaying2 Comments

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