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

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

The Five Biggest Games Industry Takeaways from the Microsoft Activision Blizzard Deal & FTC Trial

Microsoft’s pending Activision Blizzard purchase is the games industry story that won’t go away, better or worse. Since the Washington-based conglomerate announced it planned to spend upwards of $69 billion to purchase the Call of Duty publisher, it’s dominated headlines. No more so than the past week.

In my 2023 predictions piece, I wrote how legal hurdles could move the date back beyond Microsoft’s expected close at the end of its fiscal year, which ended last week on June 30th. Well, here we are. While many global regulators have already approved, including the European Union, there are those in key areas like the United States, United Kingdom and Canada still holding out.

The U.S. push-back is led by the Federal Trade Commission (FTC), which is suing Microsoft in an attempt to block the buy. As part of what could be a protracted legal battle, the FTC forced Microsoft into court over the last week as part of a preliminary injunction hearing, which would allow the regulator more time to review the acquisition ahead of a later trial date. There’s speculation and executive viewpoints that residing District Judge Jacqueline Scott Corley granting the preliminary injunction will dissolve the deal entirely.

Am I amending my prediction that it will, sooner or later, happen? First off, let me be clear in that I’m nowhere near a legal expert. While I have a history of tracking M&A activity, I’m learning new things about the legal process in real-time. Personally, I think Judge Corley will grant the FTC a preliminary injunction, then the two sides will duke it out in court, a tussle that Microsoft will ultimately win. Essentially, the company is too heavily invested to back down.

Either way, the benefit of this hitting our glacial legal system is there’s plenty of juicy information that might not otherwise surface. Everything from management emails, market shares, sales data, potential takeovers and great quotes have emerged as a result of discovery, evidence and testimonies, as shared by the excellent reporting of various media outlets like Axios, IGN and The Verge.

I’m here to recap five of the most important takeaways from an industry perspective. Check below for a rundown, then a fun bonus segment at the end. Thank you, due process!

Microsoft’s Many Potential Acquisition Targets

Before Microsoft decided to drop billions of bucks on Activision Blizzard, its management team compiled a laundry list of enticing targets across the games space. This M&A menu includes everything from big publishers to Eastern developers, from independent studios to mobile makers.

Chief among them were long-standing Japanese game companies Square Enix and Sega, a division of Sega Sammy. Phil Spencer and team searched for ways to expand Xbox’s portfolio of content, notably to enhance an expanding Xbox Game Pass catalog. The added benefit would be better access to the Japanese market, where Xbox has faltered for generations. Sega has since said it isn’t in a selling mood.

Other targets included Thunderful Games, Niantic, Zynga (which was since snatched up by Take-Two Interactive), IO Interactive and Supergiant Games. Even Bungie, which Microsoft previously owned before divesting. The Destiny creator is now a subsidiary of.. Sony.

What this really shows is something I’ve said for ages: companies are always on the hunt for talent and intellectual property (IP) to bolster its offerings. The likes of Tencent and Sony maintain similar lists, they just aren’t publicly available. It’s also telling that Microsoft instead opted to take the nuclear route in its industry-shaking bid for one of America’s few remaining massive publishers.

Xbox Console Unit Shipment Figures Finally.. Kinda?

During the last couple hardware cycles, Microsoft has backed away from sharing exact details of unit sales for its suite of Xbox consoles. Whether this decision is because it hasn’t kept up with peers or because the brand’s focus is more towards services and ecosystem, or a combination of both, there’s been limited visibility into just how many darn Xboxes the company is shipping since reporting stopped in 2016.

Until now. Well, somewhat. According to a slide at Microsoft’s BIG Festival in Brazil, Xbox Series X|S family is currently around 21 million lifetime units shipped since launch in November 2020. This means my wish-washy “maybe at 23 million” estimate last quarter was optimistic, though technically it could be there by now since there’s no firm date on the image. Note that Sony’s PlayStation 5 is currently at 38.4 million, moving almost two to market for every one Xbox.

Since the same slide references 79 million combined shipments of Xbox One and Xbox Series X|S, it follows that 2013’s Xbox One stands around 58 million to date. Last year, Microsoft commented that its prior generation hadn’t yet reached half of the PlayStation 4’s 117 million, which put its right near this same mark. Thus, it really confirms our existing expectation.

According to another document as shared by friend of the site John Welfare on Twitter, Microsoft sold-in 3.2 million Xboxes during the holiday quarter of 2022. Within the same Q4 last year, Sony moved 7.1 million PlayStation 5’s. What all of these data point reinforce is how, even early this generation, the 2:1 or more PlayStation to Xbox ratio is seemingly holding.

Executive Comments on Exclusive Content

Exclusives are unavoidable in most media, and it can be a heated topic within the games industry. Companies pay massive sums to keep games on their systems, even for a certain amount of time, to attract players because they can’t play these things elsewhere. This becomes even more complicated when layered on top of new business models, like subscription and cloud, whereby platform holders make deals to add titles exclusively to these services.

Since the big shots at Microsoft and Sony testified during this latest stint in court, they provided insights into how the industry thinks about and treats exclusives, regardless of their personal stances. For instance, Microsoft Satya Nadella doesn’t like exclusives. “I have no love for that world.” Yet he acknowledges that “the dominant player” (Sony) has already established the rules.

Intriguingly, his underling Phil Spencer made the call during a 2021 internal meeting that ZeniMax titles would all be Xbox exclusive, a move that surprised Bethesda’s now Head of Global Publishing Pete Hines as revealed by emails. Curiously, Xbox Chief Financial Officer (CFO) Tim Stuart and Head of Xbox Game Studios Matt Booty were skeptical this might cause profit issues after Microsoft’s $7.5 billion purchase of ZeniMax, as documented in a chat between the two.

Bobby Kotick, Chief Executive Officer of Activision Blizzard, claimed on the stand that he’s never thought of making Call of Duty exclusive to any single platform. He argues it would alienate a major portion of the military shooter’s massive 100 million plus monthly active players, thus becoming “very detrimental” to the company’s bottom line. I’ll note here that this lines up with what Microsoft management is claiming, that they would keep the sales juggernaut on all platforms, yet it’s worth noting the title would be made available on Xbox Game Pass, which some posit is a form of partial exclusivity.

Then there’s CEO of Sony Interactive Entertainment Jim Ryan who said that he doesn’t view a game like Starfield’s exclusivity as anti-competitive, even if he doesn’t like it (probably because he didn’t lock it up). Which makes sense, because otherwise it would contradict a key part of PlayStation’s model of stacking third-party exclusives like Final Fantasy XVI and Deathloop via external partnerships.

We also heard spicy background happenings and the status of certain projects by way of these folks taking the stand. Spencer said there were fears at Microsoft of Starfield becoming PlayStation exclusive. (Makes sense why he authorized the purchase of its publisher, ZeniMax.) Head of Xbox Creator Experience Sarah Bond dropped a bombshell that Kotick squeezed Microsoft for a better Call of Duty revenue share after threatening to keep 2021’s Call of Duty: Vanguard off Xbox. Finally, the case confirmed the likes of MachineGames’ Indiana Jones and, perhaps Xbox’s most important future release in The Elder Scrolls VI, would be only available on Xbox platforms.

Massive Cost of Sony’s Biggest PlayStation Titles

It’s no secret the cost around triple-A game development has ballooned. The most expensive titles are multi-hundred million dollar collaborations across hundreds, if not thousands, of people. Even way back in 2013, Rockstar Games reportedly spent $265 million to make Grand Theft Auto V. Embracer Group has almost 17K employees, while Ubisoft employs over 20 thousand. It’s a wonder any AAA game even makes it to market. Now, we have even more context on just how “big budget” titles can be for a publisher from a financial standpoint.

Back in April, PlayStation Head of Independent Initiative and former President of SIE Worldwide Studios Shuhei Yoshida told The Guardian the firm’s flagship titles can cost hundreds of millions, citing 2022’s God of War: Ragnarok requiring a staggering $200 million to create.

More recently during this Microsoft vs The FTC battle, a partially-redacted document dropped news around the cost of other internal PlayStation projects to the disappointment of Judge Corley (and I’m sure PlayStation brass). While I feel quite bad for the poor paralegal that didn’t fully black-out the evidence, I’m grateful for the intel.

Notably, The Last of Us Part 2 from Naughty Dog in 2020 cost $220 million with approximately 200 developers contributing to the sequel to one of Sony’s signature games. Then, over 300 people at Guerilla Games and its support studios worked on last year’s Horizon Forbidden West, pushing the budget upwards of $212 million. Keep in mind these astronomical expenses are strictly for the creation of said titles. Costs associated with a single game’s marketing and distribution add many tens of millions, if not hundreds, to the already absurd totals.

New Consoles in 2028, Cloud Not a Major Market Until 2025 to 2030

While there are a variety of points for regulators to consider in a deal like this where a platform holder is buying one of the world’s premier publishers, two key aspects of their hesitance to approve the deal revolve around console market share and the future of cloud gaming. The FTC aims to protect American consumers not just now, but also where the industry will be in five, ten, twenty years down the line. Projecting the direction of an entire medium is a monumental task, even for the most knowledgeable of dedicated economists, which is why these reviews take as long as they do.

Part of the discussion around consoles spurred talk about the future of the traditional market. While Judge Corley compared console gaming to the usage of DVDs in that she expects it will, at some point, be obsolete (for the record, I disagree), Microsoft is certainly planning to keep up its hardware plans. Court documents suggest that the manufacturer anticipates a 2028 start date to the next generation, implying the next Xbox Series Whatever and PlayStation (I assume 6) will debut in around five years.

Personally, I believe the current Xbox Series X|S and PlayStation 5 may be an anomaly and last longer than this. No console generation has ever faced a global pandemic of the coronavirus magnitude, which significantly disrupted supply in the buyer acquisition phase. The fact that people are just now able to find new boxes at retail two and a half years into the cycle could extend the usual window.

The much more nascent segment of cloud streaming is a future bet for platform holders, with Microsoft’s Xbox Cloud Gaming and Sony’s PlayStation Plus incorporating this feature. Sarah Bond stated on record that cloud is the least used feature of Xbox Game Pass Ultimate, implying that it’s still niche. Jim Ryan echoed this sentiment, saying that cloud will not be a “meaningful component of how gamers access games” until at least 2025, or even as late as 2030. I think adoption could be even slower because even if the technology improves, gaming is much different than streaming a movie or show in that latency will always be the biggest impediment. The laws of physics can’t be beat.

Bonus: Five of The Trial’s Most Quotable Moments

Judge Corley to FTC: Why did [Sony boss] Jim Ryan say there’s nothing anti-competitive to making Star-whatever exclusive? Because he does the same thing!” (Referring to Bethesda’s Starfield.)

Xbox boss Phil Spencer: “The console war is a social construct.”

Microsoft says it will keep Call of Duty on PlayStation because “They couldn’t face the Wrath of the Gamers.”

FTC lawyer James Weingarten: “What about a world in which Microsoft offers the best new Christmas character to play on Christmas in Call of Duty?”

Judge Corley: “No Sharpies!” (Joking in reference to how a key document didn’t have the proper redacting technique and everyone could see through the marker.)

Sources: Axios, Federal Trade Commission, GamesIndustry Biz, IGN, John Welfare, Microsoft, The Guardian, The Verge (Image Credit).

-Dom

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

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

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

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

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

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

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

At least for now.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-Dom

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources: Company Investor Relations Websites.

-Dom

Microsoft’s Xbox Division Starts Fiscal 2023 With Record Q1 on Strength of Hardware & Game Pass Subscriptions

Yesterday, Microsoft was the first of the “big three” gaming console manufacturers this season to report its financial results. (Didn’t know it was happening? Hop over to my latest earnings calendar post!)

It’s the first quarter of the brand new 2023 fiscal year for the American cloud and software giant, during which it pointed towards a better-than-expected quarter for the Xbox brand.

As I wrote a few months back, Xbox recently reported its best financial year sales ever. Now, quite resiliently, it’s achieved a new record: the best Q1 sales since reporting began.

Xbox generated $3.61 billion in quarterly sales during the period between July and September, which is up “slightly” since last year, or around half a percentage point of growth. This led to a mostly positive report overall for Microsoft’s gaming division since it either met or exceeded expectations, notably on the hardware side.

Microsoft attributed the gaming revenue gain to growth in Xbox Game Pass subscriptions and a double-digit boost from console sales. Even despite a modest decline in Xbox Content & Services, the business unit was able to grow.

The approach of services like Game Pass and cloud gaming continues to attract first-time or lapsed players, and is seemingly keeping existing buyers around, plus indicators for inventories on the hardware side are slowly improving. In particular, the more affordable Xbox Series S model is spurring growth.

“We’re adding new gamers to our ecosystem, as we execute on our ambition to reach players wherever and whenever they want, on any device,” said Microsoft Chief Executive Officer (CEO) Satya Nadella on its conference call. “We saw usage growth across all platforms, driven by strength off-console.”

How does a record first quarter for revenue look in the context of the broader company? See below for a complete rundown, full analysis and even more perspective on these numbers.

Digging into the above slides from Microsoft’s presentation, the biggest data point is that slight increase in gaming revenue to the record Q1 of $3.61 billion.

This happened in spite of downward pressure from both first and third-party software and lower engagement, mainly on the backs of subscription and hardware proving to be growth catalysts. To me, this indicates there are enough new buyers entering the ecosystem, some of which are buying consoles and others are subscribing to Game Pass on whatever devices they own. It’s enough to outpace a lighter release calendar and existing gamers spending less time playing, accordingly.

Moving to how this latest quarter fits in a broader context, the current annual sales for Xbox total $16.25 billion. My chart shows the trend over time, and the breakout of Xbox Context & Services versus Xbox Hardware contribution.

That dollar amount is actually the third best trailing 12-month result in the history of Xbox, behind only a couple recent quarters. Taking the full year into account shows the sort of revenue durability that better hardware availability and a steady subscription base can produce. Even when first party output is low, like it has been for most of this calendar year.

Now let’s talk these recent figures for Microsoft and Xbox in the scope of the overall industry. I often compare it to three peers: Tencent, Sony and Nintendo. Keep in mind a couple qualifiers. First, currency fluctuations, especially lately with the weakness of Japan’s yen, can drastically impact these kinds of comparisons for global companies. Also, revenue is just one measure of a company’s wellbeing. Microsoft doesn’t share profitability for its Xbox division, unfortunately. I still think this is a worthwhile endeavor, even given these caveats.

In terms of recent annual sales, Tencent remains the largest global gaming company at roughly $24 billion combined from its domestic and international games businesses. Next, Sony’s PlayStation amounted to $21 billion at last count. Which means Microsoft slots in here, at just over $16 billion. Finally, Nintendo’s latest annual result was $13 billion. These ranks have been about the same in recent years, although Nintendo has higher margins than its peers so it makes more in profit.

Speaking of profit, we can at least glean some insight by looking at Microsoft’s More Personal Computing (MPC) segment that houses the Xbox brand. Gross margin dollars declined almost 10%, with a shifting business mix to lower margin sources. Along this, expenses rose 2% which led to MPC’s operating profit moving down 15% to $4.22 billion. Gaming is usually one of the lower margin sub-segments, so I wouldn’t be surprised if Xbox saw weaker profitability in Q1.

Now digging into the category mix for Xbox, made up of Xbox Content & Services and Xbox Hardware.

The larger contributor is Xbox Content & Services, which includes software, subscriptions and related sources. It generated $2.81 billion in sales, a year-on-year drop of 3%. This comprised 78% of overall Xbox sales most recently compared to 80% in Q1 last year. That dynamic makes total sense since its Xbox Hardware counterpart is gaining recently.

During the last 12 month period, Xbox Content & Services reached $12.45 billion in revenue. That’s roughly 77% of the aggregate and the lowest annual figure in around a year, mostly due to a lighter palette of newer software titles.

The most unfortunate part of the whole report is yet another lack of update on Xbox Game Pass subscription numbers. The last official figure from the company is 25 million, and that’s a year old. Executives claim memberships are growing, one of the positive elements of that Xbox Content & Services result, however refuse to share by how much. The only stat focused on PC Game Pass, which saw 159% increase in subscriptions. Because many of these were discounted and promotional, the top-line contribution is lighter than its console offering.

Separate of the earnings report, Microsoft’s Head of Gaming Phil Spencer did offer a slight morsel around revenue contribution and profit dynamics during a Wall Street Journal Live interview. According to The Verge’s Tom Warren, Spencer claims 15% of Xbox Content & Services revenue is currently generated via Xbox Game Pass subscriptions. He expects it to remain between 10% to 15%. If the top end is true, that’s upwards of $420 million for the latest quarter and $1.88 billion over the last year. Additionally, he claimed the service is profitable for Microsoft, though didn’t offer anything in the way of detail or proof.

Back to the report, Microsoft did share an updated engagement figure for its Xbox Cloud Gaming effort, stating 20 million people have now tried game streaming via this service. That’s twice as many as back in March when it was 10 million, thus indicating there’s continued appetite for cloud as a supplement to traditional gaming and a way to attract folks that might not own a console.

How did that more traditional source fare during Q1? Well, Xbox Hardware accounted for $800 million in revenue, up 13% from last year’s quarterly output of $710 million. Add this double-digit increase to the growing list of indicators that the supply chain situation for consumer electronics is stabilizing, as is part availability, which leads to better retail inventories.

During the latest four quarters, Xbox Hardware revenue reached $3.8 billion. That’s an all-time record amount, slightly above the $3.79 billion from two quarters ago. The entry level Xbox Series S in particular has been a boon, as Nadella claimed almost half of Xbox Series S buyers are brand new to the Xbox ecosystem.

The big question, of course, is how many Xbox Series X|S units have sold to date? Starting last generation, Microsoft doesn’t share unit sales for its hardware anymore. So it’s difficult to say for sure. Last quarter, I estimated upwards of 16 million to 16.5 million. Based on better stock and a constant demand curve, I could see 17.5 million or upwards of 18 million lifetime right now for the family of devices. As a quick comparison, Sony’s PlayStation 5 is currently at 21.7 million and will be even higher when the company reports next week.

Here’s a quick look at Microsoft’s overall results. The company achieved over $50 billion in quarterly revenue, moving up 11% year-on-year. Operating profit totaled $21.5 billion, an increase of 6%. Microsoft Cloud revenue rose 24% to $25.7 billion. Results for revenue and earnings-per-share beat out analyst estimates.

I mentioned More Personal Computing (MPC) earlier, which generated the same amount of revenue as it did a year ago: $13.3 billion. Operating profit dipped 15% to $4.22 billion on higher costs.

Shifting back to Xbox, it was a great quarter for gaming given the broader environment and challenges it’s seen on the hardware side. Achieving best-ever first quarter sales is an accomplishment, even if profitability likely took a hit due to heavy investing in Xbox Game Studios development and securing third-party deals for Xbox Game Pass. That’s, quite literally, the price of doing business.

Management provided its general outlook for Microsoft and touched on guidance for the Xbox division. Note that forward-looking guidance does not account for the pending Activision Blizzard deal, which the company still expects to close by June 2023.

“As we look towards the holidays, we offer the best value in gaming, with Game Pass and Xbox Series S,” Nadella said, pushing a bit of marketing speak. Even so, I tend to agree when it comes to both of these entry points into a robust suite of software offerings. It’s quite attractive across the landscape of the industry, especially after many publishers are embracing higher pricing for premium releases.

For the period between October and December, the coveted holiday quarter, Microsoft anticipates gaming revenue will decline in the low-to-mid teens mainly because of just how well it did last year on the strength of big first party launches. Translating that into dollars, assuming a 12% decline would get the holiday quarter to $4.79 billion in sales for Xbox. Essentially, it may regress back to a pre-pandemic level.

The company expects Xbox Content & Services to move downward at the same pace as overall gaming revenue, in the low-to-mid teens. There is upside in the guidance, as management thinks Xbox Game Pass subscriptions will increase yet again. By how much? It’s not clear. Finally, Microsoft didn’t provide guidance for Xbox Hardware. Calculating it based on the prior two, the implication is a potential double-digit decline as well.

Personally, I’m slightly more bullish on Xbox’s holiday prospects, in particular I think hardware can make up for dips in first and third party content. There’s no real flagship Xbox Game Studios output in the coming months to end 2022; no Forza or Halo like last year. The largest software launches are all third party titles, though there’s no doubt deals will be made to feature some major external publisher content on Xbox Game Pass.

Elsewhere, Phil Spencer blatantly teased the rumored Project Keystone cloud streaming device in a social media post. All reporting points to the dedicated streaming device being early in development, so it’s still a ways out. What it does show is Microsoft’s commitment to streaming as a new business avenue.

More immediately, there’s been activity on the Activision Blizzard buyout side as regulators worldwide continue to review the proposed $68.7 billion deal. By now, government agencies of Saudi Arabia and Brazil have issued their approvals. The major holdout is the United Kingdom’s Competition and Markets Authority (CMA) which has moved into a second phase of its inquiry into potential antitrust concerns. the CMA claims there will be impact on competition in various industry verticals, while Microsoft responded saying the concerns are “misplaced.” Most recently, the CMA is requesting feedback from the public. That ought to go well!

I remain a firm believer that the deal will eventually be approved, it’s just a matter of how long it takes as governments notoriously move at a snails pace. American and European regulators will be the key, and we’ve yet to hear from them specifically.

Well, then. That’s the first big results recap of the season. What’s your reaction to Xbox’s big Q1? Do you agree with its forecast for the holiday quarter? Feel free to drop a line here or on social media, I’m happy to chat!

Additionally, I’ll have more reactions to earnings in the coming weeks. Thanks everyone for hanging out. Be safe and spooky!

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

Sources: Company Investor Relations Websites, ShackNews (Image Credit), Tom Warren.

-Dom

Microsoft’s Xbox Sales Reach New Fiscal Year High in 2022 Despite Fourth Quarter Declines in Content & Hardware

It’s here. My first big recap article of this latest earnings season!

In case it wasn’t clear from my recent calendar post, late July signals the start of that season. Let’s kick it off with Microsoft’s fourth quarter fiscal 2022 results, which means I’ll cover both quarterly and annual figures. The more, the better!

This latest 3-month period featured somewhat mixed results that capped off a historic year for the company’s gaming division, where it achieved the best ever fiscal revenue for Xbox as a brand.

As anticipated, gaming revenue declined in the quarter ending June 2022, dipping 7% to roughly $3.45 billion. Like many results lately in the industry, it sounds a lot worse than it was. This number is the second best Q4 in Xbox history, trailing behind only last year’s massive $3.71 billion spike.

It’s one of those “good enough” scenarios, falling perfectly in-line with the company’s, and my, expectations of a mid-to-high single digit decline. Either a big beat or epic miss would have been much more newsworthy.

What’s important is the impact on fiscal year revenue from Xbox, which moved past $16 billion for the first time ever. That’s yet another all-time year for gaming at Microsoft. It’s the sixth straight fiscal year where Xbox has achieved record sales.

Underlying this growth was upward movement in Content and Services, which houses software sales along with the likes of Xbox Game Pass and cloud offerings. A constant here has been claims from management that Xbox Game Pass subscriptions have been steadily increasing, although the team still hasn’t shared an updated sub figure since the 25 million I wrote about back in January.

On the other hand, Xbox hardware sales have stagnated over the latest 12 months which resulted in a double-digit decline during the year. Which is curious, considering comments from Chief Executive Officer (CEO) Satya Nadella indicate the family of devices is selling better than ever.

“We’ve sold more consoles life-to-date than any previous generation of Xbox and have been the market leader in North America for three quarters in a row among next gen consoles,” Nadella said in his prepared remarks on the earnings conference call.

The declining revenue along with high unit sales indicate a major talking point to me: There’s a high proportion of unit sales coming from the lower-priced Xbox Series S. Which fits with mounting evidence and anecdotes that these are much easier to find and plays from a manufacturing cost standpoint because they are less expensive to make. Plainly, Microsoft and its suppliers can’t produce enough high-end Xbox Series X boxes to grow hardware revenue. I expect high input costs to continue, thus this trend will keep up into the new fiscal year.

Now I’ll dig into the underlying numbers and highlight key trends from this report.

Peeking first at the above slides from Microsoft, they show that 7% decline in quarterly gaming revenue which gets us to that $3.45 billion figure. Not bad considering Xbox achieved a best-ever Q4 result this time last year!

The main reasons for lower sales proved to be people spending less time and money on the platform over those 3 months, which impacted purchasing of both first-party and third-party software. The main bright spot was growth in Xbox Game Pass subscriptions. I’ll go more into these segments in a bit.

Expanding to a longer time frame is my chart, which shows 12-month trailing sales figures for the Xbox business unit. This shows a couple major points.

First, if we focus strictly on each fourth quarter, it displays that record high fiscal year from Xbox: $16.22 billion between July 2021 to June 2022 compared to the prior record holder of fiscal 2021 at $15.37 billion.

Subsequently, the full chart illustrates last quarter was the first decline for trailing annual gaming sales since back in Q2 of fiscal 2020. That initial rise back then corresponds to quarters leading into the start of quarantines during the pandemic, and the figure has since leveled off right around $16 billion lately. Still, it’s only a 2% decline from last quarter’s all-time best. Which is something I’ve expected given the strong prior years and macroeconomic forces at play, including inflation.

Note: These dollar totals are based on growth rates over the prior year. Microsoft has yet to publish its 10K filing, I’m confident the math will be very close.

Where does this put Xbox sales right now in comparison to major peers in the games industry?

Since Microsoft is the first to report, I’ll use the latest annual figures for the likes of Tencent, Sony and Nintendo. Tencent is the clear leader of the pack, aggregating to annual sales of $33 billion. Sony is up next, reaching $24.4 billion. That number will refresh later this week when the company reports on Friday. That leads into Microsoft’s $16.22 billion, which will increase when the Activision Blizzard deal closes to somewhere between $23 to $24 billion depending on redundancies and cost-savings. Lastly, Nintendo is close to Microsoft’s current figure, hitting $15 billion in yearly sales.

The main caveat I’ll note when comparing across the industry is how revenue is one of many metrics used to gauge financial strength. I’d prefer profitability when available, however Microsoft does not report this granularity for Xbox alone.

That doesn’t mean we can’t glean anything on Xbox’s profit contribution from this recent report. The broader segment of More Personal Computing (MPC) experienced an operating income decline of 5% as expenses rose 8%. Microsoft called out Windows, Search and news advertising as main drivers of this weakening profit dynamic, which indicates that gaming’s contribution likely remained consistent. Which I’d say is good news, especially for the cost of making consoles.

For the quarter ending June 2022, both of Xbox’s main segments of Xbox Content & Services and Xbox Hardware suffered declines. Although the latter was more precipitous, neither was very concerning to me because of where we are in the broader cycle plus supply conditions being nowhere near normal.

Starting with Content & Services, this segment contributed 6% lower sales than a year ago. Which, like total Xbox revenue, was in-line with the company’s guidance and my own expectations. This equates to $2.77 billion in Q4, implying it contributed around 80% of the total. Another way to consider this is 4 out of every 5 dollars spent on Xbox was on software, downloadable content, subscriptions and non-hardware purchasing.

In fact, the latest annual contribution from Content & Services is a big positive for the Xbox brand. It’s now above $12.5 billion, or 77% of the total, a dollar figure which is actually up 3% compared to the prior year. That means despite weakness in the fourth quarter, Content & Services had its best fiscal year in reported history.

The main factor, of course, is Xbox Game Pass momentum and its proven impact on spending habits for ongoing subscribers. While executives refuse to share anything beyond the 25 million figure, I estimate it’s closer to 30 million by now. I’d wager it hasn’t breached that milestone. Because otherwise Microsoft would have said so!

There’s also the element of offerings like Xbox Cloud Gaming plus recent partnerships with companies like Epic Games and Samsung. Microsoft is benefiting from rounding out its ecosystem play and expanding how and where people play, which has a tangible effect on revenue growth even as individual title sales may slow.

“We’ve partnered with Epic Games to make Fortnite available for free via browser,” noted Nadella in an example of this strategy. “Over 4 million people have streamed the game to date, including over 1 million who were new to our ecosystem.”

Hardware is proving to be the more challenging business line for Xbox, declining 11% in the quarter to under $680 million. That’s the second lowest output in the past seven quarters, no doubt impacted by higher margins and continuously low availability of the premium Xbox Series X version.

Along the lines of its counterpart, the annual numbers are more reassuring. Microsoft generated $3.7 billion from Xbox console sales in fiscal 2022, which is up from $3.2 billion previously. That’s a gain of nearly 16%. This is mainly due to excellent performance during the initial stages of this fiscal year, meaning hardware has trailed off recently.

That’s not to say demand isn’t there. It’s mainly that Xbox is selling its lower-priced SKU, which doesn’t boost the top-line as much. Last quarter, I posited that lifetime unit sales of Xbox Series X|S could be between 14 million and 14.5 million. After this latest period, I’m estimating it at 16 million to 16.5 million.

It’s unfortunate we don’t know for sure, especially since Sony and Nintendo are more transparent.

The last numbers I’ll cover before wrapping up are for Microsoft as a whole. The firm generated $51.9 billion in revenue, up 12%. Operating profit reached $20.5 billion, or an increase of 8%. Quarterly sales from Microsoft Cloud moved past $25 billion for the first time ever, jumping 28% year-on-year.

Focusing on the More Personal Computing (MPC) business unit, it was responsible for $14.4 billion in sales. This means Xbox, at $3.45 billion, made up almost a quarter of the segment’s total.

These results are quite staggering as the company benefited greatly from hybrid working models and enterprise cloud usage. Still, quarterly revenue and earnings both missed analyst consensus estimates.

During the full fiscal year, Microsoft posted $198 billion in revenue and $83 billion in operating profit. It’s hard to even understand these numbers!

Now to look ahead, let’s focus on gaming within the broader company.

According to Chief Financial Officer (CFO) Amy Hood, here’s the rundown of guidance for the first quarter of fiscal year 2023, which runs from this July to September. Note this does not include any impact from the Activision Blizzard deal, which it still expects to close by June 2023.

Gaming revenue is forecasted to decline in the “low to mid single digits” driven by a drop in first party software. Content & Services has that same exact guidance. Though the management team does anticipate Xbox Game Pass subscriptions will grow again and thinks Hardware will rise as well, albeit didn’t provide any more specifics.

Let’s assume “low to mid single digits” means a dip of 3%, that should be a good barometer. This implies total quarterly revenue from Xbox of around $3.48 billion, or the second best Q1 on record. Then, for both Content & Services to decline and Hardware to increase, the former must decline 4% or more. Which would follow that Hardware can increase a percent or two and the math still works out.

Personally, I do expect a slight decline in total Xbox sales during the current quarter. There’s a handful of major 3rd party titles, including a new Madden game in August, and Xbox Game Pass will certainly have a few great additions. It’s just last year’s high was powerful, it remains a tough comparison. I’m not so sure about Hardware gains, that’s where I’m skeptical. I’m expecting flat to slightly negative contribution there unless something changes with the split of Xbox Series S to Xbox Series X.

On a bit longer of a timeline, where’s the growth other than the traditional means? There’s the clear upside of bringing Xbox Cloud Gaming to other television brands outside of Samsung. Then the substantiated plus rumors of the team developing a dongle-like device like a Google Chromecast or Amazon Fire TV Stick. And, of course, people calling for Xbox to make a handheld now that both Nintendo and Valve have active portable gaming devices.

“As announced last year, we’ve been working on a game-streaming device, codename Keystone, that could be connected to any TV or monitor without the need for a console,” a Microsoft spokesperson said to Windows Central, who first reported on the cloud stick’s development.

“We are constantly evaluating our efforts, reviewing our learnings, and ensuring we are bringing value to our customers. We have made the decision to pivot away from the current iteration of the Keystone device. We will take our learnings and refocus our efforts on a new approach that will allow us to deliver Xbox Cloud Gaming to more players around the world in the future.”

So, I’m a believer in the expansion of cloud and whatever this Project Keystone turns out to be. I don’t expect the dongle to hit market this fiscal year, so that will impact future time frames. And I really don’t think an Xbox handheld fits with its direction, for a multitude of reasons that I’ll probably write about at some point! What I do expect is for Xbox Game Studios to ramp up its output in 2023, featuring titles like Starfield and Redfall plus some surprises too.

That concludes Xbox’s results this quarter. I’ll be back soon with articles on other major gaming companies, and updates on social media throughout the coming weeks. Thanks for reading and be safe all!

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

Sources: Company Investor Relations Websites, Windows Central.

-Dom

Xbox Hardware Market Share Gain Propels Microsoft Gaming Revenue to Best Non-Holiday Quarter in Company History

The ongoing Activision Blizzard deal isn’t the only thing making major headlines for Xbox lately.

Microsoft was the first of the “big three” console makers to report this earnings season, which I outline in my latest calendar post, this time sharing its fiscal year 2022 third quarter results covering the period between January and March.

During this time, gaming achieved its best non-holiday sales total ever. While certain parts of the industry cool off, Xbox is at least keeping the fire alive.

Driven by new generation hardware gaining market share plus growth in Xbox content and services, Microsoft generated $3.74 billion in quarterly revenue from gaming, up 6% since last year. That means Microsoft’s Xbox division secured its best revenue ever for a quarter that wasn’t October to December. The prior non-holiday record holder was $3.71 billion back in April to June 2021, a few months after the November 2020 launch of Xbox Series X|S.

This strength bolstered trailing annual sales to reach $16.5 billion for the first time since reporting began. That’s after a record holiday pushed it past $16 billion just last quarter as I wrote about then.

It’s even more impressive considering last year’s stricter pandemic restrictions leading to a strong comparable. According to its report, Xbox Content & Services moved up 4% while Xbox Hardware boosted 14%. Gaming as a whole rose due to growth in Xbox Game Pass subscriptions, first party software (like Halo Infinite and Forza Horizon 5) and Xbox console hardware revenue growth. Third party content was really the sole area of weakness, exhibiting declines year-on-year. What this says is the ongoing Xbox ecosystem play is paying off, supplemented by better inventories at retail.

CEO Satya Nadella even provided a more macro view for hardware right now. “With our Xbox Series S and X consoles, we have taken share globally for two quarters in a row,” Nadella said on the company’s conference call. “We are the market leader this quarter among next gen consoles in the U.S., Canada, U.K., and Western Europe.”

Based on supply driving the cycle due to a global semiconductor shortage, this sort of strength in hardware and market share implies Microsoft was able to secure more components than Sony producing its PlayStation 5. Note that Nintendo Switch was not a part of this statistic, since Nadella’s comments specifically cite the newest console generation.

While the numbers point mostly positive, I have to bring up the usual caveat that Microsoft unfortunately doesn’t share individual profit metrics for its Xbox division. That means purchasing those inputs to produce more retail units could very well have undercut profitability due to higher margins. I’ll shed more light on profit dynamics below the fold.

It’s now time to chart a course towards a more detailed analysis.

As the slides show, Microsoft’s gaming revenue increased 6% to that $3.74 billion during the quarter which was in-line with the company’s forecast. This quarterly result implies nearly $16.5 billion in trailing annual sales, an all-time high, shown via my chart in the above gallery. If combined with Activision Blizzard’s $8.3 billion annual sales and reduced by say $1 billion in double-counting and synergies, it would be between $23 billion to $24 billion.

To provide context, how does this latest top-line result compare to peers? I usually cite Tencent, Sony and Nintendo for these sections, all of which are reporting later in May so I’ll use the latest annualized figures for now. Tencent’s 2021 revenue exceeded $27 billion, maintaining its spot as largest gaming company in the world. Sony’s at $24 billion, suggesting its standing is probably just above Microsoft plus Activision Blizzard’s operations. Finally, Nintendo generated $15 billion.

The largest sub-segment for Microsoft’s gaming business was Xbox Content & Services, which improved a modest 4% to $3 billion in fiscal Q3. That means sales from Xbox Game Pass, software, cloud and any sort of add-on content via its digital storefront account for over 80% of quarterly gaming sales. This was just the second time ever it’s crossed the $3 billion threshold.

While Xbox Content & Services slightly missed the internal growth estimate of “mid to high single digits,” it’s still a success to grow versus a great result last year. I see it as a sign the Xbox brand strategy is stimulating a paying audience.

Disappointingly, Microsoft didn’t share an update on the exact number of Xbox Game Pass subscribers. The latest figure is 25 million from back in January. I’d imagine this was due to seasonality, where it picked up after the holiday and has grown only incrementally since then. Especially given a lack of major exclusives or even third party partnerships launching into the service other than Ubisoft’s Rainbow Six Extraction.

Instead, Microsoft highlighted new information specifically on cloud gaming usage. Nadella said 10 million people have streamed games remotely since the feature kicked off in beta during November 2019 then was formally introduced to Xbox Game Pass Ultimate subs in September 2020. While cloud is still niche in the scheme of things, hitting this sort of milestone shows there’s at least some level of growing interest.

“Our Game Pass library now includes hundreds of titles across PC and console, including more games from third party publishers than ever before.” Nadella noted. “Billions of hours have been played by subscribers over the past 12 months, up 45 percent.”

Lastly, he said Azure gaming revenue increased 66% during the current fiscal year to date. These sorts of statistics on service, cloud, streaming and the like fit with the company’s gaming mantra of allowing people to play on various devices. It eases the burden on hardware shipments, which I’ll cover next.

The second sub-segment within gaming is Xbox Hardware, which exhibited the better growth during January to March. Sales here moved up 14% to $728 million. That’s the second best non-holiday result since the company began reporting splits. Microsoft didn’t previously share internal guidance for hardware, yet CFO Amy Hood said on the call that it exceeded expectations.

Company slides highlight continued demand for Xbox Series X|S underlying this change, however clearly it’s capped by supply conditions. Based on evidence from both regional tracking firms and retail channel checks, Xbox Series S in particular is showing better availability at least.

Of course, the question on everyone’s mind is: how many units of Xbox Series X|S has Microsoft shipped now during its fifth full quarter on market? Last quarter, I mentioned the estimate from Daniel Ahmad, Senior Analyst at Niko Partners, being above 12 million. While revenue growth doesn’t directly translate to unit sales trajectory, I’d guesstimate the family at upwards of 14 to 14.5 million globally. As a reference, last count for Sony’s PlayStation 5 was 17.3 million.

We’d know for sure if Microsoft was more transparent. (Wishful thinking!)

Fitting with the theme of market share gains and increased inventories was The NPD Group’s recent monthly report on U.S. games industry spending. As I covered in my article, Xbox Series X|S was the leading console for both March and the first quarter domestically by dollar sales. It’s certainly attracting buyers, when there’s stock on hand.

“Coming to the end of a good week,” wrote CEO of Gaming Phil Spencer on Twitter. “Microsoft earnings were a nice moment for Xbox, it’s always great to hear Amy [Hood] and Satya talk about the progress.”

Now, here’s yet another important caveat related to profitability. We don’t know if Microsoft is making a profit on either model right now. In fact, last year during the Epic v. Apple trial, Head of Xbox Development Lori Wright specifically said the firm sells hardware at a loss. Which is consistent with historical data and anecdotes across the industry, as consoles are known as a loss leader and a means to have people spend on software, and now subscriptions or other content.

Comparatively, Sony said it’s now turning a profit on each PlayStation 5 standard edition it ships. Without a better indication of cost impact, it’s difficult to make a direct comparison.

Stepping back to briefly touch on Microsoft’s general results, the company generated over $49 billion in quarterly sales which is 18% higher than last year. Operating income exceeded $20 billion, up 19%. Both top-line and earnings-per-share came in above analyst estimates.

Intelligent Cloud as a segment showed the most growth, jumping 24% in Q3. Microsoft Cloud revenue improved 32% to over $23 billion. Office Commercial products and cloud moved up 12%, while LinkedIn sales rose 34%.

Gaming is part of the More Personal Computing business for Microsoft, which rose 11% to $14.5 billion. This means Xbox comprised 26% of quarterly segment sales, down from 31% during the holiday quarter between October and December 2021.

In terms of a glimpse into profitability for this segment, gross margin percentage declined “slightly” last period. That’s because of a 17% increase in operating expenses, attributed to gaming, search, news advertising and Windows marketing costs.

Essentially, gaming is less profitable than other areas when investing heavily in console manufacturing and external deals. This also reflects the broader trend of inflation, impacting input pricing. The more it takes to make a product, the lower its margins. Right now, the implication is there’s higher cost in both producing consoles and making the types of deals required for Xbox Game Pass. Without exact data on how much profit is made per retail unit sold or for gaming as a whole, I have to make these kinds of inferences.

Considering gaming sales rose 50% this time last year, beating total growth estimates in the latest quarter was a great showing on the revenue side. That $3 billion figure for Xbox Content & Services in particular supports the brand’s reinvigorated move towards keeping players in a more accessible ecosystem as opposed to a singular piece of hardware. There are still indications that profitability is being hit by input availability and cost, so that’s worth keeping in mind especially moving into the second full calendar year of Xbox Series X|S.

Looking ahead, next time Microsoft will report fourth quarter and annual results for fiscal 2022.

When it comes to gaming, CFO Amy Hood laid out somewhat bearish internal guidance for April to June as the company anticipates lower sales, echoing a trend seen industry wide as a reversion towards more normalized spending habits.

“We expect revenue to decline in the mid-to-high single digits driven by lower engagement hours year-over-year as well as constrained console supply,” Hood said. “We expect Xbox Content & Services revenue to decline mid-single digits though engagement hours are expected to remain higher than pre-pandemic levels.”

Note: She didn’t provide formal guidance on hardware results.

Digging into that first estimate, let’s assume an 8% decline. This would lead to fourth quarter gaming revenue of $3.4 billion versus the prior amount of $3.7 billion. When aggregating for the full year, it would still be an increase from $15.4 billion to $16.2 billion. That implies we’ll see a fiscal year sales record for Xbox despite anticipated weakness in the final quarter.

Then, if Xbox Content & Services dips say 5%, it would generated $2.8 billion in the fourth quarter which would be the lowest result since the pandemic began.

We’ll have to see how it plays out for Xbox over a three month span where it’s going to reveal a lot more about future titles than actually launch many on the first party side. On June 12th, Xbox & Bethesda will host its annual summer showcase where I expect to see more about Starfield, Redfall, Senua’s Saga: Hellblade II, Avowed and hopefully the Indiana Jones project.

Thanks everyone for stopping by and making it this far. Be safe and well!

Comparisons are year-over-year unless otherwise noted.

Sources: Company Investor Relations Sites, The NPD Group, Xbox Wire, Yahoo Canada (Image Credit).

-Dom

Xbox’s Best Holiday Sales Result Pushes Microsoft’s Annual Gaming Revenue to Record $16 Billion

As I reported back in October, Microsoft’s Gaming division at the time saw its healthiest first fiscal quarter ever.

Now, it’s going one step further. On the strength of its first party lineup and growing subscription base, Xbox has just achieved its best holiday on record and blasted past a new milestone for annual sales, establishing a record 12-month figure.

Mere days after announcing the biggest acquisition in industry history in its purchase of Activision Blizzard, Microsoft is showing off why it’s pumping dollars so much into the space. Because it’s seeing great returns. During its 2nd quarter of 2022 financial report, Microsoft said Gaming revenue reached $5.44 billion during the holiday quarter.

That’s the single best October to December ever reported, 8% higher than last year which was the previous record holder of $5 billion. The main contributor to this record output was Xbox Content & Services, especially strong during the holiday season bolstered by flagship titles in the Halo and Forza series.

This performance also means annual Xbox sales for the Washington-based tech giant pushed passed the $16 billion milestone for the first time.

Combining the last four quarters of sales for Xbox reaches upwards of $16.28 billion. That’s 18% higher than December 2020 and 3% more than even last quarter, both of which included the launch of Xbox Series X|S. The fact that the rolling annual figure was this high shows payoffs in first party game development and key investments in partnerships for Xbox Game Pass’s extensive library.

According to Chief Executive Officer (CEO) Satya Nadella on the company’s conference call, the Xbox division saw both record engagement and revenue during the quarter. While he didn’t share specifics on the actual level of engagement or revenue, he did cite certain juicy tidbits I’ll dig into later.

Unfortunately, there was no appearance from newly-minted CEO of Microsoft Gaming Phil Spencer on the call or questions from analysts on anything related to the acquisition of Activision Blizzard. In fact, the only mention of the deal was reiterating what we already knew about its cost and closing during the fiscal year ending June 2023.

No worries. It’s time to move into the underlying numbers and corresponding reaction!

The above slides provided by Microsoft give a rundown of growth rates for Gaming and its sub-segments of Xbox Content and Services plus Xbox Hardware during the quarter ending December 2021. Namely, that 8% growth for Gaming leading to $5.44 billion in quarterly revenue which was in-line with the company’s expectations of high single digits.

Underlying this all-time number was double-digit growth in Xbox Content & Services, the sub-segment that includes software and subscription sales, which rose 10% in the quarter to around $3.86 billion or 71% of the total. Yet another record! Boosted by first-party launches like Halo Infinite and Forza Horizon 5 plus Xbox Game Pass expansion, this figure was especially impressive given its consistency around this time in late 2020.

On the conference call, Chief Financial Officer (CFO) Amy Hood mentioned there was “significant” growth for Xbox Game Pass subscriptions and first party software sales in the holiday quarter.

Why? According to Nadella, Halo Infinite has now attracted 20 million players since its staggered launch beginning back in November. It’s the largest start ever in the series that dates back to the original Xbox. Another thing that, hm, drove sales is how Forza Horizon 5 is now up to 18 million players after hitting the 10 million threshold within a week of launch in early November. These games also attracted subscription growth, the other key revenue contributor, as Xbox Game Pass now has 25 million members up from the last official figure of 18 million (with the latest rumor being around 22 million).

To me, this dispels a false notion that Xbox Game Pass isn’t properly monetizing its user base. Even those buyers that get in at a discount are sticking around, which generates ongoing revenue once the rate resets. The numbers back this up. I’d love to know more on the profit side, of course, but I work with what’s available.

Intriguingly, the 10% Content & Services growth was technically below Microsoft’s guidance of “mid-teens.” That’s because of weakness on the third party side. This signals under-performance of AAA multi-platform releases like Call of Duty: Vanguard and Battlefield 2042. Perhaps even Madden NFL 22 and other annualized sports titles. So while Call of Duty and Battlefield both were among the best-selling premium titles in the U.S. during 2021 as I wrote about here, this missed estimate implies a lower contribution to the bottom line of platform holders.

Taking a look at the above chart I’ve compiled, this is 12-month revenue going back over time for the gaming business. It helps to provide context in a couple of areas, and smooths out short-term fluctuations. The main thing it shows is the overall level of Xbox revenue over time. That’s the record $16.28 billion as of this latest period, compared to $15.86 billion last quarter then going back from there. Clearly the trend-line is on that upward trajectory since bottoming out in Q3 of FY 2020.

There’s also the split between Xbox Content and Services and Xbox Hardware categories. The green portion is for Xbox Content and Services, which most recently contributed $12.58 billion to the annual amount. The red portion is Xbox Hardware which is all physical gaming consoles under the brand. $3.7 billion this time. Both of those are also all-time highs.

Next up is Xbox Hardware. This sub-segment contributed the remaining portion of the record holiday quarter, growing 4% to almost $1.59 billion in revenue on the back of steady demand. It’s actually one of the few things in this report that wasn’t a record. That happened back in fiscal 2018’s second quarter, when hardware accounted for $1.78 billion. This year’s was still second best, so I’d say it’s doing alright.

To put it another way, the second holiday quarter for Xbox Series X|S generated almost $70 million more in dollar sales than its launch quarter did.

On the call, Hood shared how Microsoft is seeing continued buyer interest for both console models. Additionally she saw “better than expected” supply, which is a good sign considering the doom and gloom of the modern semiconductor situation.

This commentary and performance is mostly consistent with Spencer’s recent comments around Xbox Series X|S being the fastest-selling ever for the brand. Xbox Hardware is performing well during this early part of the generational cycle even in the fact of shortages, with Xbox Series S as the highlight because of higher availability. While we don’t have exact figures from Microsoft on hardware shipments globally, we do have an estimate from my friend Daniel Ahmad, Senior Analyst at Niko Partners, that it’s above the 12 million of Xbox One’s first year.

Here’s a telling experiment: What would Microsoft’s gaming revenue look like if Activision Blizzard earnings were considered? The latter hasn’t reported its last quarter yet, so I’ll use historical figures for a baseline in this thought experiment.

The most recent October to December revenue for Activision Blizzard was $2.41 billion. That means the holiday quarter for the combined entity would have been over $7.58 billion! For the full 12-month period, Activision Blizzard’s latest is $9 billion.

Which means, in aggregate, Xbox and Activision Blizzard annual revenue right now would be $25.33 billion. How does that compare to its major competitors? Well, it’s pretty impressive and much closer to the top-end than ever before, naturally.

I usually pull in figures for Sony and Nintendo as the three main console manufacturers. There’s also Tencent, the largest gaming company in the world, which is an absolute behemoth notably in mobile and the Asia Pacific region. So let’s see them all!

This is using annual and the caveat is Microsoft is the only one that’s reported this season so far. It’s still helpful to illustrate. Tencent’s latest strictly from its games business was $27.3 billion. Sony’s Game & Network Services segment hit $25.5 billion while Nintendo’s total sums to $14.7 billion, both using the exchange rates at their last reports. Which means Microsoft alone sits closer to Nintendo, while combined with Activision Blizzard it nearly surpasses Sony’s total and might even some day approach the untouchable realm of Tencent.

And that’s part of why Microsoft is willing to pay almost $70 billion for it.

As is tradition, I’ll quickly run down Microsoft’s overall results for the three months ending December before closing up.

Total revenue for the company rose 20% to $51.7 billion. It’s the first time quarterly sales topped $50 billion, pushed by an all-time high $18.3 billion revenue from its Intelligent Cloud segment. Operating profit moved up 24% to $22.2 billion.

Its results beat analyst consensus on both top-line revenue and earnings-per-share. Microsoft Cloud product revenue was a major highlight, increasing 32% to over $22 billion for only the second time ever.

We can learn a bit on gaming profitability from the More Personal Computing business unit margin movement and operating dynamics. This experienced 15% revenue growth to $17.5 billion. At $5.44 billion, gaming makes up around 31% of More Personal Computing. Operating income rose 22% to $6.36 billion, while expenses rose at a lower 17% rate partially as a result of gaming. It’s not perfect, but this can indicate sales contribution is outpacing costs.

It’s hard to overstate just how much the record revenue stats keep piling up for the Xbox business, reflective of Microsoft’s general strategy of user engagement and ecosystem establishment. This time it was first party software moving the needle, with major internal studios like 343 Industries and Playground Games leading the charge by pushing quality within key brands. The result is Xbox Game Pass literally paying off, thus generating opportunities for more future investment both organic and external.

Moving into the new calendar year, Xbox’s early 2022 exclusive slate is light during a quiet quarter for first parties. CrossfireX is a third party console exclusive from Smilegate and Remedy Entertainment launching in February, plus there’s indie partnerships hitting the platform throughout the coming months.

It is, however, quite the busy period for third party games with select titles like Rainbow Six Extraction available simultaneously on Xbox Game Pass. Dying Light 2, Elden Ring and Destiny 2’s The Witch Queen expansion all debut in February. There’s always the long tails from late year launches of Call of Duty, Madden, NBA 2K, Battlefield then other major ongoing games with seasonal updates like Fortnite and Apex Legends.

On the hardware side, Xbox Series X|S availability will continue to set the narrative. I don’t expect the higher end Xbox Series X to pick up stock any time soon, though I’m turning optimistic on Xbox Series S inventories based on recent trends and anecdotal evidence. Microsoft executives themselves said that hardware will continue to be impacted by supply limitations and didn’t provide guidance on growth expectations.

For the quarter ending March 2022, Microsoft expects gaming sales growth in “mid single digits” range. Assuming it’s exactly 5%, that’s $3.7 billion. For Xbox Content & Services, strong engagement and continued momentum will lead to increases in the “mid to high single digits.” Putting it around 7% then, this would generate $3.1 billion.

Guess what? Both would be fiscal third quarter records. The latter would even be the first time it’s passed $3 billion in a Q3.

“The other area obviously we’re seeing strength is in gaming,” Nadella highlighted during the analyst question portion of Microsoft’s earnings call. “We see the intensity of usage and the business model diversity around games, that increasingly the economics of gaming franchises is also radically becoming much more software-like.”

That certainly is the case, considering the multi-faceted approach where now, because of ongoing financial support in both areas, main contributors are actual first party software and Xbox Game Pass as a catalog of titles plus cloud experience.

Thus ends this quarter’s deep dive into Microsoft’s financials. I look forward to recapping other companies very soon! Be safe all, and stay healthy.

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

Sources: Daniel Ahmad, Microsoft, The NPD Group.

-Dom

U.S. Game Sales Decline Double-Digits in November in Difficult Hardware Supply Environment

The super important November month and Black Friday shopping seasons have come to a close, and United States sales numbers are in from The NPD Group for the video game industry!

And it was a mixed one, for a variety of reasons. That can happen when the prior year was a record, I suppose.

Last month had consumer spending down double-digits overall with declines experienced across all three major categories of Content, Hardware and Accessories. Which is understandable, considering how last year was a best-ever November and the global semiconductor shortage continues to dampen all sectors of consumer technology.

Hardware took the biggest hit with gaming console sales down nearly 40% to the lowest November level since this time in 2016. Nintendo Switch is still the standout, with the company sharing how its hybrid system sold over a million console units in the month alone. That combines all devices in the family, including the latest OLED iteration. Which, fitting with the month’s general trend, is still lower than the 1.35 million achieved in November 2020.

There’s just limited inventories across the board within Hardware, especially for new generation Microsoft Xbox Series X premium model plus Sony’s PlayStation 5 family. One bright spot is the aggressively-priced Xbox Series S version has been available at various retailers, resulting in Xbox Series X|S reaching second place in the Hardware ranks for the first time in a while.

Speaking of software, services and subscription sales as part of the bigger Content category, spending focused on mobile, military first-person shooters, Pokémon remakes and the latest Forza car game from Xbox Game Studios.

Brand new titles occupied four of the top five spots on the general software ranking: Call of Duty: Vanguard led, Battlefield 2042 up next, Pokémon Brilliant Diamond & Shining Pearl snatched up #3 then Forza Horizon 5 finished in fourth. The first three of these entered the year’s best-sellers list with just the single month on record.

Mobile, consistent as ever, generated over $2 billion in spending for the ninth consecutive month. There’s only two months in 2021 where this particular source hasn’t reached that threshold.

The last broad category of Accessories saw similar declines in November dollar sales, about 20% lower than a year ago. Steering Wheels at least showed great upside, their popularity driven mainly by a Forza release. Read on for more puns later in the piece!

“It is much harder to find a console to buy this holiday,” said The NPD Group’s Mat Piscatella. “Hardware sales [are] limited by supply, and the console with the most units in market is going to lead in sales, perhaps for a while.”

I hope those here in the States that celebrated had a safe, happy Thanksgiving. Then, everyone both domestically and overseas had a good month despite confronting the challenges of COVID-19’s Omicron variant and likely still having to attend those Zoom meetings from home while juggling that precious work-life balance. For those that can, take advantage of vaccinations for teens and kids plus booster shots for adults! It’s for the benefit of all.

Read on below for a look at spending data plus software charts, then see who can spot the worst “jokes” of all.

United States Games Industry Sales (October 31st, 2021 – November 27th, 2021):

Within The NPD Group’s monthly report, the firm said spending across the U.S. games industry last month reached just under $6.3 billion or a decline of 10% since the record high of almost $7 billion in November 2020.

While Content sales are mostly showing resilience, hardware was mainly behind the dip as this time last year both Microsoft and PlayStation launched their latest consoles. Positive areas like subscription and mobile spending weren’t enough to offset lower results in console hardware and accessories, the former certainly restricted by input part scarcity. Plainly, the biggest manufacturers weren’t able to make enough consoles to satiate buyer demand.

Good news is 2021 taken as a whole is still ahead of last year. Year-to-date approached $53 billion in November, which is 9% growth against the $48.5 billion of the same 11-month period in 2020. Basically, despite a more supply-constrained and softer software holiday quarter so far, the year is in high single-digit growth territory and moving towards another potential record result.

The Content category, software and the like, accounted for $5.14 billion in consumer spending. That’s 82% of November’s total, and a slight decline of 1% versus a year back. When expanding to 2021 so far, Content sales have risen 8% to breach past the $46 billion threshold. Which is 87% of the year’s overall spend.

A main contributor here continues to be mobile, which grew 11% in November and accounted for that “at least $2 billion” figure I referenced earlier. Smartphone titles Candy Crush Saga, Coin Master and Roblox among others propelled revenue. Though The NPD Group, in collaboration with Sensor Tower, doesn’t publish full mobile charts.

For console and PC gaming, some of the biggest blockbusters of the year launched last month and occupied the highest spots on the overall software chart.

Unsurprisingly, Call of Duty: Vanguard tops the list. As a game within the Activision Blizzard-published military shooter series has done during its launch month for a whopping 14 years straight since Call of Duty 4: Modern Warfare started the trend in November 2007.

Even considering the single month on market, Vanguard is already the year’s second best-selling game on the combined chart. Behind only last year’s Call of Duty: Black Ops Cold War. It’s unclear how Vanguard compares to prior titles on dollar sales. I have a question out to The NPD Group for context, I imagine they may not be able to answer publicly.

Oh. More importantly, Activision Blizzard management fostered and even participated in workplace toxicity plus various forms of harassment, employs a torture apologist on its board of directors and is now trying to stifle employees from collective action. CEO Bobby Kotick, among others, should be ashamed. And fired.

Back to the rankings, Battlefield 2042 landed at the second spot during its initial month on market, That’s one above where Battlefield V began in November 2018, and one below where October 2016’s Battlefield 1 launched at the top position. (No, there weren’t three other games in the war epic shooter between those. It’s just Electronic Arts with its confusing naming convention.) The title developed by DICE secured the second spot on both Xbox and PlayStation respectively and is already the sixth best-seller for 2021 as a whole. Again, no comparison details to prior titles available that I could find.

Switch exclusive Pokémon Brilliant Diamond & Shining Pearl secured third place, and that’s excluding digital sales since Nintendo doesn’t participate in that portion of reporting. The Generation IV remakes in the long-running brand immediately became the 8th best-seller on 2021’s list, and of course led Switch platform ranks.

One of the biggest success stories remains Forza Horizon 5, ranking fourth on the total software chart and third on Xbox behind only Call of Duty and Battlefield. Importantly, this didn’t include Xbox Game Pass subscriptions. Which supports the notion that services can enhance sales rather than cannibalize them. The excellent open world driving title from Playground Games zoomed off the starting line, attracting 10 million players during its first week alone in the largest first-party launch for Xbox in its 20-year history.

Familiar titles like Madden NFL 22, Mario Party Superstars and Marvel’s Guardians of the Galaxy helped round out the Top 10. Ubisoft’s Just Dance 2022 was the next new release at #11, while Japanese role-playing game Shin Megami Tensei V from Atlus debuted at #16. Note that the latter does not include downloads, which means its upside was even greater.

With just one month left in 2021, Call of Duty: Black Ops Cold War is currently in pole position with Call of Duty: Vanguard on its heels and Madden NFL 22 in third place. Will Vanguard shoot past its predecessor? Well it certainly should, taking into account holiday sales, however it’s far from guaranteed. Which would be an anomaly in recent memory, telling a clear narrative of diminishing full game sales for the series this year.

For now, here’s November’s full results.

Top-Selling Games of November 2021, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Call of Duty: Vanguard
  2. Battlefield 2042
  3. Pokémon Brilliant Diamond & Shining Pearl*
  4. Forza Horizon 5
  5. Madden NFL 22
  6. Mario Party Superstars*
  7. Marvel’s Guardians of the Galaxy
  8. FIFA 22
  9. Far Cry 6
  10. NBA 2K22*
  11. Just Dance 22
  12. Mario Kart 8*
  13. Marvel’s Spider-Man Miles Morales
  14. Animal Crossing: New Horizons*
  15. Back 4 Blood
  16. Shin Megami Tensei V*
  17. Minecraft
  18. The Legend of Zelda: Breath of the Wild*
  19. Super Smash Bros. Ultimate*
  20. Ghost of Tsushima

Top-Selling Games, 2021 To Date, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Call of Duty: Black Ops Cold War
  2. Call of Duty: Vanguard
  3. Madden NFL 22
  4. MLB: The Show 21^
  5. Resident Evil: Village
  6. Battlefield 2042
  7. Super Mario 3D World + Bowser’s Fury*
  8. Pokémon Brilliant Diamond & Shining Pearl*
  9. Marvel’s Spider-Man Miles Morales
  10. Far Cry 6

The most newsworthy of categories lately is Hardware, and November’s numbers showed a heightened impact from tough supply situation.

“It’s all about stock. The console with the most units in market will lead the charts,” Piscatella said. “[This] will likely be the case for a long while.”

In what was the most pronounced monthly decline of the three segments, Hardware sales declined 38% to $883 million. That’s the lightest November outcome since 2016’s $759 million. Last year’s figure was over $1.4 billion in the corresponding month, an all-time high established as both PlayStation 5 and Xbox Series X|S began their life cycles plus Nintendo Switch carried major software momentum into the holiday quarter.

Speaking of Switch, it was the top-selling gaming console in November as measured by both unit sales and dollars earned. (Basically, my prediction last month was half correct. Or half wrong, depending on one’s outlook. I’ll try to stay positive!)

Nintendo announced Switch sold 1.13 million units in November, 550K of which happened during Black Friday week. Note that last year’s November monthly unit sales figure was 1.35 million, which implies a decline of 16%. Still, Switch has now led on unit sales during 35 of the last 36 months, losing only September 2021 to a push from Sony’s PlayStation 5.

“As we head into 2022 and the sixth year of Nintendo Switch, the system continues to see strong demand,” said Nintendo of America President Doug Bowser in the company’s press release.

Now that there’s a full year of data on the new consoles, it’s clear that supply is dictating performance more than ever. Essentially, whichever console manufacturer produces more boxes is winning right now as Piscatella alluded. Nintendo’s November win was no doubt driven by OLED model production as its premier product, its first full month on market since launching in October. This phasing of the original model is enticing owners to upgrade or purchase an additional system.

Another noteworthy topic from last month’s report is how Microsoft’s Xbox Series X|S platform landed in second place within hardware by units and dollars. Recently it’s been lower than competitors, and I am pretty sure the last time it actually led was June 2021 when it set a record for the brand. This time, it’s a combination of higher Xbox Series S availability and the attraction of Forza Horizon 5.

Now the details are fuzzy, from I gather it’s a substantial away from Switch mainly based on comments from Niko Partners analyst Daniel Ahmad. His claim is combining Xbox Series X|S and PlayStation 5 sales for November are barely equivalent to what Switch generated alone. Which is a bit surprising to me, given how all are based on similar components and existing within a consumer tech space that’s reliant on part sourcing.

Even further, Ahmad points out a quite intriguing historical statistic in how PlayStation 4, Xbox One and Nintendo Wii U sold more in November 2014 than the current three corresponding consoles did last month. I think that drives home the limited stock right now better than any quote or commentary.

So, in a rare occurrence, PlayStation 5 brings up the rear during one of the calendar’s most intense months of commercial competition. Hardware overall was down against a record high in November 2020, still it’s lower than it probably should be a year into a brand new console generation. Bad news is the chip environment isn’t expected to change any time soon, so we should brace for further distribution limitations.

Last category to cover for November is Accessories, which also dipped almost in lockstep with its Hardware counterpart. It’s still approaching record territory for 2021 as a whole, plus one sub-segment in particular saw a substantial improvement.

Consumer spending on Accessories contracted 20% to $258 million, down from $324 million last year. It’s the lowest November month figure since back in November 2017, when segment spend was $243 million.

On the bright side, revenue for the first 11 months of the year is certainly more positive and actually currently at a record $2.18 billion. Which is an upward trend of 4% compared to this time in 2020, the prior record holder.

Clearly November was, hm.. fueled by the start of Forza Horizon 5. Steering Wheels in particular drove a substantial boost. Consumer purchasing on this sub-category more than doubled, with the Logitech G920 Driving Force Racing Wheel for PC and Xbox platforms leading the pack.

Could I possibly squeeze any more racing terms into a single section? Perhaps. I clearly peeled out and road the momentum this far!

Alright. Enough of that.

All in all, November is always an eventful time for the commercial side of gaming, the biggest publishers and data nerds covering the industry. This year paints a slightly different story than most monthly reports this year, which have been overwhelmingly positive. It’s a comparison against a massive, record-breaking month in November 2020 amidst a most challenging hardware situation, which explains the difference.

This hardware availability impacts everything from new software buyers, spenders on ongoing games over time plus especially the purchasing upside of accessories. When someone scoops up a fancy new generation console, they often buy a headset or additional controller at the same time. Without a box to find, there’s less incentive to spend on the latest peripherals.

That said, I’m very much looking forward to the finale of 2021 in December’s data. The biggest exclusive title is Xbox’s Halo Infinite, as both Sony and Nintendo aren’t pushing any massive budget first-party projects other than those that are already on sale.

I’m wildly bullish on Halo Infinite’s engagement prospects, sharing on social media how I expect at least 15 million players around launch which should drive the science-fiction shooter to one of the top spots on December’s combined software list behind the likes of at least Call of Duty: Vanguard and a sports game or two that find popularity during the holidays.

On the multi-platform side, Take-Two Interactive has the physical release of Grand Theft Auto: The Trilogy – The Definitive Edition (yes, that’s a real title and way too long to type more than once) since it was only out in digital form during November. Otherwise, it’s a relatively light end-of-year calendar for triple-A studios.

December’s report will have 2021’s annual data, which is trending towards a year of growth, especially for hardware’s performance before the supply constraints worsened. During 2020, consumers spent a record $57 billion across the games industry. 2021 is already at $53 billion, growing almost 10% as of November like I mentioned earlier in the piece. Last year’s December was $7.7 billion, which means next month only needs $4 billion to set a new record. I’m saying the potential for over $59 billion in annual spend is in sight!

So, this is the final NPD wrap up I’ll write in 2021, since December’s release is currently scheduled for January 14th, 2022. I absolutely loved covering them, and I hope you enjoy reading the recaps as well.

There’s a lot ahead at the site before the New Year as my annual Year in Review pieces will go around the last week of December. Hope everyone remains safe and well, Happy Hanukkah, Merry Christmas and a very wonderful December to all.

Thanks for the time and interest!

*Digital Sales Not Included, ^Xbox Digital Sales Not Included

Comparisons are year-over-year unless otherwise noted.

Sources: New York Times (Image Credit), The NPD Group.

-Dom

Microsoft’s Xbox Division Records Best First Quarter Sales Ever

Back in July, I wrote about how Microsoft’s Xbox division set both a new annual and fourth quarter sales record. Well folks, it’s back at it like a bad habit, this time recording its best ever first quarter revenue performance among other highs.

As the Xbox Series X|S generation approaches its first year anniversary (geez already) and Xbox Game Pass attracts players ahead of major title launches like Forza Horizon 5 and Halo Infinite, Microsoft’s gaming top-line is as strong as its ever been.

The Washington-based consumer tech conglomerate recently announced earnings results for its first fiscal quarter of the 2022 financial year, which runs from July to September. Within, the company shared how gaming revenue grew 16% since this time last year. That equates to nearly $3.6 billion in sales, a record Q1 high.

With this latest trajectory, Xbox as a whole has now achieved double-digit sales growth in each of the past six quarters.

While executives shared little to no specifics on Xbox Game Pass subscriptions or hardware units for consoles, they did provide certain color around gaming in this quarter on a conference call with analysts.

According to Chief Executive Officer (CEO) Satya Nadella and Chief Financial Officer (CFO) Amy Hood, the company is continuing to attract new gamers and retain those it established during the pandemic. This was a “record first quarter for monetization and engagement” per Nadella, while Hood said the firm “shipped more Xbox Series X|S consoles than expected, even as demand exceeds supply.”

One thing that management didn’t specify is Xbox Series X|S comparison to prior generations, which it did last quarter when they announced it was the fastest-selling in history. Does that mean it’s no longer the case, or did they just not specify it? Hardware sales for Xbox rose 166% since this time last year, implying its best first quarter by revenue based on estimates backing into it historically. We don’t actually know other than how well it’s translating to dollar sales.

Let’s look further at what numbers the company did report, namely how they translate to certain trends.

Taking a look at the earnings slides provided by Microsoft, gaming revenue grew that 16% compared to last year’s first quarter. Or $3.593 billion in dollar sales, to be exact. Compare that to the prior record holder: last year’s $3.1 billion in Q1. This was of course before the Xbox Series X|S launch in November 2020 and the ZeniMax deal closure in March 2021, so growth is certainly anticipated. Microsoft guided a “low double digit” increase, thus the result came in above forecast.

In terms of categories within gaming, Xbox Content & Services i.e. software and subscription rose slightly at 2%. A modest gain. Based on friend of the site’s Welfare’s historical math at the Install Base forum corroborated by yours truly, that translates to $2.88 billion. A low yet steady growth rate here makes sense and was in-line with Microsoft’s forecast. Last year was a few months into stay-at-home restrictions. This time, declines in third-party weren’t enough to offset increases in Xbox Game Pass subs plus first-party software.

Xbox Hardware continues to be a substantial growth driver naturally, rising 166% on high demand for the supply-constrained Xbox Series X|S family of devices and a low comparison last year. Backing into dollar sales, it’s roughly $710 million which is the best Q1 for console revenue since 2016.

What I like to do after learning quarterly figures is expand to annual, it helps identify more macro trends. That’s where my chart comes into play, mapping out total revenue and showing splits between the two sub-segments. Microsoft’s gaming revenue over the last 12 months is approaching $16 billion for the first time in history. The latest result is $15.86 billion, 77% via Xbox Content & Services. This is happening due to the combination of studio investment, rising first party game output plus the ecosystem play of subscriptions and cloud offerings.

Unfortunately as I’ve mentioned in the past, Microsoft doesn’t drill down into exact profit metrics within gaming. That doesn’t mean I can’t infer, of course!

The More Personal Computing overview slide describes operating income growth of 7% for this category that contains the Xbox business, which is lagging the 12% revenue growth. That’s driven by a shift towards gaming, notably notoriously lower margin consoles. Expenses rose 15%. This mix shift and margin decline signifies costs associated with financing the gaming business, a research and development focus plus marketing of products like new Xboxes, Game Pass and software in the back half of this year.

At this juncture, I’m disappointed in Microsoft’s decision to hold back any sort of details on its flagship exclusive. Which isn’t a single game. It’s Xbox Game Pass.

There was speculation recently after Take-Two Interactive boss Strauss Zelnick threw out a figure of 30 million subscriptions during a panel with Xbox lead Phil Spencer, who reiterated 18 million as the latest figure. Which everyone knows is outdated from way back at the beginning of this calendar year. There were rumblings it hit 22 million a few months back, albeit unconfirmed.

A potential reason for Xbox playing coy is a recent finding by Axios showing that for the year ending June 30th, Xbox Game Pass subscriptions rose 37%. Below the company’s internal estimate of 48%. While it makes sense this is less than the 86% for the year ending mid-2020, I’m curious if Microsoft is hesitant because of these speculative figures. Nearly 40% growth is actually a really impressive figure. Combine that with Nadella’s comments about best ever engagement, why not give an update? It’s just unclear where it stands now on number of subscriptions. Or really any other specific engagement indicators other than Nadella’s vague comments.

Flipping over to hardware, the big question remains: How many units of Xbox Series X|S consoles are in the market right now?

Last quarter, I shared how a reliable industry estimate for Xbox Series X|S was roughly 6.5 million units. Given the notable hardware growth alongside supply considerations, does that mean it’s now more than 8 million? I believe so, though really wish Microsoft was as transparent as its peers in this department. Good news is companies are selling-thru to customers (or scalpers, I know) whatever they can produce, which is the important barometer.

Speaking of competitors, it’s a bit tricky to run comparisons until both Sony and Nintendo report their September-ending quarters scheduled for tomorrow, October 28th then November 4th respectively. (You should know that from my latest earnings calendar!) Using June figures, Nintendo’s trailing annual gaming sales totaled $15.56 billion while Sony’s reached $24.35 billion. Microsoft and Nintendo are virtually neck-and-neck, though it’s not a perfect comparison until next week. While this provides perspective, the real trend is how records are being met or set constantly in this environment. It’s indicative of player retention and ongoing supply for manufacturing components.

One additional tidbit as part of Microsoft’s 10Q regulatory filing is a further breakdown of the ZeniMax/Bethesda acquisition. The total cost ended up being $8.1 billion for the deal that closed back in March, above the previous estimate of $7.5 billion. I’m not sure if the company has shared this before, it’s the first time I caught the exact figure. Earnings from ZeniMax have been included in More Personal Computing since closing. Xbox is investing in development of key future Bethesda titles like Starfield, Indiana Jones and even The Elder Scrolls VI, so I expect increased expense trends to continue.

Before wrapping up, I wanted to quickly review Microsoft’s overall company results.

It generated a whopping $45.3 billion in revenue during Q1, implying growth of 22%. $13.3 billion of this from More Personal Computing. Trickling down to gaming, this means the Xbox division contributed around 8% of total company sales.

On the profit side, Microsoft saw $20.2 billion in operating income. That’s 27% higher than this time last year, and the first time it’s surpassed $20 billion during any quarter. These are record times, driven by its cloud business and enterprise offerings. It’s also the reason why the firm can invest in certain areas, including Xbox.

The upcoming quarter will be an eventful one for Microsoft and its gaming business alongside the industry as a whole. It’s the coveted holiday quarter in various parts of the globe, which is an intense time for releases and hardware promotions. The company expects Xbox to have yet another record-setting performance.

“In gaming, on a high prior year comparable that included the launch of our new consoles and strength across Xbox content and services, we expect revenue growth in the high single-digits,” said CFO Hood during the forecast portion of the conference call.

Assuming the mid-range of that estimate, around 7% to 8%, that’s upwards of $5.4 billion during the holiday quarter. That would comfortably achieve a record second fiscal quarter, beating out last year’s $5.02 billion.

So, can Xbox top that? Yes. It will. Personally, I’m forecasting 10% or even higher for the broader gaming sub-category.

Within, Microsoft said Xbox Content & Services should grow in the “mid teens.” If we put that at exactly 15%, it’s $4 billion. That would be over $500 million more than last year’s total, and yet another historical high for a Q4. I can certainly see that happening, with software and services driven by key title launches like the aforementioned first-party releases then multi-platform favorites like sports titles, Call of Duty: Vanguard and Battlefield 2042.

Xbox Hardware will be the more intriguing result to me as it’s a full year into the new generational cycle. Microsoft doesn’t issue formal estimates for hardware, though it’s easy enough to back into it making these prior assumptions. Based on its other guidance, hardware sales could reach $1.3 billion. That would be slightly down since the launch quarter of Xbox Series X|S, when it was over $1.5 billion. This is totally dictated by supply since major discounting won’t happen yet. Which is why the effort towards Xbox Game Pass and cloud are so integral to the firm’s broader strategy.

Well, that’s a pretty big quarter for Microsoft overall and within Xbox. Record results, generic comments and plenty of forecasts to chew on for the future. What did you think? Are you also disappointed by a lack of transparency? Do you predict it will hit upcoming targets?

Check back soon for other write-ups and I look forward to chatting on social media soon. Thanks for reading!

Comparisons are year-over-year unless otherwise noted.

Sources: Axios, Welfare via Install Base Forum, Microsoft, Xbox Twitter (Image Credit), Yahoo Finance.

-Dom