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

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

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

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

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

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

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

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

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

During the quarter ending June:

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

Now for fiscal year 2024 revenue stats.

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

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

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

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

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

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

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

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

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

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

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

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

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

Again, now the annual figures for Xbox Hardware.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources: Company Investor Relations Websites, Xbox Support.

-Dom

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

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

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

More concise, same great quality. I hope.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Then, on an annual basis:

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

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

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

Looking at the last 12 months:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources: Company Investor Relations Websites, Xbox Wire.

-Dom

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

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

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

That’s precisely what happened.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-Dom

Starfield Rockets Xbox to Best September Quarter Sales Ever in Microsoft’s Fiscal 2024 Q1 Results

Now that I’ve posted my last earnings calendar of 2023, it’s time to look at some actual results!

First up for the big three of the games industry was Microsoft, which posted its first quarter of fiscal 2024 numbers last night.

During this time frame, the Xbox business unit had a record first quarter sales performance. Quarterly revenue on gaming moved up nearly double-digits, generating almost $4 billion.

The clear driver was Starfield in September, a launch which fit the general theme of the Washington-based company’s strategy. Bethesda Game Studios’ space RPG pulled in Game Pass subscribers more than console buyers, a clear signal that this generation is unlike any other for the platform holder.

That’s because, while content and software sales moved up for Xbox, hardware spend actually declined in this same quarter of the year’s flagship game hit market. Starfield and all first-party titles for Xbox land on its subscription service day one, plus the publisher has been offering early access to its biggest titles. For a small fee, of course.

This translated to a boost in hours played and dollars spent by gamers during July to September period, even if they weren’t as interested in scooping up Xboxes.

“In our consumer business, PC market unit volumes are returning to pre-pandemic levels. Advertising spend landed roughly in line with our expectations,” said Chief Financial Officer (CFO) Amy Hood. “And in Gaming, strong engagement helped by the Starfield launch benefited Xbox Content and Services.”

The other headline news recently for Microsoft was the closure of its $69 billion deal for Activision Blizzard, as of mid-October. This subsidiary is now included in financial forecasts and will account for the bulk of the combined entity’s gaming growth during the upcoming holiday quarter.

Scroll down for a close examination of Xbox’s all-time Q1, industry peer comparisons, a discussion on Activision Blizzard’s impact plus a suite of predictions from both management and yours truly.

Based on the above slides and its filings, Microsoft reported gaming revenue of $3.92 billion in the latest quarter. That’s an all-time Q1 best, 9% above the former record holder last year of $3.61 billion.

This growth came in slight above the company’s estimate of “low to mid single digits,” attributed to out-performance of first party and a higher contribution from Game Pass revenue. This indicates that, at least on the content sales side, Starfield had a better debut than management thought it would and brought in more interest than projected.

Moving to the chart in the gallery above, despite this record quarter, Xbox’s $15.78 billion in trailing 12-month revenue is currently 3% below where it was at the beginning of fiscal 2023.

This modest downward trajectory for the annualized figure is certainly temporary, as you can see in the final column there which incorporates the second quarter estimate due to an Activision Blizzard boost, which I’ll cover in a later section.

Now that we know Xbox’s present annual revenue figure of $15.78 billion, we can map where it stacks up across big players in the industry. Sony’s in the lead with the PlayStation figure being over $27.8 billion, amplified by a currency impact and maximum console availability. Tencent accumulated $25 billion over its latest year, while Nintendo generated $13.46 billion.

Here’s where I remind everyone, especially the fanboys, of certain caveats on these comparisons. First, it’s early in the season and there will be updates throughout the coming weeks. Then, the yen has bumped up sales especially for Sony which is also much less profitable then at least Nintendo (Microsoft and Tencent do not report profit numbers for gaming). Plus, Activision Blizzard will augment Microsoft to at least $18 billion and more in the future, so everything is relative.

As I alluded, sales only tell part of the story. While we don’t know how much Xbox made when backing out expenses, we can infer some things from its broader category and the margin mix. Gaming is a part of Microsoft’s More Personal Computing (MPC) segment, which saw Q1 operating profit go up a whopping 23% to $5.17 billion. While expenses declined 1%, the firm cited how this was more driven by a better margin in Devices that was offset by “investments in Gaming” probably related to Starfield’s marketing push. Still, since it didn’t sell as many consoles, which are typically lower margin than software, I’d wager Xbox’s profit only reduced marginally.

I’ll now shift towards digging into results for the two major product categories: Xbox Content & Services and Xbox Hardware.

Essentially, the former had a great quarter while the latter was lackluster.

Xbox Content & Services spending moved up a healthy 13%, amassing $3.18 billion over the three months ending September. By my math, that’s the highest single first quarter for this segment in history. It comprised 81% of Microsoft’s total gaming revenue in Q1, versus 78% this time last year.

It also follows that, over the last year, Content & Services hit $12.55 billion, which is the second highest total ever behind only fiscal 2022 Q3 at $12.7 billion.

More than ever, the fact that content was over 80% of gaming sales when a traditional “system-seller” type game hit market signals the ever-growing movement away from console sales and towards ecosystem. Management wants people to subscribe to their service, to generate ongoing revenue, to bolster that bottom line, rather than one-time purchases of low margin hardware.

And that’s exactly what’s happening more and more this generation as the mix remains towards software and subscriptions.

When talking about the gaming division on the earnings call, Chief Executive Officer (CEO) Satya Nadella shared that Starfield has now attracted over 11 million players to date, up from 10 million as of September 20th.

Showing a more multi-platform skew, management mentioned that almost half of the hours spent on the title have been on PC. Plus, they said it led to a single day record for new Game Pass subscriber sign-ups on its launch date. Unfortunately, they didn’t give any specific figures behind this particular claim, or what the prior best day ever might have been.

I’ll now sound like a broken record, and not the good kind, when I write that yet again management did not share updated Game Pass subscriber numbers. Which is increasingly odd, notably during a monumental quarter with Starfield supposedly boosting the service. Microsoft would have us believe it’s still at 25 million. I’d imagine we might finally hear more after Activision Blizzard titles are integrated and it hits another big milestone because of that.

Flipping in the other direction in Q1 was Xbox Hardware, which saw 7% lower sales than 12 months back. That’s 5% worse than expected, based on backing into management’s prior guidance.

This happened right after a Q4 where it declined 13%, showing that not only were console sales down even leading into the year’s biggest exclusive software launch, they were even worse than Microsoft expected.

Combining the last four quarters, Xbox Hardware currently accounts for $3.23 billion. That’s down 15% year-on-year from the high of $3.8 billion earlier in this Xbox Series X|S generation.

Which, I believe, won’t necessarily phase management. Because console sales are on the back-burner more than they have ever been in the 20-year plus history of the brand.

This time period encapsulates, even amplifies, Microsoft’s strategy. It doesn’t have system-sellers anymore; it has Game Pass sellers. It doesn’t rely on console sales any more; it relies on subscription offerings and catalog consistency. Whether or not this will be sustainable over a longer timeline is the million, scratch that, billion dollar question.

Without unit shipments being reported publicly, all we have are estimates that really end up being closer to guesses. Last quarter, I had Xbox Series X|S at between 24 million and 24.5 million lifetime, thus below Xbox One’s 24.7 million at that same stage. Xbox Series X|S was still above the Xbox 360, which was at 20.3 million launch-adjusted.

What about now and the comparison to prior generations and peers? My best guesstimate puts Xbox Series X|S lifetime at 25.5 million or so. Almost definitely no higher than the 26 million that many estimate Xbox One had by fiscal 2017 Q1. As for current generation comps, Sony’s PlayStation 5 is at nearly 42 million, likely approaching at least 45 million by the time it reports next week.

Competitors are consistently outpacing Xbox in key regions, even during the debut month of Starfield. Circana’s September report on U.S. sales had it in second place behind PlayStation 5, which was also last month’s best-selling console across Europe according to a Games Industry Biz article.

Echoing the success of gaming, Microsoft overall amassed $56.5 billion in revenue in Q1, ending 13% higher than the year prior. Operating profit jumped a whopping 25%, to nearly $27 billion.

Similarly, Microsoft Cloud sales bumped up 24% to $31.8 billion. Nadella and Hood both cited Artificial Intelligence (AI) businesses along with its enterprise operating system and productivity offerings as providing substantial upside.

The Xbox unit just had an all-time July to September period, as predicted in earlier articles, due to the highest profile software it has all year alongside the attraction of a subscription service that offers a lower-priced entry to play that. Plus, an experience like Starfield brings in more PC players than usual because of its modding potential and that Bethesda longevity.

Looking ahead, this is the first official forecast we’ve had from Microsoft on the impact from Activision Blizzard. The firm’s historical comparisons and financial forecasting are both going to be skewed due to the inclusion of this new subsidiary for the foreseeable future.

Its immediate effect will be massive. Across Q2, which is also the holiday quarter ending December, gaming sales are expected to see a growth percentage increases in the “mid to high 40s” i.e. around 45% to 49%.

Out of that, executives said the net impact from Activision Blizzard’s inclusion was 35 points, or 35%. Thus, organic growth for Xbox in Q2 would be around 10% to 14%.

What would that look like in dollar terms? Nearly $7 billion in revenue for the quarter ending December, with Activision Blizzard contributing nearly all of the growth. That’s over a billion and a half better than Xbox’s best quarter of all time, and it means 12-month sales would breach the $18 billion mark.

The company said Xbox Content and Services would grow in the “mid to high 50’s” or almost 60% growth. This would equate to another record of $5.3 billion in quarterly content sales alone.

50 points, or 50%, of that will be from the acquisition. Notably, there’s November’s Call of Duty: Modern Warfare 3, knock-on from Diablo IV and legacy titles entering Game Pass. Something like Forza Motorsport will bolster organic growth, as will major third party launches like sports titles from Electronic Arts and Ubisoft’s busy late calendar slate of Assassins Creed Mirage, Avatar: Frontiers of Pandora and The Crew Motorfest.

While Microsoft doesn’t provide official guidance on Xbox Hardware, it’s easy to back into it, and I arguer it leads to an even bigger story. Management is signalling growth for console sales well into the double-digits, upwards of 22%, to $1.7 billion. That would be the best growth rate in two years, and it’s the aspect of this forecast where I’m the most skeptical.

Now that I’ve covered the financial results, what caused them and where Microsoft is going into this quarter and beyond, that wraps up my first big rundown of the season. Thanks everyone for reading, and hopefully I’ll see you back very soon for more articles and analysis. Stay safe, all.

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

Sources: Bethesda, Circana, Company Investor Relations Websites, Games Industry.Biz.

-Dom

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