Tag: Xbox

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

DomsPlaying

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

Starfield, Mortal Kombat & EA Sports FC Drive Gains in Circana’s September 2023 Games Industry Sales Report

DomsPlaying

It’s the fourth quarter of 2023 already?! Seriously, time. Slow down.

As we inevitably enter the final stretch of what’s been a tough year for the games industry yet a great year for new releases, not only does Microsoft finally own Activision Blizzard, it’s secured another big win with its latest hit Starfield.

Even so, Sony held its own in the hardware realm during a big September for industry sales as reported by tracking firm Circana (formerly known as The NPD Group).

Last month, consumers spent nearly $4.5 billion on gaming. That’s up 10% since the same time in 2022. It marks the fifth consecutive month of growth and the second best September on record behind 2021.

Within the premium software ranks, six of last month’s top seven top sellers were new to market.

Starfield proved to be best among them, rocketing to the top of September’s overall chart. The sci-fi role-playing game from Bethesda Softworks became the first Xbox console exclusive to top the monthly list since State of Decay 2 back in May 2018.

September’s solid sales result also benefited from the latest entries in long-running series. Mortal Kombat 1 from Warner Bros. fought to second place while Electronic Arts’ rebranded soccer series EA Sports FC 24 scored third.

As for Hardware, PlayStation 5 again led all console sales, as it has most of 2023. Which is even more notable in a month where software was led by an Xbox console exclusive. Sony’s supply consistency and third party offerings keep it relevant at all times.

Circana’s Mat Piscatella confirmed on Twitter that premium game sales are doing “great” right now, though September’s growth for this particular segment came in a bit below his expectations.

Scroll down for a detailed look at the numbers, then my predictions moving into yet another busy month in gaming.

United States Games Industry Sales (August 27th, 2023 September 30th, 2023)

As referenced earlier, people spent upwards of $4.5 billion across gaming in September, up 10%.

Two of the three major categories, Content and Accessories, also generated double-digit growth. Underlying this upward momentum was a decent boost from mobile, a slew of software launches and a fair bit of interest in premium peripherals. All of this was enough to offset a decline from Hardware.

That means across the first nine months of 2023, spending rose 2% to $39.4 billion. All three categories experienced gains during this time frame.

Beginning with the largest area of Content, last month it contributed $3.85 billion. That made up nearly 86% of September’s total. For the year so far, it’s up 2% to $34 billion.

During September, sales from mobile devices moved up 4%. The list of top earners was unchanged compared to August, led by MONOPOLY GO!, Royal Match, Roblox, Candy Crush and Pokémon Go in that order.

Moving to premium software, September’s winner Starfield was best on both Xbox and PC, with the latter being its lead platform here. It’s immediately the 7th top-selling title of 2023. Note: These ranks do include revenue from the early access version, but they don’t include Xbox Game Pass subscriptions because that’s more broadly tracked in the subscription category.

Circana put together a handy list of Bethesda titles for comparison, this time using dollar sales (as some earlier charts were based on units). Fallout 76, Fallout 4 and The Elder Scrolls V: Skyrim all started in second during their respective launch months. The only other recent Bethesda title to lead its debut was The Elder Scrolls IV: Oblivion in 2006, meaning Starfield is in rarefied air for the team.

Next up was Mortal Kombat 1 at #2, the latest in a long lineage of gruesome sellers from NetherRealm Studios. It led the PlayStation platform chart, and is already the 8th best-selling of 2023. For context, both Mortal Kombat X and current franchise leader at 15 million unit sales Mortal Kombat 11 led their first months.

Yes, not only does this fighting game franchise consistently kill it commercially, it’s also adopted a convoluted naming convention. Can’t wait until Mortal Kombat 2 launches (again) in a few years.

Rounding out the Top 3 was EA Sports FC 24, which starts in 14th on the annual chart to date. Turns out it didn’t necessarily need FIFA branding. This year gained double-digit growth in units and dollars compared to FIFA 23. Domestic success echoes globally, where Electronic Arts said it had 11.3 million players at launch, a million more than its predecessor, growing new players by 20%.

The next new titles to chart were Payday 3, NBA 2K24 and The Crew Motorfest in 5th to 7th place, respectively. The usual caveat being Take-Two Interactive, the publisher of NBA 2K, doesn’t share digital, so it’s likely the basketball sim would be higher all included. Still, Payday 3 securing a Top 5 start reflects strong demand for the first franchise title in a decade.

The Crew Motorfest continues to be a pleasant, if quiet, sales surprise, racing to 7th place here amidst a crowded field. The Crew 2 started in 4th back in June 2018. Ubisoft said this latest release had the best first week globally in the history of The Crew, a franchise that has attracted over 40 million players during its nine year history.

You might be asking: Where’s Baldur’s Gate 3 since it hit PC in August and PlayStation last month? According to Circana, its publisher Larian Studios is another that doesn’t share digital for the purposes of charting. Piscatella said it’s doing “exceptionally well” especially on engagement over time. It ranked second on their Circana Player Engagement Tracker, ahead of Starfield in 3rd. On console, it was #20 on that list.

Briefly touching on the 2023 to date sales chart, Hogwarts Legacy and The Legend of Zelda: Tears of the Kingdom kept their spots at #1 and #2 while Madden NFL 24 moved into the Top 3 after a full month of sales. Elsewhere, Armored Core VI: Fires of Rubicon is a big mover, jumping four spots to 16th.

Read on for a full look at September and 2023 software ranks.

Top-Selling Games of September 2023, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Starfield
  2. Mortal Kombat 1
  3. EA Sports FC 24
  4. Madden NFL 24
  5. Payday 3
  6. NBA 2K24*
  7. The Crew Motorfest
  8. Armored Core VI: Fires of Rubicon
  9. Hogwarts Legacy
  10. Call of Duty: Modern Warfare 2
  11. Star Wars Jedi: Survivor
  12. Resident Evil 4 Remake
  13. The Legend of Zelda: Tears of the Kingdom*
  14. Minecraft
  15. Mario Kart 8*
  16. Rainbow Six: Siege
  17. Gran Turismo 7
  18. Elden Ring
  19. Sea of Thieves
  20. Diablo IV

Top-Selling Games of 2023 So Far, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Hogwarts Legacy
  2. The Legend of Zelda: Tears of the Kingdom*
  3. Madden NFL 24
  4. Diablo IV
  5. Call of Duty: Modern Warfare 2
  6. Star Wars Jedi: Survivor
  7. Starfield
  8. Mortal Kombat 1
  9. Resident Evil 4 Remake
  10. MLB The Show 23^
  11. Dead Island 2
  12. Final Fantasy XVI
  13. Street Fighter 6
  14. EA Sports FC 24
  15. FIFA 23
  16. Armored Core VI: Fires of Rubicon
  17. Elden Ring
  18. Remnant II
  19. Dead Space Remake
  20. Mario Kart 8*

Hardware was the only main segment to see lower spending this September than last, down 8% to $451 million.

Underlying this, Xbox Series X|S generated single-digit growth while PlayStation 5 and Nintendo Switch declined. No specifics on the actual numbers, but this gives a sense of how last September was quite strong for PlayStation and Nintendo in particular, and Xbox benefited from Starfield demand.

Even so, console sales are up 10% for 2023 right now to $3.7 billion. Hardware is the only major category trending towards double-digit annual growth.

Despite having “slightly” lower unit sales year-on-year, PlayStation 5 continued its trend atop the console ranks, leading September as measured by both dollars and units sold.

For the second straight month, Xbox’s family of devices landed in second. Circana pointed out that last month saw the highest Xbox ecosystem units sold since September 2016. Plus, Xbox revenue was the best since September 2014. While Microsoft’s strategy is more diversified than its counterparts, of course it wants people to buy retail boxes.

Thing is that Xbox’s big console exclusives don’t necessarily sell as much hardware as they used to in generations past. What they do is bring people to Game Pass and can stimulate sales on other platforms, like PC.

Expanding to the full year, PlayStation 5 is best in hardware on both revenue and units, as it has been for most if not all of 2023. Sony recently announced a slightly slimmer revision to its latest box, while also upping the price of its digital only version in certain territories, which will hit U.S. stores next month. Thus, I expect its dominance this year to continue.

Moving onto our final category of Accessories, spending during September bumped up 11% when compared to a year ago, to $197 million.

Circana shouted out a couple sub-areas here with double-digit spending growth. Racing controllers moved up 18%, while Gamepads increased by 15%. The former perhaps due to the ongoing popularity of titles like Gran Turismo 7 and The Crew Motorfest alongside anticipation of Forza Motorsport which hit market last week, and the latter to play all the fancy new games.

In terms of last month’s best seller, that goes to the Marvel’s Spider-Man 2 Limited Edition version of the PlayStation Dual Sense controller. Makes sense, considering it became available well before its game counterpart launches tomorrow and was one of the most sought after products in all of gaming this year.

I’ve also confirmed directly with Circana that the premium PlayStation 5 DualSense Edge pad continues as 2023’s leading peripheral on revenue.

Lastly, a tidbit on augmented and virtual reality. Piscatella noted that February’s PlayStation VR2 continues to have a “low single digit attach rate,” implying that less than 5% of PlayStation 5 owners have purchased one. It’s a high barrier to entry, after all, considering it’s tethered to the console.

This category could see a decent boost soon as the Meta Quest 3 officially hit stores earlier this month. I think Meta’s new headset has some good upside. The product series is the closest thing the niche AR/VR market has to a commercial hit, even if it won’t be mainstream any time soon.

With its bevy of AAA game launches and a resilient hardware against a high comparable, September was great month overall for domestic industry sales. It highlights Xbox’s evolving dynamics in the console space, alongside the appeal of PlayStation 5 for multi-platform titles. Nintendo was a bit quiet, although that will certainly change in the fourth quarter.

On the subscription side within Content, Piscatella described its spending as having a lot of “churn” implying a good amount of turnover without moving too much in either direction. People moving from one service to the other, rather than being additive.

He and others have described how subscription growth hit a plateau after an initial ramp up phase. Domestically, Xbox’s Game Pass revenue rose last month (unfortunately no specifics publicly on actual numbers) however other services were lower year-on-year. This implies that PlayStation Plus had a down month.

Well then. No rest for the weary! October is shaping up to be massive.

There’s a monumental battle scheduled between Mario and Spider-Man. PlayStation and Nintendo. It starts tomorrow with new games for both big name brands, and these will dictate how high spending can go this month.

Due to this, among other new releases, I’m thinking spending will go up in October potentially in the double-digit range.

That will be driven by Content, which has two of the year’s best-reviewed titles in Super Mario Bros. Wonder and Marvel Spider-Man 2. The big question is which of these will have a better ranking on the premium chart, and lead one of the year’s biggest months?

My official Twitter poll is virtually neck and neck, with Spider-Man having a slight edge at the time of publishing. While Nintendo Switch has a massive ownership base and Mario is one of the biggest IP in the world, this will solely count retail sales for that title. Considering this, I’m guessing that Spider-Man swings into first during October.

Then there’s the likes of Assassin’s Creed Mirage, Detective Pikachu, Forza Motorsport, Sonic Superstars and Alan Wake 2. Shoot, there’s even Skull Island: Rise of Kong, a new dreadfully bad King Kong game!

I can see Assassin’s Creed Mirage jumping into the Top 7. Sonic Superstars maybe Top 10. Alan Wake 2 is a straight up digital release, and I don’t know if Epic Games is a chart participant. One thing I can safely say is Skull Island: Rise of Kong will regrettably miss the Top 20.

On the hardware side, I’m leaning towards PlayStation 5 on dollars and Nintendo Switch getting units. Partially because each will have special editions associated with their respective flagship games. (Talk about fence-sitting, hah.)

I’m way upbeat, basically all around, on the start to this final quarter!

Highly recommend checking out Piscatella’s thread on social for more pre-Halloween sales goodies. He’s been answering a lot of questions there too, especially around digital, Starfield and Baldur’s Gate 3. Much respect, Mat.

Thanks everyone for reading my latest recap! Be safe.

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

*Digital Sales Not Included

^Xbox & Nintendo Switch Digital Sales Not Included

Sources: Bethesda Softworks, Circana, Electronic Arts, PlayStation Blog, Ubisoft.

-Dom

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

DomsPlaying3 Comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-Dom

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

DomsPlaying

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

DomsPlaying1 Comment

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

DomsPlaying2 Comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources: Company Investor Relations Websites.

-Dom

Monthly U.S. Games Industry Spend Increases for 1st Time in 2022 During November NPD Group Report

DomsPlaying

‘Tis the season.

Awards season? Well, technically yes. I’ll certainly be writing my Year-in-Review articles soon enough! And gaming’s biggest night in The Game Awards aired last week, showcasing the best of the year that was 2022.

What I really mean it’s when The Holiday Sale Season ramps up for video game companies and their efforts to push as much as they can to gamers everywhere. Any time people are shopping, I’m here to analyze sales results.

Because of that, today I’ll be recapping The NPD Group’s recent report on U.S. game sales during the highly-coveted month of November bolstered, of course, by Black Friday. It’s the time when manufacturers and retailers employ strategies to attract people to open those wallets.

And it was a very good month at that, especially in the context of 2022 so far. It’s the first month of the year in which monthly sales increased across the games industry. This is a huge data point given the general economic environment. It continued the strength from October, where buying leveled off after 11 consecutive months of declines.

Overall consumer spending on gaming rose 3% in November, signaling that easing inflation and better supply conditions for hardware proved to be tailwinds for the industry. Out of the three categories of Video Game Content, Hardware and Accessories, only Content saw a decline year-on-year mainly due to ongoing mobile weakness. Both Hardware and Accessories generated double-digit growth, the former boasting a substantial gain over last year’s figure.

There’s a few underlying reasons why November came in above expectations. First the release calendar has been stacked the past two months with commercial darlings, including the likes of Call of Duty from October then new titles in long-running series like God of War, Pokémon and, yup, even Sonic the Hedgehog!

Then, the improved stock of consoles, notably for Sony’s flagship PlayStation 5, is getting better at meeting consumer demand. Additionally, The NPD Group cited areas like non-mobile subscription spending, peripherals and digital full-game downloads on consoles spurring growth as well. All of these combined for a terrific month of higher sales.

On the premium software side, Call of Duty: Modern Warfare 2 continued its reign as the top-selling game during November, which it also accomplished the month prior around its debut. Just below that, three brand new games arrived within the Top 4: God of War Ragnarök, Pokémon Scarlet & Violet plus Sonic Frontiers. I’ll dive more into each later in the piece.

Within Hardware, PlayStation 5 was November’s best-selling console as measured by both dollars generated and units sold. Considering some discounting of its Xbox Series X|S competitor and the launch of mainline Pokémon games for Nintendo Switch, this win for Sony is quite impressive.

“I wasn’t expecting that we’d see any month with growth in 2022, but here we are,” said The NPD Group’s Mat Piscatella on LinkedIn. “Great new games sell really well. Would be great if more were released. The big uptick in new generation hardware supply sure helped too. Really fantastic month overall, especially when considering all the other market challenges out there.”

Here’s a look at the full report alongside my usual rundown. Get your hot cocoa ready!

United States Games Industry Sales (October 30th, 2022 – November 26th, 2022)

As shown in the info-graphic above, spending across all of gaming reached $6.29 billion in November, indicating the aforementioned 3% growth. Last year, this total was roughly $6.11 billion. For more context, November spending peaked at an all-time high back in 2020 when it reached upwards of nearly $7 billion.

Expanding to the year currently through 11 months, buying is still down 6% to $48.97 billion. Last year’s figure as of November was $52.19 billion.

The largest segment of Video Game Content hit $4.74 billion last month, or 75% of the total, which equates to a decline of 5%. In an ongoing surprise to those of us who track this regularly, mobile continued to drag down the category so much that things like premium games and other software-related sources weren’t able to offset its losses.

“Thanksgiving and Black Friday did not bring a reprieve as [mobile] spend during the week was down 5% year-over-year and 1% from 2020,” said Sensor Tower’s Dennis Yeh in the report. “Barring a meteoric (or catastrophic) final few weeks of 2022, annual U.S. mobile gaming spend should decease 1% – 2% from 2021.”

Mobile’s best-seller list was topped by the likes of Candy Crush Saga, Roblox, Royal Match, Coin Master and Clash of Clans. Indicators showed that casino, action and tabletop mobile titles ramped up in popularity during November, while role-playing and shooters were “struggling.”

Swapping to premium software, Call of Duty: Modern Warfare 2 repeated at the top spot during November and continues to be 2022’s leading seller. Activision Blizzard’s military shooter likely benefited from the launch of its Warzone 2.0 battle royale counterpart, plus it now has a full month of retail sales on the books. Nothing shocking about this particular result.

The first new release on November’s combined software list was God of War Ragnarök fighting its way to the 2nd spot. Comparatively, its predecessor in 2018’s God of War earned the top spot when it released in April of that year. Sony’s major exclusive for the back half of 2022 really only missed out on leading the month because it went up against the juggernaut that is Call of Duty.

PlayStation’s Game of the Year candidate is immediately among the Top 5 best-selling titles of 2022. This domestic success parallels its epic global start as the game shipped a staggering 5.1 million copies during its first five days. This is a record launch among first-party games in PlayStation history. Boy, that’s a whole lot!

Speaking of a great start, next up was the latest pair of Pokémon titles in Scarlet & Violet on Nintendo Switch which combine to reach 3rd place. A couple caveats being this includes full sales of both games, then excludes digital because Nintendo still doesn’t want to share that data. To compare against recent entries, Pokémon Legends Arceus started in first during (an admittedly less busy) January earlier this year while November 2021’s Brilliant Diamond & Shining Pearl also debuted in 3rd.

Pokémon Scarlet & Violet already occupy the 7th spot on 2022’s best-seller list. Beyond the domestic result, it’s a historic beginning for this game worldwide, shipping a whopping 10 million units within its first three days. That’s the fastest-selling on any Nintendo platform. Ever. Its monstrous launch set records for the series, Switch as a console and across Nintendo’s entire history!

Moving over to Nintendo’s 1990’s era rival in Sega, the #4 spot on November’s list went to Sonic Frontiers. It’s a rare appearance from the Blue Blur, as there haven’t been many mainline Sonic releases lately. Sonic Mania was a critical success back in 2017 then didn’t sell enough to chart at the time. This latest 3D platformer in Sonic Frontiers is turning out to be quite a fast seller, fittingly, moving 2.5 million copies worldwide within a month on sale.

Familiar names and big movers filled in the remainder of the overall ranks in November. Marvel’s Spider-Man: Miles Morales and Mario Party Superstars jumped back into the Top 10. The only other brand new title among the Top 20 was Tactics Ogre: Reborn slotting in at #17, which really is remarkable amidst plenty of big hitters.

Shifting to the 2022 list with just one month to go, Call of Duty: Modern Warfare 2 edges into first place. As expected. It’s the first time since Elden Ring dropped in February that FromSoftware’s masterpiece hasn’t held the year’s top spot. Past that, Madden NFL 23 has secured 3rd as Lego Star Wars: The Skywalker Saga moved down to 4th. MLB: The Show 22 seems to be impacted the most by new entries ahead of it, however it still retains a Top 10 position for now.

Check below for all premium software ranks for November and 2022 to date.

Top-Selling Games of November 2022, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Call of Duty: Modern Warfare 2
  2. God of War Ragnarök
  3. Pokémon Scarlet & Violet*
  4. Sonic Frontiers
  5. Madden NFL 23
  6. FIFA 23
  7. NBA 2K23*
  8. Gotham Knights
  9. Marvel’s Spider-Man: Miles Morales
  10. Mario Party Superstars*
  11. Elden Ring
  12. Animal Crossing: New Horizons*
  13. Mario Kart 8*
  14. Mario + Rabbids: Sparks of Hope
  15. Persona 5
  16. NHL 23
  17. Tactics Ogre: Reborn
  18. Minecraft
  19. Horizon Forbidden West
  20. The Legend of Zelda: Breath of the Wild*

Top-Selling Games of 2022 So Far, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Call of Duty: Modern Warfare 2
  2. Elden Ring
  3. Madden NFL 23
  4. Lego Star Wars: The Skywalker Saga
  5. God of War Ragnarök
  6. Pokémon Legends Arceus*
  7. Pokémon Scarlet & Violet*
  8. Horizon Forbidden West
  9. FIFA 23
  10. MLB: The Show 22^
  11. Call of Duty: Vanguard
  12. Gran Turismo 7
  13. Mario Kart 8*
  14. Kirby and the Forgotten Land
  15. Gotham Knights
  16. Minecraft
  17. NBA 2K23*
  18. Nintendo Switch Sports*
  19. Marvel’s Spider-Man: Miles Morales
  20. Animal Crossing: New Horizons*

The biggest boost to overall spending last month came from Hardware as a category. Console sales rose a momentous 45% during November, reaching upwards of $1.25 billion. This is a stark contrast to the 10% decline during October, which was mainly driven by weakness in Nintendo Switch. Seems like Nintendo may have been holding shipments to attract buyers during the more competitive time frame, or people weren’t as interested until they began Black Friday and pre-holiday shopping.

This excellent monthly result means that 2022 sales have turned positive for Hardware. After trending down 2% as of October, this category is now up 6% for the year right now. It’s generated over $5 billion in sales through the first 11 months, compared to last year’s $4.74 billion.

Funny how that happens when people can actually buy a console if they want it! And the demand is certainly there, as strong as it’s been early in this generation.

Benefiting from a generous supply improvement, the PlayStation 5 earned the top spot in the segment during November by both dollars and units. By my count, that’s four months in a row where Sony’s newest generation has led the segment by both metrics.

Nintendo Switch came in second place by both metrics. While The NPD Group didn’t share growth statistics for individual platforms, like it had in recent months when Xbox and PlayStation families showed double-digit growth, I’d imagine that all three major platforms gained ground based on how the category fared.

After this latest monthly win, PlayStation 5 remains the best-selling hardware platform of 2022 in year-to-date dollar sales. Hanging in there in its own right, Nintendo Switch leads in units.

This dynamic of added availability, especially for PlayStation 5, combined with both an ongoing appetite and better buying power from consumers is providing a boon for hardware late in the year. The perfect time for it to happen for these manufacturers, because they are able to meet the demand during the crucial holiday months. Two years into the new generation, we’re finally seeing the supply side of the curve catching up to demand.

Another solid result during November’s report was Accessories, which often benefits when people spend more on consoles because they acquire peripherals and extra controllers. After moving down 8% back in October, this segment returned to positive territory last month netting $289 million in sales or 10% higher than this time in 2021.

That brings the year so far to $2 billion in spending on Accessories, which is currently trending down 9% due to weakness in earlier months.

Game pads and headset/headphone sub-categories in particular boosted Accessories as a whole during November. The top-selling peripheral last month was the PlayStation 5 DualSense Wireless Controller Galactic Purple, paralleling Sony’s win on the hardware side. While The NPD Group didn’t confirm explicitly, I’d bet Microsoft’s Xbox Elite Series 2 Wireless Controller remained the year’s best-seller due to its outsized price and revenue potential.

Taking everything from November, it was arguably 2022’s best sales result for the U.S. games industry. It’s refreshing to see sales growth again.

Last month was exceptional for consoles, as PlayStation and Xbox continue making up ground after a slower start plus Nintendo Switch is holding up well enough late into its life cycle. On the content front, mobile certainly presents a concern; for now, it’s premium sales of new and earlier games propping up that segment. And there was clearly a good amount of demand for peripherals late in the year.

Now, moving into the last month of 2022, it’s a crucial time that will determine where domestic sales end up for the year. I’m more upbeat than I was even a couple months back, even if I’m thinking we’ll see lower sales in 2022 than last year.

Which wouldn’t be bad at all. 2021 was a record year for domestic spending on games here after all, generating over $60 billion!

Unless December is a major surprise to the upside, I’m expecting total sales will be down for the year in the mid single-digits. Against last year’s $60.4 billion, assuming a 5% drop would bring 2022 to around $57.4 billion. This indicates a December month of roughly $8.4 billion, which would be an improvement since last year’s final month.

Even as a slight drop, almost $58 billion in spending would be a great result for 2022 given the economic challenges and downward pressure the industry has experienced most of this year. It’s not where the industry could be if supply constraints and a number of delayed games didn’t happen. The world is still dealing with a global pandemic during which working dynamics and supply chains shifted drastically.

As for individual predictions, again Call of Duty: Modern Warfare 2 will win December in the Content category. For 2022 in aggregate, I think the Top 3 top-sellers from November will hold serve and finish like that.

December will be much trickier for Hardware. Anecdotally I’ve been hearing more about Xbox Series X|S stock. We know Sony has been moving up its shipments. Nintendo is there for families and households looking for a better entry point. I’m guessing PlayStation 5 will lead December on both dollars and units, with Xbox Series X|S in second by dollars and Switch in second by units.

As for the year, PlayStation 5 will carry this late momentum to a win on revenue. Alongside, Nintendo Switch will take home the crown when measured by units.

So that’s the final thread I’ll be writing on NPD results during this calendar year, because December’s result will take place sometime in January. We’ll have to see how the predictions go, and if the industry surprises me as it often does!

If you want more on the report from The NPD Group, I recommend Piscatella’s thread that’s now on LinkedIn. He has more on platform charts and further details.

Hope everyone is safe and well going into the holiday season, and I’ll be back very soon with my Year-in-Review posts before diving into the new year. Thanks all for the continued support!

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

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

Sources: Newsweek (Image Credit), Nintendo, The NPD Group, PlayStation Twitter, Sega Sammy.

-Dom

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

DomsPlaying3 Comments

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

DomsPlaying4 Comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources: Company Investor Relations Websites, Windows Central.

-Dom

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

DomsPlaying1 Comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Comparisons are year-over-year unless otherwise noted.

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

-Dom