Microsoft (NASDAQ:MSFT) is a towering force in the gaming market. The company is the maker of the Xbox game console and the related ecosystem, which forms one of the most popular gaming platforms on the planet.
But Microsoft doesn’t just profit from selling game consoles and related hardware, it also collects royalty checks from third parties that develop and sell games designed to run on the Xbox platform. The company also sells subscriptions to its online gaming service, known as Xbox live.
Oh, and as you might know, Microsoft publishes its own games too. After all, it didn’t spend $2.5 billion to acquire Mojang — the creator of the popular game Minecraft — for nothing!
I’d like to go over how this business performed last quarter, and what the company’s outlook for this business in the current quarter looks like.
Last quarter Microsoft reported that its revenue from gaming was $2.74 billion, up 44.4% from the almost $1.9 billion that it raked in during the same quarter a year ago. Breaking that down a bit further, Microsoft said that Xbox hardware revenue grew 94% year over year “against a low prior year comparable due to timing of the Xbox One X launch in the second quarter of fiscal year 2018.” The company added that Xbox software and services grew 36% thanks to “third-party title strength.”
During the conference call that Microsoft hosted to discuss its most recent financial results, CFO Amy Hood said that the gaming business turned in “better than expected results across both software services and hardware.”
Putting these results into a bigger picture, Microsoft’s gaming revenue is part of the company’s broader more personal computing segment, which also includes things like Windows license sales, search revenue, and sales of its Surface family of computers. This segment brought in $10.75 billion in revenue, so gaming made up nearly 25.5% of that business’ sales (though just 9.4% of Microsoft’s total sales in the quarter).
One more thing that’s worth pointing out is that Hood said that the gross margin percentage of the company’s more personal computing segment “decreased due to sales mix to our lower-margin gaming business.” Keep in mind, though, that overall gross margin percentage dilution isn’t a bad thing as long as overall gross margin dollars grow; Hood said that more personal computing’s “gross margin dollars grew 10% […].”
For the current quarter — that’s the second quarter of Microsoft’s fiscal year 2019 — Hood said that Microsoft expects gaming “revenue growth to moderate due to a prior year comparable that included the launch of the Xbox One X.” She did add, though, that “[software] and services growth should be similar to Q1, with continued benefit from a third-party title plus overall platform strength.”
To understand that “prior year comparable,” recall that Microsoft launched the Xbox One X on Nov. 7, 2017. Microsoft’s last quarter — as Hood explained — benefited from the fact that it included sales of the newer (and pricier) Xbox One X game console while the same quarter a year ago didn’t have those sales. In the current quarter, Microsoft doesn’t get to enjoy that easy comparison since Xbox One X was being sold in the second quarter of fiscal year 2018. So it’s not a surprise that year-over-year growth in Microsoft’s gaming business would slow sequentially.