Microsoft’s Q1 Fiscal Year Earnings
Today, Microsoft shared its earnings report for the first quarter of its fiscal year, which just so happens to also be the first almost-full quarter (minus just a couple of days) since Xbox head Asha Sharma announced “the most significant restructure in Xbox history.” While it’s certainly far too soon to meaningfully tell how much of an impact the elimination of over 1,600 jobs (3,200 by July of next year) and the separation from several beloved Microsoft-owned studios will have on Xbox’s financials, it is perhaps nonetheless notable that it thus far does not seem to have had any major effect on the number Microsoft considers important enough to share with investors.
For the first quarter (July, August, and September) of the new fiscal year, Microsoft reported that Xbox content and services revenue was down 2 percent thanks to declines in third‑party content and in Xbox Game Pass, which saw a price cut take effect back in April. Hardware revenue dropped 14 percent year‑over‑year, something it’s been doing reliably almost every quarter for years now (down 13 percent YOY last quarter, 33 percent the quarter prior, and so forth).
There is one note in the results that points to the impact of the “reset.” The overall division Xbox is in (Devices and Consumer) saw its operating expenses drop 3 percent “driven by Xbox,” which potentially points to Sharma’s cuts managing to save some money. However, this drop was offset by “continued investments in R&D compute capacity and talent.” So at least in part, laying off all those Xbox employees is serving to help Microsoft spend more money on research and development for Windows, or search and advertising, or something else under that umbrella.
Additionally, Microsoft reports that of the Devices and Consumer segment that “cost of revenue declined 8% driven by lower amortization of intangible assets from the Activision acquisition.” This seems to be saying that the division had lower costs this past quarter, because things like trademarks and patents that the company got when it acquired Activision are now assumed to be worth less than they were when Xbox originally obtained them.
It is somewhat early to determine with any real certainty, from the outside, what financial impacts Sharma’s changes are having on Xbox. Some things stand out: Game Pass costs less and consoles cost more. The former seems to have done nothing to increase Game Pass revenue yet, and the latter continues to drive consumers away. We may see stronger swings later, once Xbox has had a few more major releases to move the needle; as it stands, it just had one remake (Halo) this quarter and the PS5 ports of Black Ops 1 and 2, which sold 11 million copies on PlayStation but do not seem to have moved any needles for the division overall. Still, laying off any number of people does not change market conditions, nor does it magically sell more Xboxes. What, precisely, it will do for the numbers at Xbox that Microsoft cares enough to show its shareholders remains to be seen.
