Xbox is becoming more profitable despite $530 million earnings decrease

Xbox's shift towards more high-margin businesses like Xbox Game Pass appears to have helped make the games division more profitable in Holiday 2024.

Xbox is becoming more profitable despite $530 million earnings decrease
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TL;DR: Microsoft's focus on high-margin businesses like Xbox Game Pass has increased profitability in its games division during the holiday 2024 period. Despite a 7% revenue drop, it was the second-highest holiday period for Xbox. Gaming significantly contributed to Microsoft's More Personal Computing division's operating growth, aided by the Activision Blizzard acquisition.

Microsoft's shift towards high-margin businesses like Xbox Game Pass may have helped make the games division more profitable throughout the holiday 2024 period.

Xbox is becoming more profitable despite $530 million earnings decrease 488
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Microsoft just reported its Q2FY25 results, giving us a status update on the Xbox brand. All-told, revenue was down around 7%, dropping from the all-time high of $7.111 billion earning in Q2FY24 down to $6.581 billion, representing a hefty half-billion dollar increase. Despite the drop, though, this is the second-highest holiday period in Xbox history (thanks in no small part to ABK's contributions).

Nestled in the earnings report is also mention of operating income. Remember that Xbox is part of Microsoft's More Personal Computing division, and it's not its own branch. That means we don't get operating income/profit info for Xbox (despite us being able to glean info from leaked documents).

However, the report does specifically mention that gaming did have significant weight towards More Personal Computing's operating growth.

As per the document:

Operating income increased $798 million or 12%.

• Gross margin increased $1.9 billion or 15% driven by growth in Gaming, including the impact of the Activision Blizzard acquisition. Gross margin percentage increased driven by sales mix shift to higher margin businesses and improvement in Search and news advertising and Gaming.

• Operating expenses increased $1.1 billion or 17% driven by the impact of the Activision Blizzard acquisition

From the sound of it, Microsoft's push towards these high-margin businesses is paying off, at least on a year-over-year comparable basis.

There's some caveats with this, though; remember that ABK is indeed driving up spending (R&D is up to $1.7 billion in the last 6 months, driven primarily by acquisition costs).

Some time ago, Xbox CFO Tim Stuart discussed how Xbox Game Pass, and subscriptions in general, were higher-margin businesses than, say, hardware.