Xbox helped contribute to a 21% increase in segment profitability

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Xbox just delivered record Q3 results, and these earnings helped boost the profitability of its home segment.

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Microsoft's Q3'FY25 earnings show an uptick in Xbox revenues, with the games division raking in $5.721 billion in the period. This is a new all-time third quarter record for Xbox that pushes cumulative 9-month revenues to nearly $18 billion.

But what about profitability? That's information that we don't get. Microsoft only reports profits of its individual segments, and since Xbox is part of Microsoft's More Personal Computing segment, we don't get actual profit margins for the Xbox division. We can still analyze the full extent in what Microsoft says about gaming, though.

According to Microsoft's latest quarterly SEC filing, gaming helped contribute to the increased profitability of the More Personal Computing segment. Throughout Q3,the segment's gross margin increased by 9% or $623 million, driven in part by gaming (by how much, we don't know). Operating income was up +21% and increased by $603 million. It's possible that Microsoft's bets towards more high-margin businesses like digital-oriented game sales and Xbox Game Pass subscriptions are paying off for the company.

Also bear in mind that a sizable portion, perhaps even the majority, of this profitability may have been through search and advertising and not necessarily gaming; search and advertising revenue was up by over $440 million whereas gaming revenue was up $270 million.

Here's what Microsoft said about Xbox in its Q3 10-Q SEC filing:

More Personal Computing

• Revenue increased $767 million or 6%.
• Windows and Devices revenue increased $46 million or 1%. Windows OEM and Devices revenue increased 3% driven by growth in Windows OEM, with inventory levels remaining elevated due to tariff uncertainty.
• Gaming revenue increased $270 million or 5% driven by growth in Xbox content and services. Xbox content and services revenue increased 8% driven by growth in Xbox Game Pass, Call of Duty, and Minecraft. Xbox hardware revenue decreased 6%.
• Search and news advertising revenue increased $449 million or 15%. Search and news advertising revenue excluding traffic acquisition costs increased 21% driven by higher revenue per search and higher search volume.
• Operating income increased $603 million or 21%.
• Gross margin increased $623 million or 9% driven by growth in Search and news advertising and Gaming. Gross margin percentage increased driven by improvement in Search and news advertising and Gaming.
• Operating expenses increased $20 million or 1%.

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