Microsoft Q3 FY2022 Earnings Preview: Key Insights on Xbox Growth and Activision Deal

Anticipate the latest updates on Microsoft's Xbox content and services revenue as Q3 FY2022 earnings approach.

Highlights to Watch

• Analysts forecast an adjusted EPS of $2.18, up from $1.95 in Q3 FY2021.
• Year-over-year growth in Xbox content and services revenue is expected, though at a slower pace than last year.
• Total revenue should exhibit solid growth, albeit less rapid compared to previous quarters.

Microsoft Corp. (MSFT) has demonstrated remarkable resilience during the COVID-19 pandemic, driving robust earnings and revenue growth over the last two fiscal years, largely powered by cloud services and software sales. Beyond these strengths, Microsoft's adept navigation through a challenging regulatory landscape sets it apart from other tech giants facing antitrust pressures. This strategic advantage is pivotal as Microsoft pursues its historic $69 billion acquisition of video game developer Activision Blizzard Inc. (ATVI), a deal pending regulatory approval.

Investors will closely monitor whether Microsoft can sustain its impressive financial momentum and how regulatory developments concerning the Activision Blizzard deal influence the company's outlook when it reports Q3 FY2022 earnings on April 26, 2022. The fiscal year concludes on June 30. While analysts predict a rise in adjusted earnings per share (EPS), the growth rate is expected to be the slowest in seven quarters. Revenue growth remains strong but may trail the pace of the last four quarters.

A key focus will be the constant currency year-over-year growth of Microsoft's Xbox content and services revenue, a critical indicator of sales from its gaming hardware, software, and related services. Approval of the Activision Blizzard acquisition would catapult Microsoft into one of the world's largest video game companies. Without the acquisition, Xbox content and services revenue growth in Q3 is projected to slow compared to the prior year.

Over the past year, Microsoft stock has outperformed the broader market, with significant gains beginning in June 2021 and peaking in late 2021. Since then, the stock has experienced a sideways to downward trend, narrowing its outperformance gap. As of April 24, Microsoft shares delivered a 7.4% total return over the past year, surpassing the S&P 500's 3.3% return.

Microsoft’s Earnings Track Record

Since Q3 FY2018, Microsoft has achieved at least 16 consecutive quarters of year-over-year earnings growth. Except for three quarters, this growth typically ranged between 20% and 35% quarterly. The most vigorous earnings expansion occurred recently, with EPS growth peaking at 48.3% in Q4 FY2021. However, growth has decelerated in FY2022’s first two quarters, with Q3 FY2022 expected to show a slower yet solid 11.8% EPS increase, marking the lower boundary of recent performance.

Revenue growth has mirrored this consistency, fluctuating between 12.1% and 22.0% from Q3 FY2018 to Q2 FY2022. The last three quarters have each surpassed 20% year-over-year revenue growth, with Q3 FY2022 projected to moderate to 17.5%. Though a slowdown, this remains strong relative to the past three years’ trends.

Source: Visible Alpha

Crucial Metric: Xbox Content and Services Revenue

Investors will pay particular attention to year-over-year growth in Xbox content and services revenue at constant currency, which includes digital transactions, Xbox Game Pass subscriptions, video games, third-party royalties, cloud services, and advertising. The potential acquisition of Activision Blizzard, if approved, would significantly broaden Microsoft's gaming portfolio. Future integration plans, especially regarding Activision titles on the Game Pass subscription service, could reshape the competitive landscape. Microsoft has confirmed that the popular "Call of Duty" franchise will remain available beyond Xbox exclusivity, alleviating some competitive concerns.

Xbox content and services revenue growth has been volatile recently: exceeding 30% growth in the first three quarters of FY2021, dipping 7.0% in Q4 FY2021, flat in Q1 FY2022, rebounding to 10.0% in Q2 FY2022, and expected to grow 5.2% in Q3 FY2022.

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