Analysis: Microsoft’s FY24 Q1 is All About AI, Activision, and the Future (Premium)

Yesterday, Microsoft reported its financial results for the first quarter of its fiscal 2024. Here’s a closer look at the quarter, with an emphasis on the consumer businesses we care about the most here at Thurrott.com.

This is the second momentous Microsoft earnings announcement in a row. In the previous quarter, Microsoft finally address how the costs of its AI advances would impact its business going forward. And in this quarter, it revealed how the long-overdue Activision Blizzard acquisition would impact its earnings.
Activision Blizzard
So let's start there before moving on to the numbers and the other details that Microsoft's executives revealed in the post-earnings conference call.

"The net impact of the Activision acquisition includes purchase accounting impact, integration, and transaction-related expenses, based on our current understanding of the purchase price allocation and related deal accounting," Microsoft CFO Amy Hood said during the call. "The net impact includes adjusting for the movement of Activision content from our prior relationship as a third-party partner to first-party."

As you probably know, Xbox and gaming revenues are reported as part of Microsoft's More Personal Computing business unit, and so the addition of Activision will obviously impact that part of the company from a revenue perspective going forward. Hood said that Microsoft's expectation for the current quarter is revenues of $16.5 billion to $16.9 billion for all of More Personal Computing, with the Activision acquisition responsible for "35 points of net impact" overall and "50 points of net impact to Xbox content and services revenues."

So what does that mean?

Well, you may recall that I previously examined how the addition of Activision Blizzard would impact Microsoft's revenues in Microsoft + Activision Blizzard: Show Me the Money! (Premium). And in looking at the previous four quarters (at that time), I saw that Activision would have increased More Personal Computing's quarterly revenues by an average of 12.83 percent. (Its average impact on Microsoft overall would have been just 3.85 percent.)

More specifically, More Personal Computing delivered revenues of $14.2 billion in FY23 Q2 one year ago, a decline of 19 percent year-over-year (YOY). And I had calculated that had Activision been part of Microsoft at that time, this business unit would have delivered revenues of $16.53 billion, a gain of 16.4 percent. And that figure is right below Hood's estimate for the current quarter, which is kind of interesting. (And random: Windows, Surface, and Search are part of this business unit too, and none of these businesses, including Activision, will see flat growth.) So that's kind of fun.

Separately, Hood expects the Activision acquisition to trigger $400 million in operating expenses from purchase accounting adjustments, integration, and other transaction-related costs, and a $500 million income decline related to the reductio...