Microsoft Corp‘s (NASDAQ:MSFT) gaming revenue surged by 51% year-over-year in the third quarter of fiscal 2024, reaching $5.45 billion.

However, this impressive growth is largely attributed to the inclusion of Activision Blizzard and King, owner of successful IPs such as Call of Duty and Candy Crush Saga, which accounted for 55 percentage points of this growth, according to IGN.

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Xbox content and services revenue increased by 62%, largely due to the inclusion of Activision Blizzard. Excluding Activision Blizzard, the growth would have been only 1%.

Xbox hardware sales plummeted by a staggering 31% this quarter, marking a significant decline following a lackluster holiday season for Xbox sales last year, IGN reports. Microsoft acknowledged this decline, stating in its earnings filing that the substantial drop was “driven by lower volume of consoles sold.”

Microsoft’s 10-Q report highlights the financial impact of the Activision Blizzard acquisition. Operating expenses surged by $1.3 billion, or 41% year-over-year, with the acquisition contributing 43 percentage points to this increase.

Research and development expenses grew by $669 million, with 9 percentage points of this growth attributed to Activision Blizzard. Additionally, sales, marketing, and general administrative expenses also saw significant increases due to the acquisition.

The acquisition of Activision Blizzard came at a substantial cost beyond the $69 billion purchase price, evident in the increased expenses across various divisions.

During the earnings call, Xbox projected similar growth for the upcoming quarter, with gaming sales expected to increase in the low-to-mid 40s, driven by Activision Blizzard’s contribution, according to IGN. However, hardware sales were predicted to continue declining year-over-year, Microsoft CFO Amy Hood said.

Price Action: Microsoft shares were up 2.5% to $409.30 at the time of publication Friday, according to Benzinga Pro.

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