Microsoft Q2 2023: Windows, devices and Xbox down as the cloud holds firm

Microsoft Q2 2023: Windows, devices and Xbox down as the cloud holds firm

Microsoft just released the second quarter of its fiscal 2023 financial results. The software maker posted revenue of $52.7 billion and net income of $16.4 billion during the second quarter. Turnover is up by 2%, but the net result has fallen by 12%. The results come just days after Microsoft announced 10,000 layoffs.

Microsoft previously forecast a tough quarter for Windows OEM revenue and hardware, and the results are clear on the current state of the PC industry. PC shipments fell 16% in 2022, according to analysis by Canalys, and Gartner reported a nearly 29% year-over-year drop in the fourth quarter — the biggest quarterly decline in shipments since began to follow the PC market in the mid-1990s. Microsoft’s Windows-related revenue was hit hard.

Windows OEM revenue, the price PC makers pay Microsoft to install Windows on machines, fell 39% in the second quarter. Microsoft says this was driven by “continued weakness in the PC market and a strong year-over-year comparison.”

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Gartner says total PC shipments in 2022 were close to pre-pandemic levels, so it’s clear that the laptop buying boom is well and truly over. “Given that many consumers already have relatively new PCs that were purchased during the pandemic, lack of affordability overrides any motivation to buy, driving consumer PC demand to its lowest level in years. “, explains Mikako Kitagawa, director analyst at Gartner.

“While the number of PCs shipped declined during the quarter, returning to pre-pandemic levels, Windows usage intensity continues to be higher than pre-pandemic, with time spent per PC up nearly 10%,” Microsoft CEO Satya Nadella said in an earnings call today.

This deterioration in the PC market has also impacted Microsoft’s device revenue, which now includes HoloLens and PC accessories beyond just Surface revenue. Device revenue also fell 39% in the second quarter, despite Microsoft launching new Surface Pro 9, Surface Laptop 5 and Surface Studio 2 Plus devices just before the holidays.

The PC market is also not going to improve in the next quarter. Microsoft Chief Financial Officer Amy Hood provided guidance on mid-to-high 30% declines in Windows OEM revenue for the third quarter, as well as around 40% declines in device revenue.

Microsoft announced last week that it had changed its “hardware portfolio” amid the layoffs. The software giant recognizes $1.2 billion in its second-quarter revenue related to these hardware changes, severance and “the cost of lease consolidation as we create higher density in our workspaces.” .

After Congress rejected the military’s request to buy up to 6,900 headsets based on Microsoft’s HoloLens technology, the job cuts hit the HoloLens division particularly hard. Microsoft’s struggles with HoloLens have been well-documented over the past year after former HoloLens boss Alex Kipman left the company following allegations of misconduct and Microsoft allegedly abandoned plans. of a HoloLens 3.

Microsoft's white Xbox Series S sits next to a larger, black Xbox Series X on a wooden coffee table in a living room

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Elsewhere with Microsoft’s hardware efforts, Xbox is also down this quarter. Xbox hardware revenue fell 13% alongside a 12% drop in Xbox content and services revenue. Microsoft says this decline in content and services revenue was related to “a strong year-over-year comparison” which was “partially offset by growth in Xbox Game Pass subscriptions.” Overall, Microsoft’s gaming revenue was down 13% year over year.

Lower Xbox hardware revenue was “driven by lower price and volume of consoles sold,” meaning Microsoft sold fewer Xbox Series S/X consoles over the holidays than at higher prices in the past. during the same period in 2022. Microsoft dropped its Xbox Series S price to $249.99 for the holidays, hoping to stoke interest in its Xbox Game Pass console.

This time last year, Microsoft said Xbox Game Pass had grown to 25 million subscribers, but the company hasn’t provided an update since then, and there’s no mention of any new ones. numbers today. This could be because Microsoft Gaming CEO Phil Spencer revealed in October that growth has stalled on the console side of the service.

“We’re seeing incredible growth on PC… On console, I’ve seen the growth slow down, mostly because at some point you’ve reached everyone on console who wants to subscribe,” Spencer said in an interview in October. Spencer also revealed that Xbox Game Pass will remain at around 10-15% of Microsoft’s Xbox content and services revenue and that the service is profitable.

“We have seen new heights for [Xbox] Game Pass subscriptions, hours of game streaming, and monthly active devices,” says Nadella. “And monthly active users surpassed the record 120 million in the quarter.”

Microsoft continues to face a pushback from regulators over its planned acquisition of Activision Blizzard for $68.7 billion, which it aims to close in its fiscal year 2023 (end of June). The European Commission has opened what it calls a “thorough investigation” into Microsoft’s deal after the UK’s Competition and Markets Authority (CMA) signaled a closer look at the deal in September. The FTC is also suing Microsoft to block the purchase after weeks of back-and-forth between Microsoft, Sony and regulators over competition concerns and the future of Call of Duty.

Hood also provided advice on Microsoft’s gaming efforts for third-quarter revenue. Gaming revenue is expected to decline in the next “high-single-digit” quarterly results, while Xbo content and services revenue will decline “in the low-single digits.” Hood did not provide any guidance on Xbox hardware revenue in the third quarter.

Illustration of Microsoft 365 logos around a man

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As always, Microsoft Office, cloud and server products drove revenue in the second quarter. Microsoft’s cloud revenue is a big influence on earnings this quarter, with overall smart cloud revenue up 18% year-over-year. Revenue from server products and cloud services increased 20%, and revenue from Azure and other cloud services increased 31%.

“The next great wave of computing is being born, as Microsoft Cloud transforms the world’s most advanced AI models into a new computing platform,” Nadella said in a statement. “We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in the new era of AI.”

Nadella’s comments come just a day after Microsoft expanded its OpenAI partnership with an estimated $10 billion investment. The long-term partnership will see Microsoft become OpenAI’s exclusive cloud partner, and Microsoft’s cloud services will power all OpenAI product, service API and research workloads.

“Azure ML revenue alone has grown more than 100% for five consecutive quarters,” Nadella said on an earnings call today. Microsoft hasn’t disclosed full details of OpenAI, but rumors suggest it could receive 75% of OpenAI’s earnings until it secures its return on investment and a 49% stake in the company. business.

On the Office side of Microsoft’s earnings, Microsoft 365 consumer subscriptions grew 12% this quarter, reaching 63.2 million in total. Microsoft just launched a new $1.99 per month Microsoft 365 Basic subscription earlier this month, so expect to see that impact on subscriber numbers in upcoming quarterly results. Microsoft has also pushed the Microsoft 365 brand onto Microsoft Office, which will help with subscription numbers and awareness.

We haven’t heard much about the teams numbers for a few months now, but Nadella shared an update today. Microsoft Teams surpassed 280 million monthly active users this quarter, with Nadella saying Microsoft “continues to take share in every category, from collaboration and chat to meetings and calling.”

Office commercial products and cloud services revenue also increased 7%, with Office 365 commercial revenue increasing 11%. Elsewhere, LinkedIn revenue was up 10% year over year, and search and news advertising revenue were up 10%.

Update, Jan. 24 4:50 p.m. ET: Updated article with more info on Xbox earnings.
Update, Jan. 24 4:50 p.m. ET: Article updated with comments from Microsoft CEO Satya Nadella and Microsoft CFO Amy Hood.

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