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

Microsoft has released its second quarter 2023 financial results. The software maker had $52.7 billion in revenue and $16.4 billion in revenue in Q2. Revenue is up 2 percent, but revenue is down 12 percent. The results come just days after Microsoft announced 10,000 had been canceled.

Microsoft previously predicted a tough quarter for revenue and OEM Windows hardware, and the results are clear about the state of the PC industry right now. PC shipments are expected to decline by 16 percent in 2022, according to Canalys analysis, and Gartner reported a nearly 29 percent year-over-year decline in Q4 — the biggest drop yet. most of every quarter since it started tracking the PC market in the mid-1990s. Microsoft’s Windows-related products have hit him hard.

Windows OEM revenue, the price PC makers pay Microsoft to install Windows on machines, fell a whopping 39 percent in Q2. According to Microsoft, this is due to the continued weakness of the PC market and the strength of the previous year.

According to Gartner, total PC shipments in 2022 are close to pre-pandemic levels, so it’s clear that laptop sales have been strong. “Because many consumers have purchased new PCs during the pandemic, free shipping is driving sales, and consumer PC demand is down to its lowest level in years. year,” said Mikako Kitagawa, Principal Analyst at Gartner.

Surface Pro 9 in laptop mode.

Screen Pro 9.
Photo by Amelia Holowaty Krales / The Verge

This decline in the PC market has affected Microsoft’s hardware products, which include HoloLens and PC devices beyond the Surface income. Hardware revenue was also down 39 percent in Q2, even though Microsoft launched the new Surface Pro 9, Surface Laptop 5, and Surface Studio 2 Plus devices just before the holidays.

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Microsoft announced last week that it has changed its “tools portfolio” in a bid to make the move. The software giant is recording $1.2 billion in its Q2 earnings related to these equipment changes, severance costs, and “the cost of leasing consolidation as we build higher density across our workplace.”

After Congress rejected the Army’s request to purchase up to 6,900 headsets based on Microsoft’s HoloLens technology, the HoloLens division has been severely cut. Microsoft’s battles with HoloLens have been well-documented over the past year after former HoloLens chief Alex Kipman left the company following allegations of wrongdoing and was allegedly dismissed by Microsoft plans for HoloLens 3.

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

Xbox Series S and X consoles.
Photo by Tom Warren / The Verge

Elsewhere with Microsoft’s hardware performance, Xbox is also down this quarter. Xbox hardware revenue was down 13 percent alongside a 12 percent decline in Xbox content and services revenue. Microsoft says this is a content and service revenue decrease related to “comparable prior-year activity” that was “partially offset by growth in Xbox Game Pass subscriptions.” Overall, Microsoft’s gaming revenue fell 13 percent year over year.

The decline in Xbox hardware revenue was “driven by the lower price and volume of consoles sold,” meaning Microsoft sold fewer Xbox Series S/X consoles during the holidays than more expensive around the same time in 2022. Priced at $249.99 for the holidays, it’s expected to focus heavily on its Xbox Game Pass console.

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This time last year, Microsoft announced that Xbox Game Pass had reached 25 million subscribers, but the company has not issued an update since then, and there is no information on new numbers today. That’s probably because Microsoft Gaming CEO Phil Spencer said in October that growth on the console side of the service has stalled.

“We’re seeing incredible growth on PC … On console, I’ve seen growth grow, because at some point you’ve reached everyone on console that wants to subscribe,” Spencer said in October. Spencer also said that Xbox Game Pass will account for 10–15 percent of the revenue from Xbox content and Microsoft services, and that the service is good.

Microsoft continues to face pressure from regulators over its $68.7 billion acquisition of Activision Blizzard, which is expected to close in 2023 (end of June). The European Commission has opened what it calls an “in-depth investigation” into Microsoft’s dealings after the UK’s Competition and Markets Authority (CMA) ordered it to take a closer look at its dealings in September. The FTC is also urging Microsoft to block the sale after weeks of negotiations between Microsoft, Sony, and regulators over competition concerns and the future of Call of the Count.

Image of Microsoft 365 logos around people

Microsoft has launched a new Microsoft 365 Basic subscription.
Photo: Microsoft

As always, Microsoft Office, cloud, and server products drove revenue in Q2. Microsoft’s cloud revenue had a significant impact on this quarter’s earnings, with all-in-one cloud revenue increasing 18 percent year-over-year. Server revenue and cloud services revenue increased by 20 percent, and Azure and other cloud services increased by 31 percent.

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“The next big wave of computing is being born, as Microsoft Cloud transforms the world’s most advanced AI models into a new computing platform,” said Microsoft CEO Satya Nadella at in a price 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 came a day after Microsoft extended its OpenAI partnership with an investment estimated to be worth $10 billion. The long-term partnership will make Microsoft the exclusive cloud partner for OpenAI, and Microsoft’s cloud services will power all OpenAI efforts across products, API services, and research.

According to Microsoft’s Revenue Department, Microsoft 365 customer subscriptions increased by 12 percent this quarter, reaching a total of 63.2 million. Microsoft launched a new $1.99-a-month Microsoft 365 Basic subscription earlier this month, so expect that to hit a lot of subscribers in quarterly revenue. Microsoft is also pushing the Microsoft 365 brand on Microsoft Office, which will help with subscription numbers and awareness.

Office commercial revenue and cloud services revenue increased by 7 percent, and Office 365 commercial revenue was up 11 percent. Elsewhere, LinkedIn’s revenue is up 10 percent year-over-year, and search results and ads are up 10 percent.

Microsoft will hold a earnings call at 5:30PM ET / 2:30PM PT, and we will update this article with any relevant information and comments.

Update, January 24th 4:50PM ET: Updated article with more Xbox revenue information.

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