Microsoft Q2 2023: Windows, Hardware, and Xbox are down as the cloud stays strong

Microsoft has just published second quarter of its financial results for 2023. The software manufacturer reported revenue of $52.7 billion and net income of $16.4 billion during the second quarter. Revenue rose 2 percent, but net income fell 12 percent. The results come just days after Microsoft He announced layoffs of 10,000 workers.

Microsoft previously projected a tough quarter for Windows OEM and hardware revenue, and the results are clear on the state of the PC industry right now. PC shipments will drop 16 percent in 2022, According to Canalys analysisAnd Gartner reported down nearly 29 percent year-over-year in the fourth quarter — the largest quarterly decline in shipments since it began tracking the PC market in the mid-1990s. As a result, Microsoft’s Windows-related revenue has been hit hard.

Windows OEM revenue, the price PC manufacturers pay Microsoft for putting Windows on hardware, fell a whopping 39 percent in the second quarter. Microsoft says this was driven by “continued PC market weakness and comparable prior year strength.”

Gartner says the total amount of PC shipments in 2022 was close to pre-pandemic levels, so the laptop purchases boom is clearly over. “As many consumers already have relatively new PCs purchased during the pandemic, a lack of affordability supersedes any impulse to buy, causing consumer demand for PCs to drop to its lowest level in years.

Surface Pro 9.
Photo by Amelia Hollowate Krales/The Verge

This deterioration in the PC market has also had an impact on Microsoft’s hardware revenue, which now includes HoloLens and PC accessories beyond just Surface revenue. Hardware revenue also fell 39 percent in the second quarter, despite Microsoft launching new Surface Pro 9, Surface Laptop 5 and Surface Studio 2 Plus devices before the holidays.

Microsoft announced last week that it did changed its “device group” amid layoffs. The software giant is writing $1.2 billion in its second-quarter earnings related to these hardware changes, severance costs, and “the cost of consolidating leases as we create higher density across our workspaces.”

After Congress denied the Army’s request to purchase up to 6,900 headsets based on Microsoft’s HoloLens technology, job cuts hit the HoloLens division in particular. Microsoft’s struggles with HoloLens have been well documented over the past year following the former HoloLens head Alex Kipman has left the company Following allegations of misconduct and Microsoft reports Plans canceled for HoloLens 3.

Microsoft's white Xbox Series S sits alongside the 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 efforts, Xbox was also down this quarter. Xbox revenue decreased by 13 percent along with a 12 percent decrease in revenue for Xbox content and services. Microsoft says this was lower content and services revenue related to a “strong comparable prior year” that was “partly offset by growth in Xbox Game Pass subscriptions.” Overall, Microsoft’s gaming revenue is down 13 percent year-over-year.

The decline in Xbox 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 same period in 2022. Microsoft Xbox Series S price reduced to $249.99 For the holidays, hoping to spark interest in the Xbox Game Pass console.

This time last year, Microsoft said Xbox Game Pass was It has grown to 25 million subscribers, but the company hasn’t provided an update since then, and there’s no mention of new numbers today. That may be because Microsoft Gaming CEO Phil Spencer revealed this in October Stunted growth on the console side out of service.

“We’re seeing incredible growth on PC… on console, you’ve seen a slowdown in growth, mainly because at some point you hit everyone who wants to sign up on console,” Spencer said in an October interview. Spencer also revealed that Xbox Game Pass will remain at around 10-15 percent of Microsoft’s Xbox content and services revenue and that the service is profitable.

Microsoft still faces opposition from regulators over its scheme $68.7 billion from the acquisition of Activision Blizzard, which it intends to close in its fiscal year 2023 (end of June). The European Commission opened what it called “In-depth investigationOn the Microsoft deal after the UK’s Competition and Markets Authority (CMA) indicated it took a closer look at the deal in September. The FTC is also suing Microsoft To prevent the purchase after weeks of back-and-forth between Microsoft, Sony, and regulators over competition and future concerns Call of duty.

Illustration of Microsoft 365 logos about a man

Microsoft just launched a new Microsoft 365 Basic subscription.
Image: Microsoft

As always, it was Microsoft Office, cloud and server products that drove revenue in the second quarter. Microsoft’s cloud revenue has a significant impact on this quarter’s earnings, with total smart cloud revenue up 18% year-over-year. Revenue from server products and cloud services grew 20 percent, and revenue from Azure and other cloud services grew 31 percent.

“The next major wave of computing is being born, as the Microsoft Cloud transforms the world’s most advanced AI models into a new computing platform,” Microsoft CEO Satya Nadella said in the earnings release. “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 age of artificial intelligence.”

Nadella’s comments come just one day after Microsoft OpenAI partnership expanded With an investment believed to be worth $10 billion. The long-term partnership will see Microsoft become OpenAI’s exclusive cloud partner, and Microsoft’s cloud services will power all of OpenAI’s workloads across products, API services, and research.

On top of the Office side of Microsoft’s earnings, consumer subscriptions to Microsoft 365 rose 12 percent this quarter, to 63.2 million in total. Microsoft just launched the Microsoft 365 Basic subscription $1.99 per month earlier this month, so expect to see this impact on subscriber count in the upcoming quarterly results. Microsoft was too Push the Microsoft 365 brand Via Microsoft Office, which will help get subscription numbers and awareness.

Commercial office products and cloud services revenue also grew 7 percent, with Office 365 commercial revenue increasing 11 percent. Elsewhere, LinkedIn revenue is up 10 percent year-over-year, and search and news ad revenue is up 10 percent.

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

Update, January 24th 4:50 PM ET: The article has been updated with more information about Xbox revenue.

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