Microsoft just released its second quarter financial results for fiscal 2023. The software maker made $52.7 billion in revenue and $16.4 billion in net income in the second quarter. Revenue increased 2%, but net income fell 12%. The results come just days after Microsoft announced 10,000 layoffs.
Microsoft previously predicted a tough quarter for Windows OEM revenue and hardware, and the results are clear about the state of the PC industry right now. PC shipments fell 16 percent in 2022, according to analysis by Canalys, and Gartner reported a nearly 29 percent year-over-year decline in Q4 — the biggest quarterly decline in shipments since it began tracking the PC market in mid- The 90s. Microsoft’s Windows-related revenue was hit hard as a result.
Windows OEM revenue, the price PC makers pay Microsoft to put Windows on machines, fell a whopping 39 percent in Q2. Microsoft says this is due to “continued weakness in the PC market and a strong comparable prior year.”
Gartner says that the total amount of PC shipments in 2022 was close to pre-pandemic levels, so it’s clear that the laptop buying boom is completely over. “With many consumers already having relatively new PCs purchased during the pandemic, the lack of affordability is crowding out any motivation to buy, causing consumer demand for PCs to drop to its lowest level in years,” said Mikako Kitagawa, director analyst at Gartner.
Surface Pro 9. Photo by Amelia Holowaty Krales / The Verge
This deterioration in the PC market has also impacted Microsoft’s device revenue, which now includes HoloLens and PC accessories, in addition to Surface revenue alone. Device revenue also fell a whopping 39% in the second quarter, even though Microsoft released the new Surface Pro 9, Surface Laptop 5, and Surface Studio 2 Plus devices just before the holidays.
Microsoft announced last week that it had reshuffled its “hardware portfolio” amid layoffs. The software giant booked $1.2 billion in second-quarter earnings related to those hardware changes, benefits costs and “lease consolidation costs as we create higher density in our workspaces.”
After Congress rejected the Army’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 scrapped its HoloLens 3 plans.
Xbox Series S and X consoles. Photo by Tom Warren/The Verge
Elsewhere with Microsoft’s hardware efforts, Xbox is also down this quarter. Xbox hardware revenue was down 13 percent along with a 12 percent drop in Xbox content and services revenue. Microsoft says this decrease in content and services revenue is related to a “strong comparable prior year” that was “partially offset by growth in Xbox Game Pass subscriptions.” Overall, Microsoft’s gaming revenue was down 13 percent year over year.
The decline in 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 over the same period of 2022, Microsoft dropped its Xbox Series S price to $249.99 for the holidays, hoping to drum up 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 no new numbers are being mentioned today. That could be because Microsoft Gaming CEO Phil Spencer revealed in October that growth had stalled on the console side of the service.
“We’re seeing incredible growth on PC … On console, I’ve seen growth slow, mainly 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 percent of revenue from Microsoft’s Xbox content and services, and that the service is profitable.
Microsoft continues to face pushback from regulators over its planned $68.7 billion acquisition of Activision Blizzard, which it intends to close in its 2023 fiscal year (end of June). The European Commission launched what it called an “in-depth investigation” into the Microsoft deal after the UK’s Competition and Markets Authority (CMA) signaled a closer look at the deal in September. The Federal Trade Commission also sued Microsoft to block the purchase after weeks of wrangling between Microsoft, Sony and regulators over competition concerns and the future of Call of Duty.
Microsoft has just launched a new Microsoft 365 Basic subscription. Image: Microsoft
As always, Microsoft Office, cloud and server products drove revenue in Q2. Microsoft’s cloud revenue had a big impact on earnings this quarter, with total intelligent cloud revenue up 18 percent 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 great 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 an earnings report. “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 partnership with OpenAI with an investment believed to be worth $10 billion. The long-term partnership will see Microsoft become the exclusive cloud partner for OpenAI, and Microsoft’s cloud services will power all OpenAI workloads in products, API services and research.
As for Microsoft’s Office revenue, Microsoft 365 user subscriptions grew 12 percent this quarter, reaching a total of 63.2 million. Microsoft just launched a new Microsoft 365 Basic subscription for $1.99 per month earlier this month, so expect that to affect subscriber numbers in the next quarterly results. Microsoft is also pushing the Microsoft 365 brand over Microsoft Office, which will help with subscription numbers and awareness.
Office commercial product and cloud services revenue also grew 7 percent, with Office 365 commercial revenue up 11 percent. Elsewhere, LinkedIn revenue rose 10 percent year-over-year, and search and news ad revenue rose 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 relevant comments and information.
Update, January 24 4:50 PM ET: The article has been updated with more information about Xbox revenue.
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