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

Microsoft just posted its second quarter of 2023 financial results. The software maker reported revenue of $52.7 billion and net income of $16.4 billion during Q2. Revenue is up 2 percent, but net income is down 12 percent. The results come days after Microsoft announced 10,000 layoffs.

Microsoft previously predicted a tough quarter for Windows OEM revenue and hardware, and the results are clear on the state of the PC industry right now. PC shipments are expected to decline 16 percent in 2022, according to Canalys’ analysis, and Gartner reported a nearly 29 percent year-over-year decline in Q4 — since it tracked the PC market in the mid-1990s. It’s the biggest quarterly shipment decline since it began. As a result, Microsoft’s Windows-related revenue has been hit hard.

Windows OEM revenue, the price PC manufacturers pay Microsoft to install Windows on machines, fell 39 percent in Q2. Microsoft says this is due to “continued weakness in the PC market and a strong last year’s competition.”

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

Surface Pro 9 in laptop mode.

Surface Pro 9.
Photo by Amelia Holoti Kreils/The Verge

The deterioration in the PC market has also affected Microsoft’s device revenue, which now includes HoloLens and PC accessories in addition to Surface revenue. Despite Microsoft launching the new Surface Pro 9, Surface Laptop 5, and Surface Studio 2 Plus devices just before the holidays, device revenue also fell a whopping 39 percent in Q2.

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Microsoft announced last week that it had changed its “hardware portfolio” in the midst of the holidays. The software giant is writing down $1.2 billion in its Q2 earnings related to hardware replacements, severance costs, and “lease consolidation costs as we build more density in our workplaces.”

The job cuts have hit the HoloLens division particularly hard, after Congress rejected the Army’s request to buy up to 6,900 headsets based on Microsoft’s HoloLens technology. Microsoft’s struggles with HoloLens have been well-documented over the past year, with former HoloLens boss Alex Capman leaving the company following allegations of misconduct and Microsoft reportedly scrapping the HoloLens 3 project. was finished

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

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

As with Microsoft’s hardware efforts elsewhere, Xbox is also down this quarter. Xbox hardware revenue fell 13 percent, with Xbox content and services revenue down 12 percent. Microsoft says the decrease in content and services revenue was related to “a strong prior-year comparison” that was “partially offset by an increase in Xbox Game Pass subscriptions.” Overall, Microsoft’s gaming revenue fell 13 percent year over year.

The decline in Xbox hardware revenue was “due to lower price and volume of consoles sold,” meaning Microsoft sold fewer Xbox Series S/X consoles during the holidays than it did in the same period in 2022 at higher prices. Did on. Microsoft dropped its Xbox series. The S is priced at $249.99 for the holidays, hoping to spur interest in its Xbox Game Pass console.

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This time last year, Microsoft said Xbox Game Pass subscribers had reached 25 million, 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 in October that development on the console side of the service has stalled.

“We’re seeing incredible growth on PC…on console, I’ve seen slower growth, 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 account for about 10-15 percent of Microsoft’s Xbox content and services revenue and that the service is profitable.

Microsoft faces pushback from regulators over its planned $68.7 billion acquisition of Activision Blizzard, which it plans to close in fiscal 2023 (end of June). The European Commission has launched an “in-depth investigation” into the Microsoft deal after Britain’s Competition and Markets Authority (CMA) signaled a closer look at the deal in September. The FTC is also suing Microsoft over competition concerns and weeks of back-and-forth shopping between Microsoft, Sony, and regulators about the future. Call of Duty.

An illustration of the Microsoft 365 logo around a man

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

As usual, it was Microsoft Office, cloud, and server products that drove revenue in Q2. Microsoft’s cloud revenue is a big influence on this quarter’s earnings, with overall intelligent cloud revenue up 18% year-over-year. Server products and cloud services revenue grew 20 percent, and Azure and other cloud services revenue grew 31 percent.

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“The next big wave of computing is coming, 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 statement. “We are committed to helping our customers do more today using our platforms and tools and innovate for the future in the new era of AI.”

Nadella’s comments came just a day after Microsoft expanded its OpenAI partnership with an investment valued at $10 billion. The long-term partnership will see Microsoft become the exclusive cloud partner for OpenAI, and Microsoft’s cloud services products, API services, and research will power all OpenAI workloads.

According to Microsoft’s earnings office, subscriptions to Microsoft 365 users were up 12 percent in the quarter, reaching a total of 63.2 million. Microsoft just launched a new $1.99-a-month Microsoft 365 Basic subscription earlier this month, so expect that to impact subscriber numbers in next quarter’s results. Microsoft is also pushing the Microsoft 365 brand on Microsoft Office, which will help drive subscription numbers and awareness.

Office commercial products and cloud services revenue also rose 7 percent, with Office 365 commercial revenue up 11 percent. Elsewhere, LinkedIn revenue grew 10 percent year-over-year, and search and news advertising revenue grew 10 percent.

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

Update, Jan. 24 at 4:50 p.m. ET: Article updated with more Xbox revenue information.

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