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

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

Microsoft has just posted the second quarter of its 2023 fiscal monetary outcomes. The software program maker made $52.7 billion in income and a web earnings of $16.4 billion throughout Q2. Revenue is up 2 %, however web earnings has dropped by 12 %. The outcomes come simply days after Microsoft introduced 10,000 layoffs.

Microsoft beforehand forecast a troublesome quarter for Windows OEM income and {hardware}, and the outcomes are clear on the state of the PC business proper now. PC shipments fell by 16 % in 2022, according to analysis by Canalys, and Gartner reported an almost 29 % year-over-year drop in This fall — the most important quarterly cargo decline because it started monitoring the PC market within the mid-Nineteen Nineties. Microsoft’s Windows-related income has been hit laborious as a outcome.

Windows OEM income, the value PC producers pay Microsoft to place Windows on machines, fell by a large 39 % in Q2. Microsoft says this was pushed by “continued PC market weak spot and a strong prior yr comparable.”

Gartner says the overall quantity of PC shipments in 2022 was near pre-pandemic ranges, so it’s clear the increase of laptop computer purchases is properly and actually over. “Since many customers have already got comparatively new PCs that had been bought through the pandemic, an absence of affordability is superseding any motivation to purchase, inflicting client PC demand to drop to its lowest stage in years,” says Mikako Kitagawa, director analyst at Gartner.

The Surface Pro 9 in laptop mode.

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

This deterioration within the PC market has additionally had an influence on Microsoft’s units revenues, which now embrace HoloLens and PC equipment past simply Surface income. Devices income has additionally dropped a large 39 % in Q2, regardless of Microsoft launching the brand new Surface Pro 9, Surface Laptop 5, and Surface Studio 2 Plus units simply forward of the vacations.

Microsoft introduced final week that it has modified its “{hardware} portfolio” amid layoffs. The software program large is writing down $1.2 billion in its Q2 earnings associated to those {hardware} modifications, severance prices, and “the price of lease consolidation as we create greater density throughout our workspaces.”

After Congress denied the Army’s request to purchase as much as 6,900 headsets based mostly on Microsoft’s HoloLens know-how, job cuts have hit the HoloLens division significantly laborious. Microsoft’s struggles with HoloLens have been properly documented over the previous yr after former HoloLens boss Alex Kipman departed the corporate following misconduct allegations and Microsoft reportedly scrapped plans for a HoloLens 3.

Microsoft’s white Xbox Series S sits alongside a bigger and black Xbox Series X on a wooden coffee table in a living room

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

Elsewhere with Microsoft’s {hardware} efforts, Xbox can be down this quarter. Xbox {hardware} income has decreased by 13 % alongside a 12 % dip in Xbox content material and companies income. Microsoft says this was content material and companies income lower was associated to “a strong prior yr comparable” that was “partially offset by development in Xbox Game Pass subscriptions.” Overall, Microsoft’s gaming income declined 13 % yr over yr.

The Xbox {hardware} income lower was “pushed by lower cost and quantity of consoles bought,” which implies Microsoft bought much less Xbox Series S / X consoles over the vacations than it did at greater costs in the identical interval in 2022. Microsoft dropped its Xbox Series S worth to $249.99 for the vacations, hoping to stoke curiosity in its Xbox Game Pass console.

This time final yr, Microsoft stated Xbox Game Pass had grown to 25 million subscribers, however the firm hasn’t offered an replace since then, and there’s no point out of latest numbers right now. That might be as a result of Microsoft Gaming CEO Phil Spencer revealed in October that development has stalled on the console facet of the service.

“We’re seeing unbelievable development on PC … On console, I’ve seen development sluggish down, primarily as a result of in some unspecified time in the future you’ve reached everyone on console that desires to subscribe,” stated Spencer in an interview in October. Spencer additionally revealed that Xbox Game Pass will keep at round 10–15 % of Microsoft’s Xbox content material and companies income and that the service is worthwhile.

Microsoft continues to face pushback from regulators over its deliberate $68.7 billion acquisition of Activision Blizzard, which it intends to shut in its fiscal 2023 yr (finish of June). The European Commission has opened what it calls an “in-depth investigation” into Microsoft’s deal after the UK’s Competition and Markets Authority (CMA) signaled a more in-depth have a look at the deal in September. The FTC can be suing Microsoft to dam the acquisition after weeks of again and forth between Microsoft, Sony, and regulators over competitors issues and the way forward for Call of Duty.

Illustration of Microsoft 365 logos around a man

Microsoft simply launched a brand new Microsoft 365 Basic subscription.
Image: Microsoft

As all the time, it was Microsoft Office, cloud, and server merchandise that drove income in Q2. Microsoft’s cloud income is a giant affect on this quarter’s earnings, with general clever cloud income up 18 precent yr over yr. Server merchandise and cloud companies revenues grew by 20 %, and Azure and different cloud companies income grew by 31 %.

“The subsequent main wave of computing is being born, as the Microsoft Cloud turns the world’s most superior AI fashions into a brand new computing platform,” says Microsoft CEO Satya Nadella in an earnings assertion. “We are dedicated to serving to our prospects use our platforms and instruments to do extra with much less right now and innovate for the longer term within the new period of AI.”

Nadella’s feedback come only a day after Microsoft prolonged its OpenAI partnership with an funding believed to be valued at $10 billion. The long-term partnership will see Microsoft change into the unique cloud associate for OpenAI, and Microsoft’s cloud companies will energy all OpenAI workloads throughout merchandise, API companies, and analysis.

Over on the Office facet of Microsoft’s earnings, Microsoft 365 client subscriptions are up by 12 % this quarter, reaching 63.2 million in whole. Microsoft has simply launched a brand new $1.99-a-month Microsoft 365 Basic subscription earlier this month, so count on to see that influence the variety of subscribers within the subsequent quarterly outcomes. Microsoft has additionally been pushing the Microsoft 365 model over Microsoft Office, which can assist with subscription numbers and consciousness.

Office industrial merchandise and cloud companies income additionally grew by 7 %, with Office 365 industrial income up 11 %. Elsewhere, LinkedIn income is up 10 % yr over yr, and search and information promoting revenues are up 10 %.

Microsoft will now maintain an earnings name at 5:30PM ET / 2:30PM PT, and we’ll replace this text with any related feedback and info.

Update, January twenty fourth 4:50PM ET: Article up to date with extra Xbox income info.