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Friday, January 27, 2023

Microsoft Q2 2023: Windows, Devices, And Xbox Down As Cloud Holds Strong

Microsoft has just released Its financial results for the second quarter of fiscal 2023. The software maker reported net income of $16.4 billion on revenue of $52.7 billion in the second quarter. Revenue rose 2%, but net income fell 12%.The results were announced a few days later by Microsoft Announced 10,000 layoffs.

Microsoft previously predicted a tough quarter for Windows OEM revenue and hardware, and the current state of the PC industry is already clear. PC shipments to drop 16% in 2022, According to Canalys analysisand Gartner report The fourth quarter fell nearly 29% year-over-year — the largest quarterly decline in shipments since the PC market began tracking in the mid-1990s. Microsoft’s Windows-related revenue has been hit hard as a result.

Windows OEM revenue, the price PC makers pay Microsoft to install Windows on their machines, plunged 39% in the second quarter. This was driven by “continued weakness in the PC market and comparable strength to the prior year,” Microsoft said.

Gartner says total PC shipments in 2022 will be close to pre-pandemic levels, so it’s clear that the laptop buying spree is really over. “With many consumers already owning relatively new PCs purchased during the pandemic, a lack of affordability is replacing any motivation to buy, driving consumer PC demand to its lowest level in years,” said Mikako Kitagawa, principal analyst at Gartner.

Surface Pro 9.
Photograph: Amelia Holowaty Krales/The Verge

This deterioration in the PC market has also had an impact on Microsoft’s device revenue, which now includes HoloLens and PC accessories in addition to Surface revenue. Device 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 ahead of the holidays.

Microsoft announced last week that it has Changed its “Hardware Combo” Among layoffs. The software giant took a $1.2 billion writedown on its second-quarter earnings related to those hardware changes, severance payments, and “lease consolidation costs as we create higher density in our workspaces.”

The layoffs hit the HoloLens division particularly hard after Congress blocked the Army from buying as many as 6,900 headsets based on Microsoft’s HoloLens technology.Microsoft’s struggles with HoloLens have been well documented over the past year after former HoloLens boss Alex Kipman leaves the company Following allegations of misconduct, Microsoft reportedly Canceled 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 in Microsoft’s hardware efforts, Xbox also slipped this quarter. Xbox hardware revenue fell 13%, while Xbox content and services revenue fell 12%. Microsoft said this was a decline in content and services revenue related to “strong prior-year comparability,” “partially offset by growth in Xbox Game Pass subscriptions.” Overall, Microsoft’s gaming revenue fell 13% year-over-year.

The decline in Xbox hardware revenue was “driven by lower console prices and volumes sold,” meaning Microsoft sold fewer Xbox Series S/X consoles during the holidays than it would sell at higher prices during the same period in 2022.Microsoft Drops its Xbox Series S price to $249.99 holiday, hoping to generate interest in its Xbox Game Pass console.

This time last year, Microsoft said Xbox Game Pass Grow to 25 million subscribers, but the company has not provided an update since, and did not mention the new numbers today.That’s likely because Microsoft gaming CEO Phil Spencer revealed in October that Growth stagnates on the console side services.

“We’ve seen incredible growth on PC…on console, I’ve seen growth slow down, mostly because at some point you’ve reached everybody on console that wants to subscribe, ’” Spencer said in an interview in October. Spencer also revealed that Xbox Game Pass will remain at about 10-15% of Microsoft’s Xbox content and service revenue, and that the service is profitable.

Microsoft continues to face resistance from regulators to its plans Acquired Activision Blizzard for $68.7 billion, which it intends to close in its fiscal year 2023 (end of June). The European Commission has opened up what it calls a “look deep intoThe Microsoft deal comes after Britain’s Competition and Markets Authority (CMA) said in September it would look into the deal. The FTC is also suing Microsoft Blocking takeover after weeks of back-and-forth between Microsoft, Sony and regulators over competition concerns and future call-of-duty.

Illustration of a man surrounded by the Microsoft 365 logo

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

As always, driving revenue growth in the second quarter was Microsoft Office, cloud and server products. Microsoft’s cloud revenue had a big impact on earnings in the quarter, with overall Intelligent Cloud revenue up 18% year-over-year. Revenue from server products and cloud services rose 20%, and revenue from Azure and other cloud services rose 31%.

“As the Microsoft Cloud transforms the world’s most advanced artificial intelligence models into a new computing platform, the next major wave of computing is being born,” 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 era of artificial intelligence.”

Nadella’s comments come a day after Microsoft’s announcement Expands its OpenAI partnership Its investment is believed to be worth $10 billion. The long-term partnership will make Microsoft OpenAI’s exclusive cloud partner, and Microsoft’s cloud services will power all OpenAI workloads in products, API services, and research.

On the Office side of Microsoft’s revenue, Microsoft 365 consumer subscriptions rose 12% in the quarter to 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 to see the impact of this on subscriber numbers in its next quarter results.Microsoft has also Driving the Microsoft 365 brand With Microsoft Office, this will help increase subscription numbers and visibility.

Office commercial products and cloud services revenue also rose 7 percent, led by an 11 percent increase in Office 365 commercial revenue. Elsewhere, LinkedIn revenue rose 10% year-over-year, and search and news ad revenue rose 10%.

Microsoft will now host an earnings conference call at 5:30 pm ET / 2:30 pm PT, and we will update this article with any relevant comments and information.

UPDATE Jan. 24 at 4:50pm ET: Article updated with more Xbox revenue information.

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