Microsoft Q2 2023: Windows, devices and Xbox shut down as the cloud is powerful

Microsoft has published financial results for the second quarter of 2023. The software maker reported $52.7 billion in revenue and $16.4 billion in net income during the second quarter. Revenue rose 2 percent, but net income fell 12 percent. The results come just days after Microsoft announced it was cutting 10,000 jobs.

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. According to Canalys’ analysis, PC shipments fell 16 percent in 2022, and Gartner reported a nearly 29 percent year-over-year decline in Q4 — the biggest quarterly drop in shipments since it began tracking the PC market in the mid-1990s. As a result, Microsoft’s Windows revenue took a big hit.

Windows OEM revenue, the price PC makers pay Microsoft to put Windows on machines, fell a massive 39 percent in Q2. Microsoft said this was due to “continued weakness in the PC market and a strong year-over-year comparison.”

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. “With many consumers having relatively new PCs already purchased during the pandemic, the lack of affordability is replacing any motivation to buy, causing demand for consumer PCs to fall to its lowest level in years,” said Mikako Kitagawa, principal analyst at Gartner.

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

Microsoft announced last week that it was changing its “hardware portfolio” amid the layoffs. The software giant chalked up $1.2 billion in Q2 earnings to those hardware changes, severance costs and “the cost of lease consolidation as we create higher density in our business areas.”

The job cuts 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, after former HoloLens boss Alex Kipman left the company following allegations of misconduct and Microsoft reportedly scrapped plans for HoloLens 3.

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

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Elsewhere, Xbox was down this quarter, with Microsoft’s hardware efforts falling. Revenue from Xbox hardware fell 13 percent, along with a 12 percent decline in revenue from Xbox content and services. Microsoft said this was due to a strong prior-year comparison, which was “partially offset by growth in Xbox Game Pass subscriptions” as the decline in content and services revenue. Overall, Microsoft’s gaming revenue fell 13 percent year over year.

The decline in revenue from Xbox hardware was “related to lower price and volume of consoles sold,” meaning that Microsoft sold fewer Xbox Series S / X consoles during the holidays than it sold at higher prices in the same period of 2022. Microsoft has given up on the Xbox Series. The S price is up to $249.99 for the holidays, hoping to drum up interest in the Xbox Game Pass console.

This time last year, Microsoft said that Xbox Game Pass had reached 25 million subscribers, but the company hasn’t released an update since then, and there’s no mention of new numbers today. That may be because Microsoft Gaming CEO Phil Spencer announced in October that growth on the console side of the service has stalled.

“We’re seeing incredible growth on PC … I’ve seen growth slow on console, mainly because at some point you’ve reached everyone who wants to subscribe on console,” Spencer said in an interview in October. 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 continues to face regulatory pushback over its planned $68.7 billion acquisition of Activision Blizzard, which it intends to close in fiscal 2023 (end of June). The European Commission opened what it called an “in-depth investigation” into the Microsoft deal after the UK’s Competition and Markets Authority (CMA) took a closer look at the deal in September. The FTC is also suing Microsoft to block the acquisition after weeks of back-and-forth between Microsoft, Sony and regulators over competition concerns and its future fate. Call of Duty.

An illustration of the Microsoft 365 logos around a person

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As usual, Microsoft Office, cloud and server products were the main revenue drivers in the second quarter. Microsoft’s cloud revenue is a big driver of this quarter’s earnings, with total intelligent cloud revenue up 18 times year-over-year. Server products and cloud services revenues increased 20 percent, while Azure and other cloud services revenues increased 31 percent.

“The next big wave of computing is emerging 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 artificial intelligence.”

Nadella’s comments came a day after Microsoft extended its OpenAI partnership 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 across products, API services and research.

On the Office side of Microsoft’s revenue, Microsoft 365 consumer subscriptions grew 12 percent this quarter to a total of 63.2 million. Microsoft 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 onto Microsoft Office, which will help drive subscription numbers and awareness.

Office commercial products and cloud services revenues also increased by 7 percent, and Office 365 commercial revenues increased by 11 percent. Elsewhere, LinkedIn revenue was up 10 percent year-on-year, while search and news advertising revenue was 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 relevant comments and information.

Update, January 24 at 4:50 PM ET: Article updated with more Xbox revenue information.

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