Microsoft Q2 2023 Windows Devices and Xbox Fail as Cloud

Microsoft Q2 2023: Windows, Devices and Xbox Fail as Cloud Remains Strong

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

Microsoft previously forecast a tough quarter for Windows OEM revenue and hardware, and the results on the current state of the PC industry are clear. According to an analysis by Canalys, PC shipments fell 16 percent in 2022, and Gartner reported a nearly 29 percent year-over-year decline in the fourth quarter — the largest drop in quarterly shipments since it began tracking the PC market in the mid-2020s 1990s. Microsoft’s Windows-related revenue was hit hard as a result.

Windows OEM revenue, the price PC makers pay Microsoft to install Windows on machines, fell a massive 39 percent in the second quarter. Microsoft says this was driven by “continued PC market weakness and a strong comparable year ago.”

According to Gartner, total PC shipments in 2022 were near pre-pandemic levels, making it clear that the boom in laptop purchases is finally over. “With many consumers already owning relatively new PCs purchased during the pandemic, lack of affordability is crowding out any motivation to buy, causing consumer PC demand to fall to its lowest level in years,” said Mikako Kitagawa, Director Analyst at Gardener.

The Surface Pro 9 in laptop mode.

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

This deterioration in the PC market has also impacted Microsoft’s device sales, which now include HoloLens and PC accessories alongside Surface sales. Device sales also fell a massive 39 percent in the second quarter, despite Microsoft launching new Surface Pro 9, Surface Laptop 5 and Surface Studio 2 Plus devices just before the holidays.

Microsoft announced last week that it changed its “hardware portfolio” amid layoffs. The software giant is writing down $1.2 billion in its Q2 earnings related to these hardware changes, severance costs and “the cost of rent consolidation 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 have 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 reportedly scrapped plans for a HoloLens 3.

Microsoft's white Xbox Series S sits next to a larger 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 is also down this quarter. Xbox hardware sales are down 13 percent, while Xbox content and services sales are down 12 percent. Microsoft says the decline in revenue from content and services is related to “a strong year-over-year comparison,” which was “partially offset by growth in Xbox Game Pass subscriptions.” Overall, Microsoft’s gaming revenue fell 13 percent year over year.

The fall in Xbox hardware revenue was “due to the lower price and volume of consoles sold,” meaning Microsoft sold fewer Xbox Series S/X consoles over the holidays than it did over the same period in 2022 prices. Microsoft set its Xbox Series S price at $249.99 for the holidays, hoping to spark interest in the 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, and no new numbers are mentioned today. That could be because Microsoft Gaming CEO Phil Spencer revealed in October that growth on the service’s console side has stalled.

“We’re seeing incredible growth on PC… On console, I’ve seen that growth has slowed down, largely because you’ve eventually reached everyone on console who wants to subscribe,” Spencer said in an October interview. Spencer also announced that Xbox Game Pass will remain at about 10 to 15 percent of revenue from Microsoft’s Xbox content and services and that the service is profitable.

Microsoft continues to face regulatory backlash over its proposed $68.7 billion acquisition of Activision Blizzard, which the company hopes to close in fiscal 2023 (ending in late June). The European Commission has launched what it calls an “in-depth investigation” into Microsoft’s deal after Britain’s Competition and Markets Authority (CMA) signaled a closer scrutiny of the deal in September. The FTC is also suing Microsoft to block the purchase after weeks of back-and-forth between Microsoft, Sony and regulators over competition concerns and the future of Call of Duty.

Illustration of Microsoft 365 logos surrounding a man

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

As always, it was Microsoft Office, cloud, and server products that drove revenue in the second quarter. Microsoft’s cloud revenue is a major driver of this quarter’s earnings, with total intelligent cloud revenue up 18 percent year over year. Server products and cloud services revenue increased 20 percent, and Azure and other cloud services revenue increased 31 percent.

“The next great wave of computing is born as the Microsoft Cloud transforms the world’s most advanced AI models into a new computing platform,” said Microsoft CEO Satya Nadella in a 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 AI.”

Nadella’s comments come just a day after Microsoft renewed its OpenAI partnership with an estimated $10 billion investment. The long-term partnership will make Microsoft the exclusive cloud partner for OpenAI, and Microsoft’s cloud services will support all OpenAI workloads across products, API services, and research.

On the Office side of Microsoft revenue, Microsoft 365 consumer subscriptions are up 12 percent this quarter, totaling 63.2 million. Microsoft earlier this month introduced a new Microsoft 365 Basic subscription for $1.99 per month. So expect this to impact the number of subscribers in the next quarterly results. Microsoft has also pushed the Microsoft 365 brand over Microsoft Office, which will help with subscription numbers and awareness.

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

Microsoft will now host a conference call on the results at 5:30pm ET / 2:30pm PT and we will update this article with any relevant comments and information.

Update Jan 24 4:50pm ET: Article updated with more information on Xbox earnings.