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Microsoft Q3 2023: Windows, devices, and Xbox down again

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Microsoft just posted the third quarter of its 2023 fiscal financial results. The software maker made $52.9 billion in revenue and a net income of $18.3 billion during Q3. Revenue is up 7 percent, and net income has increased by 9 percent. While Windows, Xbox, and devices revenue have all been hit hard this quarter, Microsoft’s cloud, office, and server businesses have made up for weaknesses elsewhere.

Microsoft had a tough quarter for Windows and devices revenue last quarter, and Q3 isn’t much different. Windows OEM revenue, the price that PC manufacturers pay Microsoft to put Windows on laptops and PCs, fell by 28 percent in Q3.

Microsoft’s devices revenue has dropped again amid the PC industry’s struggles.
Photo by Amelia Holowaty Krales / The Verge

The PC market had a particularly bad quarter with both IDC and Canalys reporting that shipments of PCs and laptops were down around 30 percent year over year. The PC market woes have also hit Microsoft’s devices revenue, which includes HoloLens and PC accessories instead of just Surface revenue. Devices revenue has dropped by 30 percent in Q3.

The devices revenue doesn’t cover Microsoft’s Xbox efforts, though. That’s separated out into Xbox hardware revenue, which has dropped by 30 percent this quarter along with a slight increase of 3 percent in Xbox content and services revenue thanks to Xbox Game Pass growth. Overall, gaming revenue has declined 4 percent.

Microsoft sold fewer Xbox Series S / X consoles over the holiday quarter than it did at higher prices in the same period in 2022, and it looks like that has continued into the most recent quarter. Microsoft blames most of the Xbox hardware revenue decline on “increased console supply” during the same quarter last year, so it looks like the company is still struggling with hardware supplies and perhaps softer demand.

This works out to be the lowest quarter of Xbox hardware revenue since Microsoft launched its Xbox Series X / S consoles in 2020. The drop in Xbox hardware revenue isn’t particularly surprising given the lack of first-party games throughout 2022 to drive sales.

Microsoft still isn’t providing an update on Xbox Game Pass subscriber numbers. Microsoft said Xbox Game Pass had grown to 25 million subscribers in January 2022, but we haven’t had an update for well over a year now. Microsoft Gaming CEO Phil Spencer revealed in October that Xbox Game Pass growth had stalled on the console side of the service, with Microsoft making a bigger push toward gains for PC Game Pass instead.

The Xbox Series X.
Photo by Vjeran Pavic / The Verge

PC Game Pass launched in 40 new markets earlier this month, taking the total up to 86 countries that now have access to Game Pass. Microsoft is still looking to push Game Pass to mobile devices, and a key part of that is the company’s proposed $68.7 billion acquisition of Activision Blizzard.

Regulators in the UK are due to issue their final decision on the acquisition tomorrow morning after months of back-and-forth. It’s a key decision that will determine the future of this giant deal. The CMA has already sided with Microsoft over Call of Duty on PlayStation concerns, and the panel of experts conducting the investigation will now deliver their verdict on how the acquisition could affect the wider cloud gaming market. The EU is due to deliver its verdict on the deal next month, while the FTC has sued to try and block Microsoft from acquiring Activision Blizzard.

The weakness in Xbox, devices, and Windows OEM revenue means that overall Microsoft’s More Personal Computing unit saw revenues of $13.3 billion, a 9 percent decline year over year.

Microsoft 365 subscriptions are up again.
Image: Microsoft

Revenue in Office, cloud, and server products has made up for Xbox, devices, and Windows, though. Server products and cloud services revenue grew 17 percent, with Azure revenue up 27 percent. Microsoft says this growth was driven by “strong demand for our consumption-based services.”

Microsoft 365 consumer subscribers grew 12 percent this quarter, up to 65.4 million subscribers. That’s also an increase on the 63.2 million Microsoft reported last quarter. Microsoft launched a new $1.99 a month Microsoft 365 Basic subscription earlier this year, so this has clearly helped keep subscriber numbers high. Microsoft has also been pushing the Microsoft 365 brand over Microsoft Office, which will help with awareness.

Office commercial products and cloud services revenue also grew by 13 percent this quarter, with Office 365 commercial revenue up 14 percent. LinkedIn also saw “record engagement” this quarter, according to Microsoft. Sessions grew by 15 percent on the social network, and revenue is up 8 percent.

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

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