Xbox and Windows fall in Microsoft’s $51.9 billion quarter

Microsoft posted the fourth quarter of its 2022 financial results today, reporting revenue of $51.9 billion and a net income of $16.7 billion. Revenue is up 12 percent, and net income has increased by just 2 percent. But while revenue was up, Microsoft saw some of its core businesses, including Windows and Xbox, start to slip.

The PC market had been thriving throughout the pandemic, but PC shipments experienced a big decline in the recent quarter — nearly 13 percent according to Gartner. It’s the sharpest decline in nine years, thanks to geopolitical tensions, inflation, and continued supply chain challenges.

Microsoft’s Windows OEM revenue, the price PC manufactures pay Microsoft to put Windows on machines, fell 2 percent in Q4, driven by what Microsoft described as “production shutdowns and a deteriorating PC market.”

Photo by Becca Farsace / The Verge

“We did see the market weaken through the quarter, so that did impact our results,” says Kendra Goodenough, director of Microsoft investor relations, in a call with The Verge. Microsoft CEO Satya Nadella offered some more context on the PC market during an investors call today. “Despite a changing market for PCs during the quarter, we continue to see more PCs shipped than pre-pandemic, and are taking share,” says Nadella.

Despite the weaker PC market, Surface is doing well on the commercial side. Surface revenue has increased 10 percent for Q4, despite no big Surface launches during the quarter. “Consumer side is definitely dropping off at a faster rate when it comes to overall demand environment right now, so when we think of the commercial strength on Surface that’s where we get a little bit more help on that Surface [revenue] number,” explains Goodenough.

Microsoft refreshed its compact Surface Laptop Go in June with 11th Gen Intel processor, but we’ll be waiting until the fall until we see a bigger refresh to the Surface lineup. 2022 marks 10 years of Surface, so expect the usual fall event for new devices.

All eyes are now on Intel’s planned price increases of its CPUs and chips, and how they might affect the PC market. Intel is planning price rises for its flagship CPUs and a wide range of other chips later this year, including Wi-Fi and other connectivity chips.

Photo by Vjeran Pavic / The Verge

Over on the Xbox side, hardware revenue fell 11 percent, alongside a 6 percent dip in Xbox content and services revenue. Microsoft attributed the services declines to “lower engagement hours and monetization” across both first- and third-party titles. Overall gaming revenue at Microsoft declined 7 percent, year over year.

“The decline you’re seeing in Xbox hardware is partly a reflection of the fact we had that launch… about two years ago, so with the supply constraints that we had seen over the last couple of years it has kind of extended out that period for consoles,” say Goodenough. “We’re still seeing strong demand, but coming off those highs that we saw in the last couple of years with the launch.”

Despite the quarterly hardware revenue decline, Nadella says Microsoft has “been the market leader in North America for three quarters in a row among next-gen consoles.” Xbox also had its best fiscal year ever in terms of revenue, at around $16.2 billion for the entire fiscal year. Microsoft’s guidance for fiscal Q1, 2023 sees gaming revenue and Xbox content and services revenue both declining again next quarter, though.

Photo by Vjeran Pavic / The Verge

Last quarter Microsoft revealed 10 million people had used the company’s Xbox Cloud Gaming service, and that’s bound to have grown even higher thanks to Fortnite now being the only game that’s free to stream on the service. “Over 4 million people have streamed [Fortnite] to date, including over 1 million who were new to our ecosystem,” explains Nadella.

Microsoft hasn’t provided an update on Xbox Game Pass subscribers this quarter, after the service grew to 25 million in January following the holiday releases of Age of Empires IV, Forza Horizon 5, and Halo Infinite.

Microsoft also isn’t discussing its planned $68.7 billion acquisition of Activision Blizzard any further today. The purchase is expected to close in fiscal year 2023, and it will see Microsoft publish franchises like Warcraft, Diablo, Overwatch, Call of Duty, and Candy Crush.

Outside of gaming and Windows, Microsoft’s Office, cloud, and server products continue to growth at impressive rates. Office commercial products and cloud services revenue is up 9 percent this quarter, and Office consumer is up 9 percent year over year. Microsoft 365 Consumer subscriptions are now at 59.7 million, as Microsoft continues to tempt consumers into Office subscriptions and services like Microsoft Teams.

Image: Microsoft

Microsoft’s server products and cloud services revenue also jumped 22 percent year over year, thanks as always to Azure and other cloud services revenue growing by 40 percent.

LinkedIn continues to grow at Microsoft, thanks to advertising demand. LinkedIn revenue was up 26 percent this quarter, which Microsoft attributes to its Talent Solutions and Marketing Solutions businesses. Search and news advertising revenue is also up by 15 percent year over year.

These latest results arrive after Microsoft was forced to lower its guidance for this quarter in June, and the company cited unfavorable foreign exchange rates. The dollar is strong against a number of currencies right now, amid geopolitical tensions and inflation. Microsoft is affected when it converts foreign currency into dollars. Microsoft is now also seeing impacts from a softening of the PC market, and even a reduced ad market spend as the economic outlook looks increasingly more uncertain.

Update, July 26th 4:45PM ET: Article updated with comments from Microsoft.

Update, July 26th 6:30PM ET: Article updated with comments from Microsoft’s earnings call.