Microsoft today released its financial results for the fourth quarter of 2022, reporting revenue of $51.9 billion and net income of $16.7 billion. Revenue was up 12 percent, and net income was up just 2 percent. But while revenue rose, Microsoft saw some of its core businesses, including Windows and Xbox, begin to decline.
The PC market has been booming during the pandemic, but PC shipments suffered a big drop last quarter, nearly 13 percent, according to Gartner. This is the sharpest drop in nine years, thanks to geopolitical tensions, inflation and ongoing supply chain challenges.
Microsoft’s Windows OEM revenue, the price PC makers 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 really saw the market weaken in the quarter, so that impacted our results,” Kendra Goodenough, Microsoft’s director of investor relations, told The Verge. Microsoft CEO Satya Nadella offered a little more context for the PC market during a call with investors today. “Despite the changing PC market in the quarter, we continue to see more PCs shipped than before the pandemic, and we’re gaining share,” Nadella said.
Despite the weaker PC market, Surface is doing well on the commercial side. Surface revenue was up 10 percent for Q4, despite no major Surface launches in the quarter. “The consumer side is definitely declining at a faster rate when it comes to the overall demand environment right now, so when we think about the commercial strength of Surface, that’s where we get a little bit more help with that Surface [revenue] number,” explains Goodinough.
Microsoft refreshed its compact Surface Laptop Go in June with an 11th-generation Intel processor, but we’ll have to wait until the fall to see a major refresh of 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 for its processors and chips and how they might affect the PC market. Intel plans to raise prices for its flagship processors and a wide range of other chips later this year, including Wi-Fi and other connectivity chips.
Photo by Vjeran Pavic / The Verge
On the Xbox side, hardware revenue fell 11 percent, along with a 6 percent drop in Xbox content and services revenue. Microsoft attributed the service declines to “lower hours of engagement and monetization” across both first- and third-party titles. Total gaming revenue at Microsoft was down 7 percent year over year.
“The decline that you’re seeing in Xbox hardware is partly a reflection of the fact that we had this launch … about two years ago, so with the supply constraints that we’ve seen over the last couple of years, it’s kind of extended that period for consoles ,” Goodenough says. “We’re still seeing strong demand, but we’re coming off those highs we’ve seen over the last couple of years with the launch.”
Despite the quarterly decline in hardware revenue, Nadella says Microsoft is “the market leader in North America for three consecutive quarters among next-gen consoles.” Xbox also had its best fiscal year in terms of revenue, at about $16.2 billion for the entire fiscal year. However, Microsoft’s guidance for the first fiscal quarter of 2023 shows revenue from games and Xbox content and services declining again next quarter.
4 million people have tried Fortnite on Xbox Cloud Gaming. Photo by Vjeran Pavic / The Verge
Last quarter, Microsoft revealed that 10 million people used the company’s Xbox Cloud Gaming service, and that’s undoubtedly grown even more thanks to Fortnite now being the only game that’s free to stream on the service. “Over 4 million people have watched the stream [Fortnite] to date, including over 1 million that were new to our ecosystem,” Nadella explains.
Microsoft hasn’t provided an update to Xbox Game Pass subscribers this quarter after the service hit 25 million in January following the holiday releases of Age of Empires IV, Forza Horizon 5 and Halo Infinite.
Microsoft also did not discuss further today its planned acquisition of Activision Blizzard for $68.7 billion. The purchase is expected to close in fiscal 2023, and Microsoft will publish franchises such as Warcraft, Diablo, Overwatch, Call of Duty and Candy Crush.
Outside of gaming and Windows, Microsoft’s Office, cloud and server products continue to grow at an impressive pace. Revenue from commercial Office products and cloud services increased 9 percent this quarter, and Office users increased 9 percent year-over-year. Microsoft 365 user subscriptions are now 59.7 million as Microsoft continues to tempt users to Office subscriptions and services like Microsoft Teams.
Microsoft’s cloud services continue to grow. Image: Microsoft
Revenue from Microsoft’s server products and cloud services also jumped 22 percent year-over-year, as usual thanks to a 40 percent increase in revenue from Azure and other cloud services.
LinkedIn continues to grow at Microsoft, thanks to ad demand. LinkedIn’s revenue rose 26% this quarter, which Microsoft attributed to its Talent Solutions and Marketing Solutions businesses. Search and news ad revenue also increased 15 percent year-over-year.
These latest results arrive after Microsoft was forced to cut its guidance for the quarter in June and the company cited unfavorable currency exchange rates. The dollar is strong against a number of currencies at the moment amid geopolitical tensions and inflation. Microsoft is affected when it converts foreign currency into dollars. Now Microsoft is also seeing impacts from a softening PC market and even reduced advertising spending as the economic outlook looks increasingly uncertain.
Update, July 26 4:45 PM ET: The article has been updated with comments from Microsoft.
Update, July 26 6:30 p.m. ET: The article has been updated with comments from Microsoft’s earnings call.
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