Microsoft Q2 2024: gaming takes over Windows

Microsoft just posted the second quarter of its 2024 fiscal financial results. The software maker made $62 billion in revenue and a net income of $21.9 billion during Q2. Revenue is up 18 percent, and net income has increased by 33 percent.

This is the first quarter Microsoft is reporting earnings as a $3 trillion company and also the first time the company has reported additional revenue from its Activision Blizzard acquisition. This additional revenue has made gaming Microsoft’s third largest business this quarter, above Windows.

Office and cloud revenue still reign supreme, contributing nearly 60 percent of Microsoft’s overall revenue. While Windows OEM revenue is bouncing back, devices revenue from Surface sales has continued to decline this quarter.

The Surface Laptop Studio 2.
Photo by Amelia Holowaty Krales / The Verge

Microsoft did warn that devices revenue would decline against this quarter, and it’s down 9 percent. Microsoft CFO Amy Hood said on an earnings call today that this was better than the company’s expectations, thanks to “stronger execution in the commercial segment.” Devices revenue is expected to decline again in Q3, 2024, in the “low double digits.”

Microsoft CEO Satya Nadella said last quarter that “PC market unit volumes were at roughly pre-pandemic levels,” so it’s likely that Surface simply hasn’t recovered as well. That’s despite Microsoft launching its new Surface Laptop Studio 2, Surface Laptop Go 3, and even a Surface Go 4 late last year. Microsoft’s devices revenue also includes HoloLens and PC accessories, and revenue has been declining for more than 12 months now.

Windows is doing better, though. OEM revenue, the price that PC manufacturers pay Microsoft to put Windows on laptops and PCs, is up 11 percent this quarter. Windows OEM revenue has suffered throughout Microsoft’s entire 2023 fiscal year, but this is now two consecutive quarters of growth compared to five consecutive quarters of declines for devices revenue. Hood is expecting Windows OEM revenue to be “relatively flat” next quarter.

Xbox Series S / X devices.
Photo by Tom Warren / The Verge

Speaking of devices, all eyes are on the Microsoft Gaming division for the company’s latest earnings. Microsoft is now reporting Activision Blizzard revenue as part of its gaming unit, bolstering overall revenues in Xbox content.

Xbox content and services revenue, which includes Xbox Game Pass, is up by a massive 61 percent. That’s largely because of the Activision Blizzard revenues, so it’s difficult to understand immediately how Xbox did without this giant addition.

Microsoft says the net impact from the Activision Blizzard acquisition is just over $2 billion in revenue, but the cost of integration, transaction costs, and other costs of revenue all total $930 million. With other operating expenses ($1.59 billion) it works out to an operating loss of $440 million.

While the Activision Blizzard acquisition is complete, Microsoft laid off 1,900 workers in its gaming division earlier this month — primarily affecting Activision Blizzard employees. Microsoft has also been overhauling its Xbox management in recent months and even named a new Blizzard president earlier this week.

Xbox hardware is also up by 3 percent, after the all-important holiday quarter. Microsoft ran a number of Xbox Series X promotions during the holidays in the US, but that doesn’t appear to have resulted in a big boost in sales and revenue. Hood blamed a “weaker than expected console market. Overall Microsoft’s gaming revenue is up 49 percent, mainly boosted by better than expected Activision Blizzard revenues.

It’s an important quarter for gaming at Microsoft as it’s now the company’s third largest business. Gaming contributed $7.11 billion in revenue for the quarter, more than the $5.26 billion from Windows, but behind the $13.47 billion from Office and cloud services and the giant $23.95 billion from server products and cloud services.

Once again, there are no fresh 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 two years now. Nadella did reveal in last quarter’s earnings call that Starfield had contributed to Xbox Game Pass growth. “On launch, we set a record for the most Game Pass subscriptions added on a single day ever,” he said.

Microsoft CFO Amy Hood expects overall gaming revenue to grow in the low 40 percent region, with 45 points due to Activision Blizzard. That means the rest of Microsoft’s gaming efforts revenue could be down next quarter. Xbox content and services in Q3 is expected to be “low to mid 50” percent, driven by around 50 points of net impact from the Activision Blizzard acquisition. “[Xbox] hardware revenue will decline year-over-year,” for Q3, says Hood.

Microsoft’s Office sales are still going strong in the cloud.
Image: Microsoft

Microsoft’s Office division is once again performing well, with productivity and business processes total revenue up 13 percent year-over-year. This was mainly driven by Office 365, with commercial seat growth up 9 percent.

Microsoft 365 Consumer subscribers have now reached 78.4 million, nearly 16 percent up year-over-year. Microsoft launched a $1.99 a month Microsoft 365 Basic subscription last year, which continues to boost overall numbers of subscribers.

Office commercial products and cloud services revenue also grew by 15 percent year over year thanks to Office 365 Commercial revenue growth of 17 percent. That means Microsoft ended this quarter with more than 400 million Office 365 paid commercial seats, a clear sign that the company continues to convert businesses to cloud-powered versions of Office.

Microsoft has also been selling Copilot for Microsoft 365 in recent months, but the company isn’t detailing how selling AI add-ons is impacting its revenue, though. “We’ve moved from talking about AI to applying AI at scale,” says Microsoft CEO Satya Nadella, in the company’s earnings release. “By infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains across every sector.”

The bigger impact for Microsoft’s AI ambitions will come from its server-side investments with Azure OpenAI. “Azure and other cloud services was up 30 percent year-over-year… those growth rates include a six point contribution from our AI services,” says James Ambrose, Microsoft’s director of investor relations, in a call with The Verge.

Microsoft’s overall intelligent cloud business generated $25.9 billion in revenue this quarter, a 20 percent year-over-year increase. Most of that revenue was driven by Azure.

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

By 111 Tech

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