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Microsoft reports strong Q4 earnings as Surface and gaming both up

Microsoft reports strong Q4 earnings as Surface and gaming both up

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Illustration by Alex Castro / The Verge

Microsoft posted the fourth quarter of its 2018 financial results today, reporting revenue of $30.1 billion and net income of $8.9 billion. Revenue has increased 17 percent year over year, and net income is up an impressive 35 percent. Microsoft’s Office and cloud offerings continue to fuel the company’s growth, but both the Surface and gaming businesses are up this quarter, too.

Surface revenue has jumped 25 percent year over year this quarter to $1.1 billion, “driven by strong performance of the latest editions of Surface” says Microsoft. The billion dollar target was important this quarter, as it means Surface has now ended the financial year as a billion dollar business. Microsoft recently unveiled the new Surface Go, but the smaller 10-inch tablet doesn’t go on sale until next month. Microsoft has relied on existing Surface devices to fuel growth this quarter, as the company has not yet launched refreshed models this year.

Microsoft’s Xbox One X console
Microsoft’s Xbox One X console
Photo by James Bareham / The Verge

Microsoft’s gaming business is growing as it looks to the cloud

Microsoft’s gaming business is also growing, just as the company has unveiled its plans for game streaming. Gaming revenue increased 39 percent this quarter, alongside Xbox software and services revenue growth of 36 percent. Microsoft no longer reveals Xbox hardware sales, so it’s still not clear exactly how its consoles are contributing to the way it now reports its gaming business. Still, Xbox Live active users also grew to 57 million, thanks to users across Xbox One, Windows 10, iOS, and Android. Microsoft is now planning to unveil new Xbox console bundles next month at Gamescom in Germany.

PC sales are growing for the first time in six years, and Microsoft’s Windows revenue hints that the business spending referenced by analyst firms IDC and Gartner has helped. Windows OEM Pro revenue is up 14 percent year over year, while non-pro versions of Windows OEM licenses declined by 3 percent. It’s clear that Windows revenue growth is still coming from business / consumer spending on high-end pro machines than those at the more affordable part of the market. Microsoft admits its non-Pro revenue decline was “driven by continued pressure in the entry level price category.” Windows commercial products and cloud services revenue is also up 23 percent, thanks to more multi-year agreements with businesses.

LinkedIn revenue continues to push in the right direction for Microsoft after its $26 billion bet on acquiring the business-focused data and social networking company. LinkedIn revenue is up 37 percent, to $1.4 billion.

Microsoft’s search advertising revenue from Bing has been growing steadily over the course of the financial year. Each quarter it has consistenly grown by around 15 percent, and Q4 is no exception. Search revenue is up 17 percent, thanks to higher revenue per search and an increase in search volume. While many are quick to dismiss Microsoft’s Bing search engine, Microsoft might have a unique opportunity to capitalize on its search engine after the EU ruled to force Google to unbundle its search app from Android. Phone makers will certainly be looking for opportunities to bundle rival search engines and browsers in the coming months.

microsoft office stock
Microsoft Office

Office continues to be a strong business for Microsoft

Office continues to be an understandably strong business for Microsoft as the company continues to transition consumers and businesses to the cloud. Office 365 now has 31.4 million subscribers, and Office consumer and cloud services revenue has grown 8 percent as a result. On the commercial side, Office and cloud services revenue grew 10 percent thanks to Office 365 commercial growth of 38 percent. 

Elsewhere, Microsoft’s server products and cloud revenue grew 26 percent, driven by Azure revenue growth of 89 percent. Microsoft continues to push businesses to its Azure cloud, and the company recently unveiled a new five-year tech partnership with Walmart to use Microsoft 365 and Azure cloud services across the retail giant.

“We had an incredible year, surpassing $100 billion in revenue as a result of our teams’ relentless focus on customer success and the trust customers are placing in Microsoft,” says Microsoft CEO Satya Nadella. “Our early investments in the intelligent cloud and intelligent edge are paying off, and we will continue to expand our reach in large and growing markets with differentiated innovation.”