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Microsoft’s Q1 earnings boosted by cloud and Office as Surface and Xbox stall

Microsoft’s Q1 earnings boosted by cloud and Office as Surface and Xbox stall


No new Surface or Xbox hardware in recent quarter

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Illustration by Alex Castro / The Verge

Microsoft posted the first quarter of its 2020 financial results today, reporting revenue of $33.1 billion and a net income of $10.7 billion. Revenue is up 14 percent, and net income has increased by 21 percent. Once again, it’s Microsoft’s cloud and Office revenues that have pushed the company to solid earnings, as both Surface and overall gaming revenue has decreased.

Microsoft’s Surface revenue performed well in this same period last year, thanks to a boost from the introduction of the lower-cost Surface Go. During this quarter Microsoft didn’t refresh or release any Surface products, and revenue has dipped 4 percent as a result. Microsoft blames the “timing of product lifecycle transitions” for the miss.

New Surface Laptop 3 devices
New Surface Laptop 3 devices
Photo by Amelia Holowaty Krales / The Verge

Microsoft has just unveiled and launched updated Surface Pro 7 and Surface Laptop 3 models, complete with USB-C support. The software maker is also releasing the Surface Pro X next month and its new Surface Earbuds later this year. Next quarter should be an interesting time for Surface revenue as a result.

Over on the gaming side, revenue has also dropped by 7 percent. That’s overall gaming revenue, and Microsoft has changed the way it reports Xbox revenue recently. It now splits out its Xbox content and services growth separately, which has remained “relatively unchanged” from the same period last year. That’s surprising given the company’s focus on subscriptions like Xbox Live and Xbox Game Pass, and we’ll need to look to the next quarter to see if that will start to grow and prove these subscription bets are worthwhile.

On an earnings call with investors, Microsoft CEO Satya Nadella revealed that Minecraft is “stronger than ever” for the company, with record revenue this quarter. That could be part of the “Pewdiepie Effect,” as Minecraft has been surging once again on YouTube thanks to Felix “PewDiePie” Kjellberg’s recent videos. Microsoft CFO Amy Hood also revealed that Gears 5 and Xbox Game Pass were driving revenues in Q2, but this was offset against a popular third-party game last year. Microsoft is now expecting overall gaming revenue to decline again next quarter, and it could dip as much as 20 percent or more due to a lack of Xbox console sales.

Microsoft just launched its Project xCloud game streaming preview, with four games initially available in the US, UK, and Korea. It’s early days for this service, and the company has not yet revealed pricing or even a release date for the full xCloud service. Microsoft is also planning to make its Xbox Elite 2 controller available on November 4th, priced at $179.99.

An Xbox Elite 2 controller
Xbox Elite 2 controller
Photo by Tom Warren / The Verge

We’re now edging closer to the Windows 7 support cutoff on January 14th, and Microsoft is seeing some strong Windows licensing growth as a result. Windows OEM Pro revenue grew 19 percent, which Microsoft says is ahead of the overall commercial PC market. Windows 7’s end of support is driving a lot of this, and a renewed focus on upgrades to Windows 10. Windows OEM non-Pro revenue declined by 7 percent, and Microsoft once again blames continued pressure from low-cost rival hardware for consumers.

Microsoft 365 agreements (a combination of Office and Windows) also seem to be picking up. Windows commercial products and cloud services revenue has jumped 26 percent, as businesses look to modernize their license agreements and services. On a call with investors, Microsoft CFO Amy Hood revealed the company is expecting “OEM revenue growth should be ahead of the PC market” in Microsoft’s Q2 2020 fiscal results.

Office is the real star of the show in Microsoft’s Q1 earnings. Office 365 commercial revenue is up 13 percent year over year, and Microsoft now has 200 million Office 365 commercial subscribers. That’s a nearly 30 percent jump from the 155 million reported last year, and it shows that Microsoft is really capturing businesses as they move to the cloud.


Over on the consumer side, 35.6 million people now subscribe to Office 365 for consumers, up from 32.5 million last year. Revenue has also grown by 5 percent, but it’s clear most of Microsoft’s Office growth is naturally coming from the commercial side.

Cloud is the next big highlight of Microsoft’s Q1. Server products and cloud services are up 30 percent year over year, with Azure revenue itself up 59 percent. Microsoft continues to battle rivals like Amazon, Salesforce, Google, and others for businesses to adopt cloud services, and it’s forming partnerships with some major players.

Over the past year Microsoft has secured cloud partnerships with SonySamsung, Kroger, and Albertsons. The partnerships follow a big five-year deal with Walmart to provide cloud services that was announced last year.

While Surface and gaming revenue clearly stalled this quarter, Microsoft’s overall revenue split across its various businesses is still equal. Productivity and business processes revenue was $11.1 billion, which includes Office commercial and consumer, LinkedIn, and Dynamics. Intelligent cloud came in at $10.8 billion, which includes server products, cloud services, and enterprise services. Revenue in Microsoft’s more personal computing bucket was $11.1 billion, which includes Windows, search, Xbox, and Surface.

All three of these overall revenue groups are roughly even at around $11 billion each, which is impressive given the diversity of businesses that Microsoft operates.

Update, October 23rd 6PM ET: Article updated with comments from Microsoft CEO Satya Nadella and Microsoft CFO Amy Hood on an investors call.