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Surface, Windows, and Xbox help drive Microsoft to strong Q3 earnings

Surface, Windows, and Xbox help drive Microsoft to strong Q3 earnings

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Illustration by Alex Castro / The Verge

Microsoft posted the third quarter of its 2019 financial results today, reporting revenue of $30.6 billion and net income of $8.8 billion. Revenue has jumped 14 percent year over year and net income has increased 19 percent. Cloud and Office continue to push Microsoft’s revenue in the right direction, but Xbox, Surface, and Windows have held their own this quarter to help drive some solid results.

Microsoft might not have launched any new Surface products in the recent quarter, but it’s still a strong quarter for the company’s hardware products after a busy holiday season. Surface revenue grew 21 percent year over year, up to $1.3 billion and likely reflecting demand for a range of Surface hardware. Microsoft revealed in its fiscal Q1 that Surface Book 2 and Surface Go were pushing sales, but the company launched its Surface Pro 6 and Surface Laptop 2 late last year, alongside the new Surface Studio 2 and Surface Headphones.

Microsoft’s gaming business continues to be a highlight of the company’s earnings. Gaming revenue is up 5 percent this quarter, although this was offset by Xbox software making up for lower Xbox hardware revenue.

Photo by James Bareham / The Verge

Microsoft still hasn’t set a date for its new xCloud game streaming service, despite Google unveiling its own Stadia game streaming service. Microsoft recently demonstrated xCloud publicly for the first time, and it’s promising trials of the service later this year. Microsoft’s gaming boss, Phil Spencer, has also promised the company will “go big” for E3.

While Windows was in the negative during the holiday season quarter, it has bounced back thanks to what Microsoft says is “better than expected Q3 commercial PC demand.” That means businesses have been upgrading machines in the recent quarter, probably pushed on by the fact that Windows 7 goes out of support next year.

Windows OEM Pro revenue is up 15 percent, which is a big jump, and even non-Pro revenue only declined 1 percent. Microsoft also says “improved chip supply” helped both consumer and commercial PC shipments. Microsoft recently started to notify Windows 7 users that the operating system will be out of support on January 14th, 2020. We’ll likely see a more stable PC market in the coming months as businesses and consumers move toward Windows 10.

Cloud and Office continue to drive big revenue for Microsoft

Microsoft’s consumer offerings continue to grow, but it’s the cloud and Office services that are pushing big growth in the company elsewhere. Office commercial products and cloud services revenue increased 12 percent year over year, and Microsoft now has more than 180 million active monthly Office 365 business users. There are 34.2 million people subscribed to Microsoft’s Office 365 service for consumers. On a call with investors, Microsoft CEO Satya Nadella also revealed that Outlook for iOS and Android has now passed 100 million users.

Server products and cloud services revenue also increased 27 percent, thanks to more growth in Microsoft’s Azure cloud services. Azure revenue alone grew 73 percent year over year, and continues to be the big driver for the company’s cloud efforts.

Unlike many other tech rivals, Microsoft has a very diverse business and revenue split for all of its products and services. Microsoft splits its businesses up into three main buckets, and they’re all roughly contributing the same amount of revenue this quarter (around 30 percent each).

“Productivity and Business Processes” makes up Office for business and consumer, along with LinkedIn and Microsoft’s Dynamics business. “Intelligent Cloud” includes Azure, server products, and enterprise services, and then finally it’s “More Personal Computing” that includes Windows, Xbox, and Surface.

Update April 24th, 6PM ET: Article updated with comments from Microsoft’s earnings call with investors.