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Microsoft reports weaker Surface and Windows revenue amid global chip shortage

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Cloud and Office save the revenue day

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Illustration by Alex Castro / The Verge

Microsoft posted the fourth quarter of its fiscal 2021 financial results today, reporting revenue of $46.2 billion and a net income of $16.5 billion. Revenue is up 21 percent, and net income has increased by 47 percent. While cloud and Office services have boosted Microsoft’s revenues, it’s clear that the global chip shortage is taking its toll elsewhere.

With the PC market experiencing its first big growth in 10 years earlier this year, there were some signs recently that laptop and PC sales could be starting to slow again amid a global chip shortage. Microsoft’s Windows results this quarter reflect that.

The Surface Pro 7 Plus has been on sale for six months now.
Photo by Tom Warren / The Verge

Windows OEM revenue has declined by three percent, in what Microsoft blames on “supply chain constraints. Windows non-pro OEM revenue also declined four percent, with Windows OEM Pro revenue also down, by 2 percent.

Windows commercial products and cloud services revenue has increased 20 percent, though. This includes businesses opting for Microsoft 365, with multi-year agreements and reflects the company’s push towards its bundling of Office and Windows.

Microsoft is now planning to boost the PC market with the introduction of Windows 11, which is expected to ship on new devices in October. Windows 11 is a visual overhaul to the operating system, with a new Start menu, updated design, and an overall simplification of Windows.

This recent quarter is also the first time we’ve seen the new Surface Laptop 4 combined with sales of the Surface Pro 7 Plus affect overall Surface revenue at Microsoft. Surface revenue has decreased by 20 percent this quarter, “driven by supply constraints” and a strong quarter of Surface sales in the year prior.

Microsoft’s new Xbox Series consoles are now three quarters into sales.
Photo by Vjeran Pavic / The Verge

Microsoft’s Xbox Series X and Series S consoles are now on their third quarter of sales, after helping grow hardware revenue in recent months. Hardware revenue is up again, as expected, by 172 percent. “We’re all in on games,” said Microsoft CEO Satya Nadella during the company’s earnings call today. “The Xbox Series S and X are our fastest selling consoles ever, with more consoles sold life-to-date than any previous generation.”

Microsoft’s overall gaming revenue is up by 11 percent, but Xbox content and services revenue has declined by four percent. Microsoft mentions growth in Xbox Game Pass subscriptions and first-party titles offsetting declines from third-party title revenue during a strong quarter in the year prior.

Microsoft has not disclosed new Game Pass subscriber numbers, after the company revealed it had 18 million subscribers back in January. Microsoft had been regularly revealing Xbox Game Pass numbers over the past year, but it has now gone two quarters without any updates.

Microsoft 365 keeps growing on the consumer side.

While Microsoft’s Windows and Surface businesses took a hit this quarter, cloud services, Office, and LinkedIn have all seen impressive revenue growth. Office commercial revenue is up 20 percent, and Office consumer revenue up 18 percent. Overall Microsoft 365 consumer subscribers has also jumped to 51.9 million, a 22 percent increase year-over-year.

Server and cloud services revenue grew 34 percent this quarter, with Azure alone up 51 percent. Overall revenue for Microsoft’s Intelligent Cloud business was $17.4 billion, 37 percent of Microsoft’s total revenue.

LinkedIn continues to grow well for Microsoft, too. LinkedIn revenue is up 46 percent year-over-year, thanks to stronger advertising demand after a dip during the early stages of the pandemic last year. Microsoft says LinkedIn sessions have grown 30 percent, “with record engagement.” Search advertising revenue is also up 53 percent.

This has all resulted in LinkedIn becoming a $10 billion annual business for Microsoft. “In the past 3 years, gaming, security, and now LinkedIn, have all surpassed $10 billion in annual revenue,” said Nadella on the company’s earnings call today.

Update, July 27th 6:15PM ET: Article updated with comments from Microsoft’s earnings call.