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Microsoft Q1 2023: profits and Windows down but Xbox and devices up

Microsoft Q1 2023: profits and Windows down but Xbox and devices up

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Microsoft’s profits are down 14 percent this quarter and Windows OEM revenue is down as the PC industry stumbles

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Illustration of Microsoft’s Windows logo
Alex Castro / The Verge

It’s a new financial year for Microsoft, and the Windows and Xbox maker has just posted the first quarter of its 2023 financial results today. Microsoft made $50.1 billion in revenue and a net income of $17.6 billion during Q1. Revenue is up 11 percent but net income has decreased by 14 percent — meaning profits are down at Microsoft this quarter.

While there were signs of PC declines earlier this year, it’s clear this quarter that the PC is very much in decline, and that has impacted Microsoft’s Windows results. PC shipments experienced another big decline in the recent quarter — 15 percent, according to IDC. Geopolitical tensions, inflation, and continued supply chain challenges are all contributing to PC sales issues, alongside softer demand.

The Surface Pro 9 in laptop mode seen from above with the stylus beside it. The screen displays The Verge homepage.
The Surface Pro 9 launched today.
Photo by Amelia Holowaty Krales / The Verge

Microsoft’s Windows OEM revenue, the price PC manufacturers pay Microsoft to put Windows on machines, fell 15 percent in Q1, driven by what Microsoft describes as a “continued deterioration in the PC market.”

Despite the challenges, IDC says shipment volumes “remain well above pre-pandemic levels,” so it’s not all doom and gloom for Windows and PCs just yet. “Despite the drop in PC shipments during the quarter, Windows continues to see usage growth,” says Microsoft CEO Satya Nadella on an earnings call. Nadella says there are nearly 20 percent more monthly active Windows devices than before the pandemic.

That doesn’t mean it’s going to get better next quarter, though. Microsoft is forecasting a Windows OEM revenue decline in Q2, 2023 in the high 30 percent mark.

Microsoft’s Surface devices are still doing well, too. While there weren’t any big new Surface launches in Q1, Surface revenue is up by 2 percent. Microsoft now declares this as “devices revenue,” rather than just Surface, as it now includes revenue from HoloLens and PC accessories.

That devices revenue is expected to drop next quarter though. Microsoft expects a big drop of around 30 percent in Q2, 2023 fiscal earnings. Microsoft just recently announced new Surface Pro 9, Surface Laptop 5, and Surface Studio 2 Plus devices, which will likely renew interest in Surface in the coming months.

Microsoft’s white Xbox Series S sits alongside a bigger and black Xbox Series X on a wooden coffee table in a living room
Microsoft’s Xbox Series S and X hardware.
Photo by Tom Warren / The Verge

Microsoft’s other hardware, Xbox, is up this quarter. Hardware revenue increased by 13 percent alongside a 3 percent dip in Xbox content and services revenue. Microsoft says this was driven by “declines in first-party content and in third-party content, with lower engagement hours and higher monetization, particularly offset by growth in Xbox Game Pass subscriptions.” Overall, gaming revenue at Microsoft “grew slightly” year over year, which means it was flat.

Interestingly, Nadella revealed that “nearly half of the Xbox Series S buyers are new to our ecosystem.” That explains Microsoft’s investment in the $299 Xbox Series S. It’s an Xbox Game Pass console for people who have never touched an Xbox before.

Speaking of Xbox Game Pass, Microsoft once again hasn’t provided an update on Game Pass subscription numbers this quarter after the service grew to 25 million in January following the holiday releases of Age of Empires IV, Forza Horizon 5, and Halo Infinite.

In gaming, we saw usage growth across all platforms, driven by strength off console,” says Nadella. “PC Game Pass subscriptions increased 159 percent year over year.” Microsoft says more than 20 million people have streamed games on Xbox Cloud Gaming, up from 10 million earlier this year. It’s clear that Fortnite deal has helped boost Microsoft’s cloud gaming efforts.

All eyes are now on Microsoft’s planned $68.7 billion acquisition of Activision Blizzard that it intends to close in its fiscal 2023 year. While regulators in Brazil and Saudi Arabia have approved the deal, Microsoft is battling UK regulators and Sony over Call of Duty, Xbox Game Pass, and much more.

The European Commission has started reviewing Microsoft’s Activision deal and has set a November 8th provisional deadline. Microsoft isn’t sharing anything more on the deal and said last month that it’s “progressing in line with the expected regulatory schedule and process, and we remain confident that the acquisition will close in fiscal year 2023.”

Microsoft has started notifying Office users of the upcoming brand changes
Microsoft Office is becoming Microsoft 365 soon.
Image: Microsoft

Microsoft Office, cloud, and server products are always the big revenue drivers these days, and nothing has changed here for Q1. Microsoft highlighted cloud revenue as the big driver of this quarter’s earnings, with Microsoft cloud hitting $25.7 billion in revenue, up 24 percent year over year. Office commercial and consumer product divisions were both up 7 percent, helping push Microsoft’s productivity business to $16.5 billion in revenue.

Microsoft 365 consumer subscriptions have also grown again this quarter, up 13 percent to 61.3 million. Microsoft continues to promote its subscription offerings in Windows and on new laptops that are shipped by third-party OEMs. Microsoft Office will soon become Microsoft 365 in a major brand overhaul, so that will likely help drive growth around the company’s Office-based subscriptions.

Other surprises in Microsoft’s latest quarter are LinkedIn revenue up 17 percent year over year, and search and news advertising revenues up 16 percent. LinkedIn grew thanks to strength in the talent solutions side of the business, and Nadella says there are now more than 150 million subscriptions to newsletters on LinkedIn.

The search and advertising bump was “driven by higher search volume and Xandr.” Nadella says Microsoft has “expanded the geographies we serve by nearly 4x over the past year.” Microsoft Edge may also be helping out with Bing search and advertising revenues. “Edge is the fastest growing browser on Windows and continues to gain share as people use built-in coupon and price comparison features to save money,” says Nadella.

Update, October 25th 6:10PM ET: Article updated with comments from Microsoft CEO Satya Nadella during an earnings call.