Wednesday, January 29, 2020

Microsoft’s Office, Surface, and cloud businesses lead Q2 results

Illustration by Alex Castro / The Verge

Microsoft posted the second quarter of its 2020 financial results today, reporting revenue of $36.9 billion and net income of $11.6 billion. Surface and Office are both up, and revenue from Windows licenses has also increased just as Windows 7 support comes to an end. Gaming revenue is down a massive 21 percent, and Microsoft is blaming some of that on a strong quarter of a third-party game last year.

Microsoft’s Surface revenue jumped massively during the same quarter a year ago, on the back of a Surface Pro 6, Surface Laptop 2, Surface Studio 2, and Surface Headphones launch. It pushed Surface closer to a $2 billion business. This year, Surface revenue has also increased by 6 percent to $1.9 billion.

 Photo by Vjeran Pavic / The Verge
Surface Pro X

Microsoft launched its new Surface Pro X device with an ARM-based Qualcomm SQ1 processor inside, and also refreshed its typical Surface lineup. The Surface Pro 7 got the latest Intel processors and USB-C, while the Surface Laptop 3 got a new 15-inch model (with AMD processors), USB-C, and options for metal or fabric finishes.

Microsoft is planning to launch its new Surface Earbuds in the spring, and the company will likely unveil new Surface Book and Surface Go models this year, alongside its plans to launch the new dual-screen Surface Neo and Surface Duo devices.

Over on the gaming side, Microsoft also has a big year ahead for its Xbox business. While we wait for the new Xbox Series X console to launch later this year, overall gaming revenue has decreased 21 percent for the recent quarter. Microsoft notes that Xbox content and services revenue also decreased by 11 percent, primarily due to a “third-party title” (likely Fortnite or Red Dead Redemption 2) performing better last year. Subscription growth has partially offset this decrease, but clearly the third-party game boosted Xbox content revenue last year.

While revenue has decreased in gaming, it’s no surprise as Microsoft prepares to launch a new Xbox console and is investing in efforts like Xbox Game Pass for its gaming business over the long term. Some of these bets simply won’t pay off immediately in quarterly revenue.

Microsoft is also planning to launch its xCloud game streaming service this year, and it looks like it will likely be bundled into some type of subscription with Xbox Game Pass. Public trials are underway, and Microsoft has steadily been adding plenty of new titles for beta testers to try out. Windows 10 support and PS4 controller support are both coming this year, too.

Windows 10 REVIEW embargoed
Windows 10

It was also an interesting quarter for Windows. Microsoft ended support for Windows 7 earlier this month, and it has helped push the PC market to its first year of growth since 2011 as businesses and consumers upgrade. Both Windows OEM Pro and non-Pro was up in the recent quarter, with Pro revenue jumping by a massive 26 percent that’s to what Microsoft calls “healthy Windows 10 demand” for Windows 7 upgrades. Microsoft 365 agreements with businesses also pushed commercial products and cloud revenue up by 25 percent this recent quarter.

The real story of Microsoft’s earnings, as always, is in the company’s Office and cloud businesses. Office Commercial products and cloud services revenue increased 16 percent in the recent quarter, and even Office consumer revenue is up 19 percent with Office 365 consumer subscriptions growing to 37.2 million.

Overall revenue in what Microsoft calls “Intelligent Cloud” was $11.9 billion, an increase of 27 percent year-over-year. Azure itself grew 62 percent, and server products and cloud services revenue is up 30 percent.

Microsoft’s three main business areas are as follows:

  • Office, LinkedIn, Dynamics (Productivity and Business Processes) - $11.8 billion, an increase of 17 percent
  • Azure, server products, enterprise services (Intelligent Cloud) - $11.9 billion, an increase of 27 percent
  • Windows, Surface, Xbox and gaming, Bing ads (More Personal Computing) - $13.2 billion, an increase of 2 percent

It’s clear that most of Microsoft’s growth is coming from Office, Azure, and commercial cloud services. While “More Personal Computing” has the most overall revenue, its growth is far lower due to its established businesses like Windows and Xbox. Once again, Microsoft’s revenue is spread across a variety of big businesses, and the company isn’t fully reliant on any individual business for a majority of its revenue.

Microsoft will now hold a conference call for financial analysts at 5PM ET, and we’ll update this article with any relevant information.

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