In its latest earnings report, Microsoft highlighted strong performance in its cloud services and productivity solutions, but the gaming side of the business saw revenue fall significantly.
On Wednesday (29 January), Microsoft published its earnings report for its second fiscal quarter, which ended on 31 December 2019, showing revenue increased by 14pc to $36.9bn.
Compared to the corresponding period last year, Microsoft’s operating income increased by 35pc to $13.9bn, and its income increased by 38pc to $11.6bn. The company returned $8.5bn to shareholders in the form of share repurchases and dividends.
Microsoft CEO Satya Nadella said: “We are innovating across every layer of our differentiated technology stack and leading in key secular areas that are critical to our customers’ success.
“Along with our expanding opportunity, we are working to ensure the technology we build is inclusive, trusted and creates a more sustainable world, so every person and every organisation can benefit.”
Strengths in productivity and cloud services
Revenue in productivity and business processes was $11.8bn for the quarter, which marked an increase of 17pc. This included a 16pc revenue increase in Office commercial products and cloud services, and a 19pc increase in office consumer products and cloud services. The total number of Office 365 subscribers hit 37.2m.
LinkedIn’s revenue increased by 24pc, while revenue for Dynamics products and cloud services increased by 12pc, driven by a 42pc increase in Dynamics 365 revenue.
Commercial Cloud revenue was up 39pc year on year to $12.5bn, while revenue for Intelligent Cloud was up by 27pc to $11.9bn. Microsoft said that Azure’s revenue growth was up 62pc, but it did not disclose revenue figures. Additionally, Enterprise Services revenue increased by 6pc.
The personal computing side of Microsoft’s business has seen an increase too, with revenue up by 2pc to $12.2bn. The company said that Windows OEM revenue increased by 18pc, Windows commercial products and cloud services revenue increased by 25pc, and that Surface revenue increased by 6pc.
A bad quarter for Xbox
Microsoft confirmed that its quarterly gaming revenue fell by 21pc year on year, which was a drop of $905m for the company. Hardware revenue fell by 43pc, which may be explained by the company’s announcement of its next games console, the Xbox Series X, which is due for release later this year.
Xbox content and services revenue fell by 11pc, against a high prior year, which Microsoft said is “primarily from a third-party title”. Many assume this to be Fortnite, which has seen sales slow considerably over the last year.
While Fortnite’s base game is free of charge, the brand makes a significant amount of money through in-game purchases and downloadable content. Fortnite’s revenue slipped to $1.8bn in 2019, down from $2.4bn in 2018.
Microsoft CFO and executive vice-president Amy Hood predicted that gaming revenue will continue to decline in the next quarter, in the “low double-digit range”.
The good news
It wasn’t all negative for Xbox, as Nadella confirmed that Xbox’s Game Pass, which offers a Netflix-like on-demand service for access to a library of games, saw subscribers double in the latest quarter.
Xbox recently expanded Game Pass to PC, allowing PC gamers to access a catalogue of more than 100 games on Windows 10. Some of the games that Microsoft has included on its Game Pass for both PC and Xbox include The Outer Worlds, Halo: The Master Chief Collection and Rise of the Tomb Raider.
As the next iteration of the Xbox is set to be released in 2020, Microsoft’s Game Pass will likely be a deciding factor for many consumers torn between the Xbox Series X and Sony’s PlayStation 5, which is also set for release by the end of the year.
In 2020, we’ll also see Microsoft launch its new xCloud game streaming service, which will likely be bundled into a subscription package with Game Pass. Public beta tests are already underway, with Nadella revealing that “hundreds of thousands of people [are] participating in initial trials.”
Nadella added that Microsoft set a new record for Xbox Live monthly active users in the latest quarter.
Also on the horizon for Microsoft’s gaming business will be the introduction of support for PS4 controllers on Windows 10. Until this year, only PC-specific and Xbox controllers were compatible with PC.