Microsoft just published its third quarter financial results for 2023. The software company generated $52.9 billion in revenue and net income of $18.3 billion during the third quarter. Revenue increased by 7 percent, and net income increased by 9 percent. While Windows, Xbox, and Devices revenue took a hit this quarter, Microsoft’s cloud, desktop, and server businesses more than made up for weaknesses elsewhere.
Microsoft had a tough quarter for Windows and hardware revenue last quarter, and the third quarter isn’t much different. Windows OEM revenue, the price that computer manufacturers pay Microsoft to put Windows on laptops and PCs, fell 28 percent in the third quarter.
The PC market has performed particularly poorly, with both IDC and Canalys reporting PC and laptop shipments down about 30 percent year-over-year. The PC market woes have also affected Microsoft’s hardware revenue, which includes HoloLens and PC accessories rather than just Surface revenue. Hardware revenue fell 30 percent in the third quarter.
Despite the revenue decline, “Demand for PCs has been a little better than we expected,” Microsoft Chief Financial Officer Amy Hood says on today’s earnings call. Hood added that demand was higher than expected for the commercials. Microsoft now expects a similar quarter in the fourth quarter of fiscal 2023, where “Windows and PCs should be in the low to mid-20s,” Hood says.
However, hardware revenue does not cover Microsoft’s Xbox efforts. That was broken down into Xbox hardware revenue, which fell 30 percent this quarter along with a slight 3 percent increase in Xbox content and services revenue thanks to Xbox Game Pass growth. Overall, gaming revenue decreased by 4 percent.
Microsoft sold fewer Xbox Series S/X consoles during the holiday quarter than it did during the same period in 2022, and that appears to have continued into the most recent quarter. Microsoft blames most of the decline in Xbox revenue on “oversupply of the console” during the same quarter last year, so it looks like the company is still struggling with hardware supplies and possibly weak demand.
This works out to be the lowest quarter of Xbox revenue since Microsoft launched the Xbox Series X/S consoles in 2020. The decline in Xbox revenue isn’t particularly surprising given the lack of first-party games throughout 2022 to drive sales.
Despite the hardware decline, Microsoft CEO Satya Nadella says, “We set third quarter records for monthly active users and monthly active devices” for Xbox. Microsoft has nearly $1 billion in subscription revenue. Microsoft expects gaming revenue growth in the upcoming fourth quarter of fiscal 2023 “mid-to-high single-digit,” according to CFO Amy Hood along with “low-to-mid-teen Xbox services and content revenue growth” thanks to That’s in part to Xbox Game Pass and third-party content.
Microsoft is still not providing an update for Xbox Game Pass subscriber numbers. Microsoft said Xbox Game Pass grew to 25 million subscribers in January 2022, but we haven’t had an update in over a year now. Microsoft Gaming CEO Phil Spencer revealed in October that Xbox Game Pass growth had stalled on the console side of the service, with Microsoft making a bigger push toward PC Game Pass earnings instead.
PC Game Pass launched in 40 new markets earlier this month, bringing the total to the 86 countries that now have access to Game Pass. Microsoft is still looking to push Game Pass to mobile devices, and a key part of that is the company’s proposed $68.7 billion acquisition of Activision Blizzard.
UK regulators are due to make their final decision on the takeover tomorrow morning after months of backtracking. It is a major decision that will determine the future of this giant deal. CMA has already sided with Microsoft Call of duty about PlayStation’s concerns, and the panel of experts conducting the investigation will now deliver its verdict on how the acquisition will affect the broader cloud gaming market. The European Union is due to issue its ruling on the deal next month, while the Federal Trade Commission has filed a lawsuit to try to block Microsoft from acquiring Activision Blizzard.
Weakness in Xbox, hardware and Windows OEM revenue meant Microsoft’s total personal computing unit saw revenue of $13.3 billion, down 9% year-over-year.
Revenue in Office products, the cloud, and servers, though, was offset by Xbox, hardware, and Windows. Server products and cloud services revenue grew 17 percent, with Azure revenue increasing 27 percent. Microsoft says this growth has been driven by “strong demand for our consumption-based services.”
Microsoft 365 consumer subscribers grew 12 percent this quarter, to 65.4 million subscribers. This is also an increase from the 63.2 million reported by Microsoft last quarter. Microsoft launched a new $1.99 per month Microsoft 365 Basic subscription earlier this year, so this has clearly helped keep subscriber numbers up. Microsoft is also pushing the Microsoft 365 brand into Microsoft Office, which should help raise awareness.
Commercial office products and cloud services revenue also grew 13 percent this quarter, with commercial revenue for Office 365 increasing 14 percent. LinkedIn also saw “record engagement” this quarter, according to Microsoft. Sessions grew 15 percent on the social network, and revenue rose 8 percent.
Nadella also revealed on Microsoft’s earnings call that Microsoft Teams now has 300 million monthly active users, up from 280 million in January. Microsoft just released its latest Teams client that improves memory usage and performance, with plans to roll it out broadly later this year.
Nadella also provided an update on the rollout of Microsoft Copilot for Business, with more than 10,000 organizations signing up. We expect to hear more about Microsoft’s plans for AI at Build next month. “In a few weeks we will be having our Build conference, and we will be sharing how we are building the most powerful AI platform for developers,” says Nadella.
Update, April 25th 6:10 PM ET: The article has been updated with comments from Microsoft’s Q3 2023 earnings call.