Monday, September 20, 2021

Microsoft reports weaker Surface and Windows revenue amid global chip shortage

Microsoft today announced the fourth quarter of fiscal 2021 financial results. It reported revenue of $46.2 million and net income of $16.5 million. The revenue is up 21 per cent, while net income is up 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.

The PC market saw its first significant growth in 10 years earlier this month. There were signs that sales of laptops and PCs could slow down due to a global shortage of chips. Microsoft’s Windows results this quarter reflect that.

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

Windows OEM revenue has declined by three percent, in what Microsoft blames on “supply chain constraints. Windows OEM Pro revenue has also fallen by 4 percent.

However, revenue from cloud services and Windows commercial products has increased by 20 percent. 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 plans to increase the PC market by introducing Windows 11. The new operating system is expected to be available on new devices in October. Windows 11 is a visual overhaul of the operating system that includes a new Start menu and updated design. It also simplifies 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 Paic / 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. As expected, hardware revenue has increased 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 that Xbox Game Pass subscriptions have grown, and first-party titles revenue has declined by four percent. This is in contrast to the declines in third-party title revenues during a strong quarter last year.

After revealing 18 million subscribers in January, Microsoft has not revealed new Game Pass numbers. Microsoft had been regularly sharing Xbox Game Pass numbers for the past year but has now gone two quarters between any updates.

Microsoft 365 continues to grow 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 has increased 20 percent and Office consumer revenues has increased 18%. The number of Microsoft 365 subscribers overall has risen to 51.9million, a 22 percent increase over the previous year.

This quarter, revenue from cloud services and servers grew by 34 percent. Azure alone grew 51 percent. Overall revenue for Microsoft’s Intelligent Cloud business was $17.4 billion, 37 percent of Microsoft’s total revenue.

Microsoft continues to see strong growth in LinkedIn. LinkedIn revenue has increased by 46 percent over the past year, thanks to stronger advertising demand following the pandemic. Microsoft says LinkedIn sessions have grown 30 percent, “with record engagement.” Search advertising revenue is also up 53 percent.

All of this has led to 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 27, 2006 at 6:15 ET: Article updated with comments from Microsoft’s earnings call.

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