Microsoft 2023 Q1: OEM revenue drop, cloud income growth, Xbox price increase possibility, and more

Microsoft finally released the first quarter of its 2023 financial results, and scrutinizing it shows a lot of interesting news and possibilities for the company’s future.

To start, the report shows the tech giant earned a net income of $17.6 billion and $50.1 billion in revenue. Compared to past reports, Microsoft’s revenue increased by 11%, while its net income fell by 14%. This only means the company’s profits during the quarter weren’t that good. A huge factor that affected this was the decline in the PC sales of the company, which it said was a “continued deterioration in the PC market.” Specifically, it pertains to the 15% decrease in the original equipment manufacturer (OEM) revenue of Windows, which the PC manufacturers provide to Microsoft in order to use Windows in their products. Microsoft believes it could worsen in the next quarter, which could lead to a 30% drop. The same percentage is expected from the device revenue of Microsoft, which is made of HoloLens, Surface devices, and other computer accessories (Xbox consoles excluded), though it grew 2% in the said quarter. Interestingly, while there was an obvious and continuous reduction in computer sales, Microsoft CEO Satya Nadella said that the monthly active Windows device usage grew by almost 20% compared to the pre-pandemic era.

On a positive note, the company’s cloud revenue contributed $25.7 billion in revenue in this quarter’s earnings report. In connection with that, Microsoft 365 consumer subscriptions gained 61.3 million growth while Office Consumer products and cloud services revenue increased by 7%. Additionally, LinkedIn revenue increased 17% as Dynamics products and cloud services revenue increased 15%. Microsoft also experienced some gains in terms of LinkedIn revenue, which is up 17 percent year over year. GitHub also contributed positively to Microsoft by now reaching annual recurring revenue of $1 billion and over 90 million active users, compared to its $200 to $300 million revenue and around 28 million active users during acquisition.

Meanwhile, Microsoft’s gaming revenue saw a small growth. According to Microsoft, the Xbox division has a 4% increase in overall revenue (thanks to 13% growth in Xbox hardware), though the game content and services revenue fell by 3%. Despite this, the report showed that Xbox Cloud Gaming is growing, bringing last year’s 10 million streamer population to 20 million. And while Microsoft’s plan to build an Xbox mobile gaming store could help in the future in further growing the number, it is still early to say since there are two giants to handle in this area, Google and Apple.

On the other hand, Microsoft Gaming CEO Phil Spencer hinted during a guesting WSJ Tech Live that there is a possibility of increasing Xbox Game Pass or its Xbox console prices in the future. A bit surprising, indeed, given that Microsoft repeatedly underscored in recent news that they wouldn’t be doing it yet though it seems inevitable, especially with the things that happened in the first quarter of its 2023 report. Now, it could be the start of that change.

“For us running the business, we have to look at the return on our business, the cost of the business. We’ve held price on consoles, and held price on games, and our subscription. I don’t think we’ll be able to do that forever.” Spencer said. “I do think that at some point, we’ll have to raise some prices on certain things, but going into this holiday, we thought it was really important to maintain the prices that we have because consumers, right now, are more uncertain than they have been in a long time.”

Microsoft made a clearer explanation for this, saying its cloud provision is being affected by the increasing energy costs in Europe. Specifically, this could translate to up to $800 million, which could be too much for Microsoft to handle in the future.