In the third quarter of the 2024 fiscal year, Microsoft reported earnings. The company’s revenue reached $61.9 billion. This is a 17 percent increase. The net income was $21.9 billion, up by 20 percent.
For the second consecutive quarter, Microsoft has added revenue from buying Activision Blizzard. This briefly made gaming Microsoft’s third biggest business. However, gaming has now returned to fourth place. This is because revenue from Windows OEM was higher than anticipated this quarter.
Microsoft had a good quarter with Office and Microsoft Cloud revenues rising 23 percent from last year. However, overall gaming revenues only increased because of Activision Blizzard. Xbox hardware sales fell sharply this quarter. Revenue from devices like Surface also dropped again.
This quarter, revenue from Windows OEM increased by 11 percent compared to last year, which was unexpected. Microsoft had predicted it would stay roughly the same. This revenue comes from the fee that PC makers pay to use Windows on laptops and PCs.
It had declined in 2023 but has been improving in 2024. Microsoft plans to increase these revenues further over the summer. They will introduce what they call “AI PCs,” which use the newest Snapdragon chips from Qualcomm.
Microsoft is set to reveal new Surface devices equipped with Snapdragon X Elite and X Plus chips. This announcement will happen at a special AI and Surface event on May 20th. If these chips meet Qualcomm’s promises for performance and battery life, they could be the most significant change in CPUs since Apple introduced its own chips.
Microsoft anticipates a decrease in device revenue for the fourth quarter, with a drop around the mid-teens, as stated by CFO Amy Hood. They expect growth in Windows OEM revenue to be between low and mid single digits in the fourth quarter. This is because PC market volumes are likely to remain at levels seen before the pandemic.
This move currently involves only these games, but it seems to address a slowdown in Xbox Game Pass growth and Xbox console sales.
“We’re bringing four of our popular games to new platforms, including Nintendo Switch and Sony PlayStation for the first time,” stated Microsoft CEO Satya Nadella during today’s earnings call. “Earlier this month, we had seven games in the top 25 on the PlayStation Store, more than any other publisher.”
Despite some initial success with Xbox games on other platforms, sales of Xbox hardware fell by 31 percent this quarter. This significant drop follows a weak holiday season for Xbox sales last year. In its earnings report, Microsoft acknowledged that the decline was due to selling fewer consoles.
Gaming revenue increased by 51 percent overall, mainly due to earnings from Activision Blizzard, which added 55 points to the total increase. Without Activision Blizzard’s contributions, Microsoft’s gaming revenue would have actually dropped this quarter.
Activision Blizzard made $1.97 billion in revenue in Q3. However, costs related to integration and transactions, along with other expenses, amounted to $980 million. With additional operating costs of $1.34 billion, Activision Blizzard ended up with an operating loss of $350 million for the quarter.
Without Activision Blizzard, Xbox content and services revenue would have risen only 1 percent, showing that this major acquisition is significantly boosting Microsoft’s gaming income. It seems this trend will continue into the next quarter for Microsoft’s gaming sector.
Microsoft CFO Amy Hood mentioned that they anticipate a decrease in Xbox hardware sales next quarter. However, overall gaming revenue should grow in the low to mid 40 percent range, with Activision Blizzard contributing about 50 points to this growth.
Expected revenue from Xbox content and services is set to increase in the high 50 percent range in Q4, influenced by 60 points from Activision Blizzard.
Investors are keen to observe any revenue generated from Microsoft’s substantial investments in AI over the last year, particularly from Azure OpenAI. This service allows businesses to handle AI operations in the cloud.
Out of the 31 percent revenue increase for Azure and other cloud services, AI services accounted for seven points — a preliminary sign of what Microsoft might earn from AI in the future.
Aside from the company’s main financial results, CEO Satya Nadella also discussed security matters during today’s investor call. “Security underpins every layer of the tech stack, and it’s our number one priority,” says Nadella. “We are doubling down on this very important work, putting security above all else, before all other features and investments.”
What we think?
I think Microsoft’s new AI and Surface event will be exciting. They plan to introduce AI PCs with powerful chips. This could really change computers like Apple did before. However, Xbox sales are down, which is worrying.
They need to sell more games and maybe new consoles to improve. I’m curious about how their AI investments will perform, especially in cloud services. This could be a big deal for Microsoft’s future.
