Microsoft’s Surface devices down again in Q2 earnings as Xbox picks up Activision revenue

Microsoft just posted the second quarter of its 2024 fiscal financial results. The software maker made $62 billion in revenue and a net income of $21.9 billion during Q2. Revenue is up 18 percent, and net income has increased by 33 percent.

This is the first quarter Microsoft is reporting earnings as a $3 trillion company and also the first time the company has reported additional revenue from its Activision Blizzard acquisition. While Office and cloud revenue remain strong, devices revenue from Surface sales has continued to decline this quarter, with Windows bouncing back after a slow period for the PC market.

Microsoft did warn that devices revenue would decline against this quarter, and it’s down 9 percent. Microsoft CEO Satya Nadella said “PC market unit volumes were at roughly pre-pandemic levels,” so it’s likely that Surface simply hasn’t recovered as well. That’s despite Microsoft launching its new Surface Laptop Studio 2, Surface Laptop Go 3, and even a Surface Go 4 late last year. Microsoft’s devices revenue also includes HoloLens and PC accessories, and revenue has been declining for more than 12 months now.

Windows is doing better, though. OEM revenue, the price that PC manufacturers pay Microsoft to put Windows on laptops and PCs, is up 11 percent this quarter. Windows OEM revenue has suffered throughout Microsoft’s entire 2023 fiscal year, but this is now two consecutive quarters of growth compared to five consecutive quarters of declines for devices revenue.

Speaking of devices, all eyes are on the Microsoft Gaming division for the company’s latest earnings. Microsoft is now reporting Activision Blizzard revenue as part of its gaming unit, bolstering overall revenues in Xbox content.

Xbox content and services revenue, which includes Xbox Game Pass, is up by a massive 61 percent. That’s largely because of the Activision Blizzard revenues, so it’s difficult to understand immediately how Xbox did without this giant addition.

Microsoft says the net impact from the Activision Blizzard acquisition is just over $2 billion in revenue, but the cost of integration, transaction costs, and other costs of revenue all total nearly $1 billion. With other operating expenses it works out to an operating loss of $440 million.

We’ll need more guidance from Microsoft on what the next quarter of Activision Blizzard earnings will look like, particularly as Microsoft continues to integrate the company into the broader Microsoft Gaming division. While the Activision Blizzard acquisition is complete, Microsoft laid off 1,900 workers in its gaming division earlier this month — primarily affecting Activision Blizzard employees. Microsoft has also been overhauling its Xbox management in recent months and even named a new Blizzard president earlier this week.

Xbox hardware is also up by 3 percent, after the all-important holiday quarter. Microsoft ran a number of Xbox Series X promotions during the holidays in the US, but that doesn’t appear to have resulted in a big boost in sales and revenue. Overall Microsoft gaming revenue is up 49 percent, mainly boosted by Activision Blizzard revenues.

Once again, there are no fresh Xbox Game Pass subscriber numbers. Microsoft said Xbox Game Pass had grown to 25 million subscribers in January 2022, but we haven’t had an update for two years now. Nadella did reveal in last quarter’s earnings call that Starfield had contributed to Xbox Game Pass growth. “On launch, we set a record for the most Game Pass subscriptions added on a single day ever,” he said.

Developing…