Microsoft’s Surface and cloud focus helps boost Q4 earnings as Xbox sales disappoint

Microsoft posted the fourth quarter of its 2019 financial results today, reporting revenue of $33.7 billion and net income of $13.2 billion. Both are big increases year-over-year, setting a new record fiscal year for Microsoft. The results also come as Microsoft continues to be valued as a $1 trillion company thanks to the company’s market cap. Microsoft first passed the $1 trillion milestone in this quarter, thanks to its continued growth in cloud and diverse businesses.

Surface revenue was up in the same quarter last year, and it’s up once again by 14 percent. Microsoft attributes this to “strong growth in our commercial segment.” This growth shows that Surface hardware is selling well, despite no new refreshed models during this quarter. Microsoft also released the Surface Go last year and it helped boost revenue, and there’s no refreshed model in 2019 to help push revenues.

Microsoft did refresh the Surface Pro, Surface Laptop, and Surface Studio back in October, but we’re still waiting to see an updated Surface Book. We’re now expecting Microsoft to unveil new Surface Pro and Surface Book models in October. On an earnings call with investors, Microsoft CFO Amy Hood revealed the company is expecting Surface revenue to decline next quarter, likely because of a lack of new hardware.

Gaming was a big focus for Microsoft at E3 during this quarter, but the company’s gaming business has stalled. Gaming revenue declined by 10 percent this quarter, alongside Xbox software and services revenue decline of 3 percent.

Microsoft still doesn’t reveal exact Xbox hardware sales, but Xbox chief Phil Spencer said during this quarter that Microsoft’s business “isn’t how many consoles you sell.” Still, Microsoft’s Xbox hardware revenue declined a massive 48 percent, and Microsoft attributes this to a “decrease in the volume of consoles sold.” As we approach Xbox Project Scarlett, it’s unlikely that this hardware sale growth will bounce back, but Microsoft is hoping the Xbox One S All-digital Edition will help.

Xbox Live active users did grow to 65 million in the quarter though, thanks to the wide range of users across Xbox One consoles, Windows 10 PCs, and mobile devices like iOS and Android. Microsoft is now getting ready for its xCloud game streaming service to enter public preview in October.

Over on the Windows side, OEM Pro revenue grew by 18 precent, thanks to demand for Windows 10 and businesses upgrading their machines from Windows 7. However, non-Pro revenue declined 8 percent which was actually below the overall consumer market, once again because of “continued pressure in the entry level category.” Google’s range of Chromebooks are still trying to compete with Microsoft’s Windows laptop grip, but they’re continuing to see success in education and in entry level price brackets.

As always, it’s Microsoft’s cloud services that are the star of the earnings show. Office commercial products and cloud services revenue increased 14 percent year-over-year, and Microsoft also has more than 180 million active monthly Office 365 business users. There are 34.8 million people subscribed to Microsoft’s Office 365 service for consumers.

Server and cloud services revenue grew by 22 percent, boosted once again by Azure revenue growth of 64 percent. These are healthy numbers, but this is the lowest growth rate for Azure in recent years, showing that the company still has room to catch Amazon and keep Google at bay.

Microsoft also recently revealed that Microsoft Teams has overtaken Slack with more than 13 million daily active users. It’s a significant milestone after just two years, even if Slack says it’s not worried about the competition.