Microsoft’s Surface and Xbox hardware revenues take a big hit in Q3

Microsoft just posted the third quarter of its 2024 fiscal financial results. The software maker made $61.9 billion in revenue and a net income of $21.9 billion during Q3. Revenue is up 17 percent, and net income has increased by 20 percent.

This is the second quarter in a row that Microsoft is including its additional revenue from its Activision Blizzard acquisition that’s pushed gaming to be Microsoft’s third largest business, above Windows.

Investors are also looking to see signs of revenue from Microsoft’s big AI investments over the past year, especially on the Azure OpenAI side where the company charges businesses to run AI tasks in the cloud. Once again, Office and cloud revenues still reign supreme at Microsoft this quarter, with Microsoft Cloud revenue up 23 percent year over year.

This quarter Windows OEM revenue is up 11 percent year over year. This is the price that PC manufacturers pay to license Windows for laptops and PCs, and while it suffered throughout 2023 it has been picking up again throughout 2024. Microsoft is now hoping to boost its Windows OEM revenues over the summer, with the launch of what it calls “AI PCs” that are powered by Qualcomm’s latest Snapdragon chips.

We’re expecting Microsoft to unveil its own Surface devices running on Snapdragon X Elite and X Plus chips on May 20th, at a special AI and Surface event. These new chips could be the biggest CPU shakeup since Apple Silicon, if they’re able to deliver the performance and battery life balance that Qualcomm is promising.

Microsoft will be relying on this push, particularly on the Surface side. Once again, devices revenue has declined in Q3 by a massive 17 percent. Devices revenue has been down for well over 12 months now, despite new launches of Surface devices and Microsoft switching up its hardware portfolio amid layoffs. Microsoft now has a new Windows and Surface chief, after Panos Panay’s surprise departure to Amazon last year. Pavan Davuluri took over Windows recently, after taking over Surface devices last year. Microsoft split up the Windows and Surface groups under two different leaders last year, but they’re back under a single leader now.

Over on the Xbox and gaming side, Xbox content and services revenue, which includes Xbox Game Pass, is up by 62 percent. This is once again thanks to Activision Blizzard revenues, which makes it more difficult to gauge how Xbox did without this addition.

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Microsoft revealed in February that Xbox Game Pass has now grown to 34 million subscribers, including the Xbox Game Pass Core (previously Xbox Live Gold) members. Four previously Xbox-exclusive games are now available on PS5, with some launching on Nintendo Switch, too.

This strategic shift is limited to these games for now, but it appears to be in response to a slowing of Xbox Game Pass growth and Xbox console sales. This quarter Xbox hardware is down by a massive 31 percent, a big drop following a soft quarter for Xbox sales during the all-important holiday season last year.

Overall gaming revenue is up 51 percent, bolstered by the additional Activision Blizzard revenue.