Microsoft Reports Strong Financial Results for Q2 2024: $62 Billion in Revenue and $21.9 Billion in Net Income, Marking an 18% Increase in Revenue and a 33% Rise in Net Income.

In its inaugural quarter as a $3 trillion company, Microsoft announces earnings, marking the first time the financial report includes revenue from the recently acquired Activision Blizzard. This influx of additional revenue propels gaming to become Microsoft's third-largest business for the quarter, surpassing Windows.

Office and cloud revenue remain dominant, constituting almost 60 percent of Microsoft's total revenue. Although Windows OEM revenue is on an upward trajectory, the decline in devices revenue, particularly from Surface sales, persists in this quarter

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As anticipated, Microsoft cautioned about a decline in devices revenue for this quarter, reporting a 9 percent decrease. Microsoft CFO Amy Hood noted in an earnings call that the performance exceeded the company's expectations, attributing it to 'stronger execution in the commercial segment.' Further, devices revenue is projected to experience another decline in Q3 2024, anticipated to be in the 'low double digits.

Despite Microsoft's CEO Satya Nadella noting that PC market unit volumes had returned to pre-pandemic levels last quarter, it appears that Surface has not experienced a comparable recovery. Despite the launch of new products like the Surface Laptop Studio 2, Surface Laptop Go 3, and Surface Go 4 in late 2023, Microsoft's devices revenue, which encompasses HoloLens and PC accessories, has been on a declining trend for over a year.

While Windows OEM revenue faced challenges throughout Microsoft's entire 2023 fiscal year, there is now a positive trend with an 11 percent increase in the current quarter. This marks two consecutive quarters of growth, contrasting with devices revenue, which experienced five consecutive quarters of declines. Microsoft CFO Amy Hood anticipates that Windows OEM revenue will remain 'relatively flat' in the upcoming quarter.

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Attention is focused on Microsoft's Gaming division in the latest earnings report, with the inclusion of Activision Blizzard revenue contributing to the overall revenues in the Xbox content segment.

Xbox content and services revenue, encompassing Xbox Game Pass, has witnessed a substantial 61 percent increase. The significant boost is primarily attributed to the inclusion of Activision Blizzard revenues, making it challenging to gauge Xbox's performance without this substantial addition.

Microsoft indicates that the net impact resulting from the Activision Blizzard acquisition is slightly over $2 billion in revenue. However, when factoring in integration costs, transaction expenses, and other costs of revenue, totaling $930 million, along with additional operating expenses of $1.59 billion, the overall result is an operating loss of $440 million.

Even though the Activision Blizzard acquisition has been finalized, Microsoft recently carried out layoffs affecting 1,900 workers in its gaming division, with a primary impact on Activision Blizzard employees. In recent months, Microsoft has undergone significant restructuring in its Xbox management, culminating in the appointment of a new Blizzard president earlier this week.

Following the crucial holiday quarter, Xbox hardware has experienced a modest increase of 3 percent. Despite various promotions for Xbox Series X during the holidays in the US, sales and revenue did not see a significant surge, which Microsoft attributes to a "weaker than expected console market." The overall gaming revenue for Microsoft, however, has seen a substantial rise of 49 percent, primarily fueled by better-than-expected revenues from the Activision Blizzard acquisition.

This quarter holds significance for Microsoft's gaming division as it now stands as the company's third-largest business. Gaming contributed $7.11 billion in revenue for the quarter, surpassing the $5.26 billion from Windows but trailing behind the substantial revenues of $13.47 billion from Office and cloud services and the significant $23.95 billion from server products and cloud services.

Despite the absence of updated Xbox Game Pass subscriber numbers, Microsoft previously reported that Xbox Game Pass had reached 25 million subscribers in January 2022. However, there has been no new information in this regard for the past two years. In the last quarter's earnings call, Nadella mentioned that Starfield played a role in the growth of Xbox Game Pass, setting a record for the most subscriptions added on a single day at launch.

Microsoft CFO Amy Hood anticipates overall gaming revenue to experience growth in the low 40 percent range, with approximately 45 points attributed to Activision Blizzard. This suggests that the remaining revenue from Microsoft's other gaming endeavors could see a decline in the next quarter. Specifically, Xbox content and services in Q3 are projected to be in the "low to mid-50" percent range, driven by around 50 points of net impact from the Activision Blizzard acquisition. Hood also expects "[Xbox] hardware revenue will decline year-over-year" in Q3.

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Microsoft's Office division continues to thrive, as evidenced by a 13 percent year-over-year increase in total revenue for productivity and business processes. The notable driver behind this growth is Office 365, with a 9 percent uptick in commercial seat growth.

The number of Microsoft 365 Consumer subscribers has climbed to 78.4 million, marking an almost 16 percent increase year-over-year. The introduction of the $1.99 per month Microsoft 365 Basic subscription last year has contributed to the ongoing growth in overall subscriber numbers.

Office commercial products and cloud services revenue witnessed a robust 15 percent year-over-year growth, propelled by a 17 percent increase in Office 365 Commercial revenue. This results in Microsoft concluding the quarter with over 400 million paid commercial seats for Office 365, underscoring the company's ongoing success in transitioning businesses to cloud-powered versions of Office.

Microsoft has been actively selling Copilot for Microsoft 365 in recent months; however, the specific impact of selling AI add-ons on its revenue is not detailed. Microsoft CEO Satya Nadella highlights the company's shift from talking about AI to applying it at scale. By integrating AI across every layer of its technology stack, Microsoft aims to attract new customers and contribute to productivity gains and benefits across various sectors.

The primary impact on Microsoft's AI ambitions stems from server-side investments, particularly with Azure OpenAI. According to James Ambrose, Microsoft's director of investor relations, in a call with The Verge, "Azure and other cloud services were up 30 percent year-over-year... those growth rates include a six-point contribution from our AI services." The overall intelligent cloud business for Microsoft recorded $25.9 billion in revenue this quarter, marking a 20 percent year-over-year increase, with the majority of revenue driven by Azure.