Microsoft’s Surface business is growing just as Windows faces Chromebook competition

Microsoft’s Surface Business Is Growing Just As Windows Faces Chromebook Competition
Microsoft’s Surface Business Is Growing Just As Windows Faces Chromebook Competition

Microsoft posted the second quarter of its 2019 financial results today, reporting revenue of $32.5 billion and net income of $8.4 billion. Surface and gaming are both up, but revenue from Windows licenses has slipped.

While Surface revenue only grew 1 percent in the same quarter last year, it has jumped by a massive 39 percent this year to $1.86 billion. The big jump is not entirely surprising, as Microsoft released its Surface Pro 6 and Surface Laptop 2 during the most recent quarter, alongside the new Surface Studio 2 and Surface Headphones. It was a busy holiday period for Surface, and the revenue reflects that.

Surface Book 2 and Surface Go sales pushed Surface revenue to $1.1 billion in the previous quarter, so it’s clear demand has continued across these new Surface devices. It means Surface is now nearly a $2 billion business for Microsoft.

Microsoft’s Surface Business Is Growing Just As Windows Faces Chromebook Competition

ESET Software

Microsoft’s gaming business has been a recent highlight of the company’s earnings, and fiscal Q2 2019 is no different. Gaming revenue is up 8 percent this quarter, although Xbox hardware revenue has dropped by 19 percent mainly due to the Xbox One X launch in the same quarter a year ago. Xbox Live active users also hit 64 million during the holidays, up 8 percent from the previous year.

We’re still waiting to hear more about Microsoft’s xCloud game streaming service, and the company is due to start public trials this year. It’s all part of Microsoft’s plan to create its own Netflix for games, but it will face competition from Google, Nvidia, Sony, and even possibly Amazon in the future. On a call with investors, Microsoft CEO Satya Nadella revealed that xCloud “will be in public trials later this year,” hinting that we won’t see the service soon.

Microsoft’s Surface Business Is Growing Just As Windows Faces Chromebook Competition

Cloud gaming could become a key battleground for Microsoft and other tech companies, and the software maker is already a step ahead of some rivals thanks to its cloud dominance. Microsoft’s Azure revenue has grown 76 percent this quarter. Server products and cloud services in general have also grown by 28 percent. The entire “intelligent cloud” division has now increased by 24 percent, marking $8.6 billion of Microsoft’s overall $29.1 billion revenue this quarter.

Over on the Windows side, OEM Pro revenue is down 5 percent this quarter, which Microsoft says is roughly in line with PC sales to businesses. Non-Pro revenue has decreased by 11 percent, and Microsoft blames this on “continued pressure in the entry-level category.” In other words: Chromebooks. Microsoft just unveiled its latest Chromebook challenge to appeal to students and schools, in an effort to fend off Google’s hardware for 2019. It’s clear that entry-level pricing and devices are threatening Windows licensing revenue as consumers have many different choices for devices. On an investor call, Microsoft CFO Amy Hood revealed that some of the decline was due to the timing of new chips from partners constraining OEMs and new devices.

As always, Microsoft’s future growth looks increasingly dependent on its cloud success. Azure revenue is up 76 percent year over year, and Office commercial products and cloud services grew 11 percent. Microsoft also now has 33.3 million Office 365 consumer subscribers, up from 29.2 million this time last year. LinkedIn, Microsoft’s $26 billion bet, is also seeing solid revenue growth of 29 percent.

Update, January 30th 6PM ET: Article updated with comments from Microsoft’s investor call.