Microsoft Q1 2021 earnings: Surface, Xbox, and cloud boost revenue

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Microsoft posted the first quarter of its 2021 financial results today, reporting revenue of $37.2 billion and a net income of $13.9 billion. Revenue is up 12 percent, and net income has increased by 30 percent. While the ongoing pandemic continues to force many to work remotely during an economic downturn, Microsoft is benefiting from the shift in the way people are now working, playing games more, and connecting to others through videoconferencing.

Cloud services are the biggest boost to Microsoft’s revenues from the pandemic shift in behavior. Both Office commercial and consumer are up, with Office 365 Commercial revenue growth up by 21 percent. Server products and cloud services revenue has also increased 22 percent as more businesses rely on cloud services for remote working. Azure revenue itself grew 48 percent.

The biggest news here from a consumer point of view is that Microsoft 365 Consumer subscribers have also increased to 45.3 million. That’s a jump of 27 percent year-over-year, and likely thanks to Microsoft’s renewed focus on consumers with Microsoft 365 and Microsoft Teams earlier this year.

Cloud and Office aren’t the only products driving Microsoft’s growth, though. Surface revenue has jumped by 37 percent this quarter to $1.5 billion. That’s a big increase for a quarter that hasn’t seen any new Surface devices introduced. Microsoft only just introduced a new Surface Laptop Go device and updated Surface Pro X earlier this month, but those will count to next quarter’s revenue.

Microsoft’s next-gen Xbox consoles.
Photo by Tom Warren / The Verge

Over on the gaming side, Xbox content and services revenue has also increased significantly by 30 percent compared to the same quarter last year. A number of consumers have turned to gaming and services like xCloud or Game Pass during the pandemic, and it’s clear there’s an increased demand for Microsoft’s gaming services. Microsoft notes that Xbox Game Pass subscriptions and strength in third-party and first-party titles helped with revenue.

Microsoft is now gearing up to launch its next-gen Xbox Series X and Series S consoles on November 10th. The consoles complement Microsoft’s xCloud game streaming service that launched last month, and the company’s ongoing efforts with Xbox Game Pass. Microsoft revealed it has 15 million Xbox Game Pass subscribers last month, but the company hasn’t provided any fresh numbers today.

Microsoft appears to be bullish about demand for the Xbox Series X and S consoles. “We expect very strong demand following the launch of our next-generation Xbox Series X and S consoles,” said Microsoft CFO Amy Hood during a call with investors. This demand should drive “supply constrained hardware revenue growth of approximately 40 percent” next quarter.

Microsoft reported a jump in Windows usage earlier this year after lockdowns throughout many parts of the world led to remote working for many. This jump in usage hasn’t resulted in increased Windows OEM revenue during this quarter, though. Windows OEM revenue has dropped 5 percent, and Microsoft blames lower commercial demand for the dip.

While commercial demand for PCs might be softening, Windows OEM non-pro revenue has grown by 31 percent, thanks to consumer PC demand. It’s likely that students and families are driving this growth during the pandemic, turning to PCs to help support remote learning. During an earnings call with investors, Microsoft CEO Satya Nadella said “PCs have become mission critical,” and that Microsoft is seeing double digit growth in monthly active devices for Windows 10.

Surface Laptop Go.
Photo by Tom Warren / The Verge

Elsewhere, LinkedIn revenue has also grown by 16 percent year-over-year with 722 million users. Search revenue has decreased by 10 percent, though. Microsoft splits its various businesses into three buckets: productivity and business processes, intelligent cloud, and more personal computing. The more personal computing bucket includes Surface, Xbox, and Windows, and Microsoft says gaming and Surface drove its revenue growth of 6 percent for this quarter.

Azure drove the intelligent cloud revenue growth, and Office 365 and LinkedIn helped the productivity and business processes bucket. It’s clear that these main revenue drivers — Azure, gaming, Surface, and Office — have been influenced by the pandemic.

Microsoft CEO Satya Nadella said at the beginning of this pandemic that the company had witnessed “two years’ worth of digital transformation in two months.” That transformation appears to be continuing for many businesses, students, and consumers.

Update, October 27th 6:10PM ET: Article updated with comments from Microsoft’s investor call.

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