Microsoft Surface sales are tanking, Microsoft says

With soaring cloud revenues, plunging Windows and device revenues, and a few days into a substantial layoff, Microsoft’s first-quarter results feel a bit like a quote from Dickens.

The best of times: “The next major wave of computing is being born,” as Microsoft reported 31 percent revenue growth in its Intelligent Cloud business, a day after Microsoft invested again in OpenAI and its chat service, ChatGPT. (ChatGPT will run on top of Microsoft’s Azure cloud.) The worst of times: Windows OEM revenue sank 39 percent, thanks to a tanking PC market; Microsoft’s Devices (Surface) revenue fell the same amount, thanks to issues launching products, reduced demand, and success a year ago.

In the end, it all sort of came out in the wash, however, with net income down 12 percent to $16.4 billion and revenue sinking 2 percent to $52.7 billion. Microsoft reported $14.2 billion in revenue in More Personal Computing, its consumer business, down 19 percent, but 18 percent growth to $21.5 billion in Intelligent Cloud and 7 percent growth in Productivity and Business Processes, Microsoft’s Office business.

For Microsoft’s consumer business, however, the quarter was one of Microsoft’s worst. Not only did Devices (formerly called Surface) revenue sink by more than it has in years, Microsoft said that the company had problems launching certain undisclosed Surface devices. (Devices also includes the Xbox, HoloLens, Surface Duo, and its peripherals.) Xbox hardware revenue sank by 13 percent, too. According to Microsoft chief financial officer Amy Hood, the drop in Windows OEM revenue was expected, thanks to a drop in PC sales that Gartner ranked as the worst ever.

Microsoft chief executive Satya Nadella focused on the long-term positives, saying that “the next major wave of computing is being born as we turn the world’s most advanced AI models into a new computing platform.”

“The age of AI is upon us and Microsoft is powering it,” Nadella added.

Nadella also said that Microsoft would be applying AI to its Power platform, which allows those with no knowledge of coding to code apps through a visual user interface. “We are making it easier for anyone to streamline repetitive tasks introducing new AI powered features to turn natural language prompts into complex workflows,” Nadella said.

Microsoft, however, believes that the Windows OEM license sales and Surface devices will see “continued declines,” Hood said, with expected revenue of $11.9 to $12.3 billion, down from the current quarter. Devices revenue should decline in “the mid 40s, as we work through the execution challenges noted earlier,” Hood said, meaning that a forecasted drop of more than 40 percent in the Devices business would be more than the current quarter, too. Xbox revenue should also decline in the single digits, Hood said, and Windows OEM revenue should continue to drop in the “high 30s,” Hood said, or just under 40 percent.

Microsoft did not disclose which Surface devices failed to meet expectations, though there were only a few to choose from: the Surface Pro 9, in either a 5G ARM model or with a Core chip inside; the Surface Studio 2+; and the Surface Laptop 5. None, though, differed that substantially from their predecessors.

Revenue in Microsoft’s Productivity and Business Processes, however, should be up between 11 and 13 percent, Hood added, driven by Office 365.

Microsoft is “continuing to work towards closing” its Activision acquisition, Hood added.

This story was updated at 5:19 PM with additional details.