Microsoft Surface and Windows FY21 Q4 revenue see declines due to ongoing 'supply chain constraints'

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MS logo (Image credit: Daniel Rubino / Windows Central)

What you need to know

  • Surface revenue is down 20% due to expected ongoing supply constraints.
  • Microsoft pulled in $1.37 billion in Surface revenue, down from $1.5 billion last quarter.
  • Windows OEM non-Pro licenses declined by 4%, and Windows OEM Pro revenue declined by 2%.
  • Microsoft beat overall Wall Street expectations again, bringing in $46.2 billion in total revenue.

Update: In the investor call, Microsoft gave guidance for next quarter's More Personal Computing (MPC) division. Surface is expected to see reduced revenue in the "low teens," as Microsoft contends with ongoing supply chain issues. Xbox sales to grow in "low single digits," gaming services growth of "low double digits", search revenue up in the high 30s, and overall MPC revenue to fall between $12.4 and $12.8 billion, an increase from $11.8 billion YoY from FY21 Q1.

Microsoft's earnings report (opens in new tab) for the fourth quarter of its 2021 fiscal year has just come out, and the company is reporting $1.37 billion in revenue for the Surface division.

Overall revenue for the company was a staggering $46.2 billion. Wall Street expectations were for $44.10 billion in revenue, with Microsoft again blowing past those numbers – a trend Microsoft has been doing for years now.

Revenue in More Personal Computing, which includes Windows and Surface, was $14.1 billion and increased 9% (up 6% in constant currency). The overall increase is driven by Windows Commercial products (e.g. Microsoft 365) and cloud services, up 20% YoY.

Likewise, Bing search advertising revenue grew 53% on a "low prior year comparable, with improved customer advertising spend."

Compared to last year, Microsoft pulled in $1.74 billion in revenue for Surface and $1.5 billion in revenue from last quarter in April. The new numbers reflect a significant 20% drop in Surface revenue compared to this time in 2020.

Source: Microsoft (Image credit: Source: Microsoft)

However, none of this is a surprise. Microsoft anticipated a decline in Surface revenue due to those challenges, making today's news in line with investor expectations.

Microsoft noted back in April during its investor call that the current fourth quarter would see "execution challenges" in shipping Surface to consumers. That's industry jargon for the ongoing chip shortage affecting nearly all industries due to high demand and a short supply of critical components. Indeed, Microsoft noted in its FY21 Q4 results that "supply chain constraints" drove the decline.

The Windows OEM license news also reflects a more return-to-normal. This time last year, Microsoft saw a staggering 34% jump in Windows OEM non-Pro licenses, likely due to the growing pandemic and need for immediate new PCs to meet demand.

Like Surface revenue, Microsoft pins the decline in Windows OEM revenue on supply chain constraints as well as "a strong prior year comparable in OEM non-Pro" licenses.

The good news is that the need for Windows OEM licenses and even Surface hardware appears to be relatively high, but the supply is falling well short of demand. Many companies, including Intel, have noted things may not return to normal for chip supply until well into 2022.

Microsoft also saw strong demand, but a more return to normalcy for its gaming division driven by Xbox, where revenue is up 11% YoY.

Microsoft Surface: A light quarter

Surface Laptop 4 13 Intel Hero

Source: Daniel Rubino / Windows Central (Image credit: Source: Daniel Rubino / Windows Central)

Microsoft didn't have too much in the way of new products over the spring and summer of 2021. The only new product launched was Surface Laptop 4, itself a minor iteration of last year's Surface Laptop 3.

Source: Microsoft (Image credit: Source: Microsoft)

The company, however, did refresh many of its accessories to meet the demand of the modern workforce. Refreshes to Surface Headphones 2+ and new headsets and speakers were all part of that push, which, while lower in revenue, is still vital to the bottom line.

Microsoft seems busy finishing up Windows 11, which saw a surprise announcement back in June. The company has received primarily favorable feedback from its next-gen OS, which is expected to launch later this year in October.

While Microsoft has not commented on future Surface hardware, the Surface Duo 2 and a new Surface Pro 8 are expected to be announced in the coming months. However, the ongoing chip shortage has likely pushed back additional Surface hardware releases, possibly until spring or fall 2022.

Daniel Rubino

Daniel Rubino is the Editor-in-chief of Windows Central, head reviewer, podcast co-host, and analyst. He has been covering Microsoft since 2007 when this site was called WMExperts (and later Windows Phone Central). His interests include Windows, laptops, next-gen computing, and for some reason, watches. Before all this tech stuff, he worked on a Ph.D. in linguistics, watched people sleep (for medical purposes!), and ran the projectors at movie theaters because it was fun.

  • Surface revenue represents 3% of Microsoft's total revenue (1.37/46.2=.02965). Microsoft made a $16.5 billion profit. This is a 35% profit margin. If you assume Surface's margin is 10%, then MSFT made about $400 million selling hardware (less than 3% of the profit). There is no rational reason MSFT should make hardware. The Surface division produces a lower gross margin and its sales growth is below other segments at MSFT. So why do it? Simply to improve the overall Microsoft/Windows ecosystem. It is treated more like a marketing/engineering effort than a profit center. I like surface hardware, but I don't fool myself in thinking that MSFT is trying to dominate the OEMs in the Windows ecosystem. Hence, they will never compete on price and will invest all of Surface's profits back into the hardware development cycle.
  • Yup, it's a point I've been trying to drive home for years. Surface is about setting a standard, not about mass sales or beating its own partners like HP, Dell, Lenovo, Razer, and others. And the industry is better for it. All those companies now make much better hardware, sometimes beating Microsoft, benefiting the entire Windows ecosystem.
  • Exactly.
    Surface is about keeping OEMs from going back to their lazy, shovelwave ways of the pre-Surface days.
    Besides, $400M *profit* is hardly peanuts. They've bought entire companies for less.
  • Yes, it amazes me when people say $400M profit has no rationale. Like seriously?? Even for a trillion dollar company, that amount of profit can easily support tens or even hundreds of highly skilled engineers with change to spare. So it's still very worthwhile imho.
  • Azure sales are growing at 51%. The profit margin exceeds 60%. I made up the $400 million profit number. If you actually tried to check my math you would see I was completely wrong.
    10% times $1.37 billion in revenues equals $137 million profit in the last quarter. If you multiply that by 4 quarters you get $550 million. No one knows how much profit the Surface division earns. A typical OEM has a 2 to 3% profit margin. Thus MSFT is more likely earned $41 million in profit. Why do I point this out? There is a lot of discussion about the Duo 2. I would love to buy this device and replace my $200 moto which replaced my $600 Oneplus after it was run over by a car. But the software is still suspect and I got burned buying MSFT phones from the earliest devices. So if MSFT really made $41 million profit from the surface last quarter, how much money is MSFT going to spend on engineers to improve the software for the Duo 2, when they are currently trying to get Windows 11 out the door with all the changes being made to Windows Store? I would hazard a guess by saying not much. Maybe the 100 engineers they bought from Romania to build the first android software modifications for the Duo 1 are all the people they have dedicated to Duo 2 development. I own a real estate business and every day I have to decide just how much money I will spend on CapEx versus Operations versus distributions. There is a reason I work 7 days a week most weeks in a year. My most valuable resource as a business owner is my time. Do I hire someone to perform tasks or do I do the task myself? If I told you I can remove and install an HVAC system in 8 hours and spend $1500 on supplies, would you say that is a valuable use of my time? The information you would need to make a decision is knowing it would cost me $2500 minimum for the labor alone. So that means I paid myself $300 plus an hour to do this work. MSFT is no different. Do they pay an engineer $400 an hour to improve Azure, to maintain a 60% plus margin on revenue growing at 50% plus? OR do I spend the $400 an hour to build a device with less than 10% growth with a profit margin of 3%? Rationally you spend the money on Azure.
  • You are right
  • Tl;dr
    As above
  • Again: Surface does not exist in a vacuum. It is as much a part of the Windows product line as the keyboards and mice. (And what are the margins on those?) Even if it didn't bring in a profit, Surface would still be worth it for prodding the Windows OEMs to do R&D and refrain from CPU killing junkware. (Remember when Sony charged to *remove* the crapware?) It got so bad savvy PC buyers had to nuke their bran new systems to get a pristine full power Windows install. MS isn't doing Surface for the extra money it brings any more than GM does Corvettes, or Ford does LIGHTNINGS, but all welcome any direct cash on top of the indirect, "Halo-effect" sales they foster. Your approach might please the Wall Street quarter to quarter crowd but MS doesn't need to play that game and hasn't since they started paying dividends. There's more ways to make a profit than squeezing the last penny from customers.
  • Its also better to have profit spread over multiple sources, so they as a company do not get to dependent on certain products for profit.
  • That, too. MS has over a dozen billion-dollar product lines.
    It isn't by accident; they nurture each to the nest of their "natural" share of their respective market. Some they dominate, some the merely lead, and others they're just one player among many. c.f., Keyboards and Mice, headsets and earbuds. Today's sideline might be tomorrow's category leader. Or not. But as long as it is profitable and serves a purpose... It helps that Nadella is better at the long game than Balmer.
  • Chip shortage is a bullshit excuse for a fail quarter. Apple increases its numbers.
  • Sales from pre-orders and products in hand are completely different. Apple has been feeling it, just like any other company, despite the sales. Additionally, Apple has an ecosystem that isn't on any other device, unless Apple makes it. Whereas, Microsoft makes significantly less hardware than Apple and people have other OEM choice to utilize MS products.
  • Are you serious? Of course chip shortages would affect things, it affects Applex Google, and every company out there too.
  • It's not. The main chip manufacturer is TSMC and many companies including amd, Nvidia, Intel, Microsoft, Qualcomm, etc. Use them. But Apple is their biggest customer. All these companies have to get in the queue for manufacturing and if Apple wants more they get more which pushes other companies to the side.
  • Apple expects chip shortages to affect iPhone production for the coming quarter, FYI. But thanks for your insider knowledge of how businesses work and for ignoring what has been talked about endlessly in the press for months now.
  • Every quarter since last year is the same ... i'm not ignoring nothing but you act like a Microsoft's lawyer, are you ? Every fail or bad number you have a perfect excuse with a ton of arrogance together. PS5 has sold over 10 millions units. Xbox sales about 6 millions ... Of course chip shortage ...
    I'm not saying MS's numbers are bad. not at all. But you should be less arrogant with the people who disagrees with you.
  • Because I am right and you are wrong.
  • Typical arrogant. Period.
  • Arrogant or confidence? Depends on which side you're on I guess. The fact is, my analysis is correct. "HP quarterly earnings highlight impact of global semiconductor shortage".
  • I can tell you for a fact as someone who purchases Surface devices for work the chip shortage is real. I have had i7 Surface Laptop 4's back ordered for 3 months. I'm unable to get Surface docks or type covers for Surface Pro's. Your opinion doesn't equal the reality for businesses which I would say is Microsoft's biggest customers for Surface. On the personal side I have been unable to get a series X since release, why do you think that is?
  • This chip shortage is starting to drive me crazy. We ordered close to 80 Surface Laptop Gos and two months later we're still waiting.
  • Yup, heard as much from a friend in IT. Ordered some Surfaces in June, won't be here until Sept.
  • Yup. 10,000+ 85 inch Surface Hub ordered 2 months ago. Due November.
  • 👀 I’ll take one of those! Lol, what sort of organization are those for?
  • Bummer regarding the likely hardware delay, even if understandable. Was really looking forward to the 3. gen Surface Pro X and Surface Go (ideally also ARM based, though a fall release was unlikely anyway), as well as the new form factor Surface "Laptop Pro/Book 4".
  • Of course, because TSMC is pouring everything they've got into iMacs and MacBooks. They know how good the M1 is, they're not blind.
  • Apple is facing the same crunch, FYI. "Apple Slumps Lower as CEO Tim Cook Cautions Chip Shortage May Trim iPhone Sales"
  • You're right, but even in crisis, TSMC has client priorities that are based on contracts and past sale numbers. It wouldn't make sense if they didn't considering they have a complete monopoly.
  • Absolutely. Lenovo is the #1 PC maker in the world, so they get top orders. Microsoft is waaaaay down the list of ordering chips, so it makes sense they feel it worse. I bet Lenovo's numbers this quarter will still be good (their guidance last quarter said as much). It's the smaller firms that feel this chip crunch the most. Bigger firms like Apple, Lenovo, HP, and Dell less so because, as you mention, client priorities.
  • Baloney. The "chip shortage" is not the cause of this. Apple just had ANOTHER record quarter, in every product line. Macs up. iPads up. iPhones up. Services up. Watches up. "Overall revenue for the company was a staggering $46.2 billion. " Whereas Apple had $81.4 billion in revenue, up 36% YoY. Is that super duper staggering? This was easy to predict. PC sales and Windows licenses had been going down for 10 years. It went up in 2020 because people were suddenly forced to work from home. Which meant that LOTS of people did not already have a Windows PC at home. This alone is VERY significant. Now, that is largely over. Expect to see a glut of used Windows PCs for sale on eBay. This of course will hurt sales of new PCs. Numbers WILL go down. MS numbers HAVE gone down. Wait until Lenovo, Dell and HP report their sales numbers. It is going to be ugly. I fully expect to see a merger between Lenovo and/or Dell and/or HPs PC division in the next 3 years. Which also neatly explains the bizarrely strict hardware requirements for Windows 11. MS is hoping to drive sales of new Windows PCs, in order to keep Lenovo, Dell, HP and their own Surface division happy. Or maybe even keep them in business.
  • Yup, you're spot on. We've just sold 4 used windows laptops at home for new 3 MacBook Airs, and got rid of a whole lot more windows laptops at the office. We're considering switching the entire company to the new M1X MacBook Pros when the reviews come out, since our software has enough liberty to use cross platform.
  • Cool story bro
  • "Baloney."
    Do you even read the press? Even Apple is reporting the same: "Apple Slumps Lower as CEO Tim Cook Cautions Chip Shortage May Trim iPhone Sales". And forget Apple, here's Intel in the WSJ: "Intel CEO Says Chip Shortage Could Stretch Into 2023." If you know people in IT this is an ongoing issue. A good friend of mine buys Surfaces for the private school he works out; things ordered in June won't be here until September. Microsoft told investors LAST quarter this was going to be an issue and, again, said it will be an issue next quarter. Those are the facts. The accusation that you think Microsoft is lying to investors on guidance is hilarious (which is a criminal offense). This armchair analyst BS needs to take a backseat, my friend. You're out of touch on all levels here.
    "Wait until Lenovo, Dell and HP report their sales numbers. It is going to be ugly. I fully expect to see a merger between Lenovo and/or Dell and/or HPs PC division in the next 3 years"
    You're out of your mind. Lenovo literally had its best quarter ever in May: "Best fourth quarter ever for PC and Smart Devices (PCSD) with US$12.4 billion in revenue, up 46% year-on-year and profitability at an all-time high of 6.7%." They also expect another good quarter coming up:
    "The challenges of FY 20/21 continue, in varying degrees, into the new year. Nevertheless, with the permanent market changes accelerated over the past year the Group’s outlook for the rest of 2021 and the 21/22 fiscal year remains positive. The market changes over the past year are fueling three major trends that the Group is capitalizing on. Firstly, the consumption upgrade, with customers spending more time on their devices, buying more, and upgrading more often. Secondly, the infrastructure upgrade, with customers moving from buying data center products to buying total infrastructure solutions. "
    That's how this works. "Naddy6969" doesn't need to "fully expect" anything as companies literally tell you in investor calls what they anticipate for the next quarter. Guess what, none are saying "it's going to be ugly." Lenovo can execute on PC deliveries better than anyone due to its size (and location), which is why it can weather the chip shortage (which it still acknowledges above) better than Microsoft (a very small buyer). Anyone who has done any research on Lenovo would know this. The only PC companies that are losing market share are Acer, ASUS, and the struggling Asian ODMs/OEMs. HP, Dell, Lenovo, and Razer have all seen massive growth taking the market away from those companies. But you know, you figured it all out 🙄I hope no one ever takes investing advice from you.
  • The chip shortage is really a demand problem. For years PC sales were declining. Now they are growing. OEMs would be selling more devices if they could get more chips. But everyone wants chips. Car companies can not produce cars because they need chips. Why? Because everyone wants their car to connect to their phone. Everyone is making a ton of money. They are just saying they would make a ton more if they could get the chips. This is truly a 1st world problem impacting everyone in the world. You have billions of people around the world complaining they can not get a new $1000 computing device. Cry me a river.
  • Yup. Demand is still very high for everything, as you mention. Even in Microsoft's earnings call, they note strong demand for OEM licenses and Surface, but, everyone is competing for silicon. It'll take another 6 months at least for it to catch up. There are questions about long-term how the PC market will fair, but, so far, investors and analysts seem bullish on it meaning this wasn't just a one-off pandemic peak.
  • In the console space everybody is selling everything they can build and still outselling their own previous best, despite the shortages. Sony has racked up 10M units and XBOX more than their previous best launch (XBOX 366 did 6.5M, benefiting from the PS3 flawed launch). Nintendo has been outselling both. Some of it is pent-up demand as the past generation was overlong but a lot of it is a shift in consumer behavior as more consumers turn to gaming for their entertainment spending. When Sony and MS suggest the console shortages might run into 2023 they're not just talking TMSCs issues or a China invasion, but of booming demand.
  • So, tell me “Daniel Rubino”. If everyone is having such a great quarter, why is Surface revenue down 20% due to the “chip shortage”? Why is no one else having chip shortages? Sounds to me like Surface demand is down. But yes, YOU have it all figured out. “Apple Slumps”? Are you high? Apple has had 4 record quarters in a row. I know where to invest my money. It is NOT in Windows PC makers in 2021.
  • He literally explained that already multiple times. If you can’t read, why are you on a site designed for reading?
  • Why is my name in quotes? It's as if you don't know how quotes work. That is my name. Anyway, as noted above, I said:
    "Absolutely. Lenovo is the #1 PC maker in the world, so they get top orders. Microsoft is waaaaay down the list of ordering chips, so it makes sense they feel it worse. I bet Lenovo's numbers this quarter will still be good (their guidance last quarter said as much). It's the smaller firms that feel this chip crunch the most. Bigger firms like Apple, Lenovo, HP, and Dell less so because, as you mention, client priorities."
    Companies with large, expensive chip orders get priority over smaller firms with smaller orders. It's why Apple's orders with TSMC went, mostly, smoothly (but even they are not impervious). It's not rocket science. Again, Microsoft said last quarter it expects issues executing orders due to supply issues. That's true. Talk to people in IT trying to order Surface devices, the wait is months. Lenovo is not having these problems, at least at this scale (they still have some supply issues). Their guidance last quarter is demand is strong, it'll do well. We'll see. Talk to anyone in this industry and find an analysis that disagrees with this. I'll wait.
  • "So, tell me “Daniel Rubino”. If everyone is having such a great quarter, why is Surface revenue down 20% due to the “chip shortage”? Why is no one else having chip shortages?"
    Just hammering home, again, why you're wrong as if I hadn't already proved as much. "HP quarterly earnings highlight impact of global semiconductor shortage". I'm very glad I don't take investment advice from you, as you're out of the loop.
  • Windows ecosystem has a problem, Apple and Google have been gaining market share over the last few years and I do not think Windows 11 will help in anyway
  • Yup. They have nice idea with win 10x and imo that was their only chance to make something really new and secure, but they chose to make rounded win10 and name it win11.
    There's a lot of potential in sandboxed secure windows for non powerusers and they just trash the only fresh idea they had.
    I think this is because they are too lazy to make something new working. Remember uwp that even they don't use.
  • Windows still sits on a big fat chunk of the pie, so not really an issue yet. I think ChromeOS will get some more traction but that can hardly be stopped (though W11 can definitely help here because of the android app support).
  • You are stating the obvious. Why are there more iPhones and Androids being used every day in the world than PCs? Because they are mobile devices that provide high utility to users. We all know this, and therefore MSFT spent billions and years of effort to get into the mobile space. They failed and as such Windows is not the dominant OS. But if you are sitting at home far more than before and not out and about and you are expected to perform your job, guess what. You sit at a desk with a bigger screen and with a keyboard and a mouse. So, you buy a new computer. Once you can leave your house, you will use your phone more. Hence, covid has emphasized the need for good personal computing. Smartphones just do not have the utility to be as productive as a PC. But that does not mean Windows will become the dominant OS. Azure and cloud services are critical to the future. Apple will make a ton of money extending its ecosystem into more "light" utility business processes (think of selling donuts out of your shop). Google will make a ton of money out of selling cheap smartphones and having a good mobile ecosystem (but they really make all their money from search ads).. But all this will run on a hybrid/cloud-based computing system. MSFT will generate tons of money by moving the iOS, Android, Windows/office workloads through the cloud.
  • Hopefully we'll still get a Surface Pro 8 later this year.
  • I believe we will to coincide with Windows 11. But other Surfaces are up in the air. My hunch is we'll see a large amount of Microsoft's portfolio pushed back until spring or even fall 2022. Microsoft simply doesn't have the market pull to get ahead in line for chip shortage. Not when Lenovo and HP are ordering 30x the volume at least.
  • Recent rumors are pointing to a DUO2 and a new, different SurfaceBook.
  • I'm aware of the rumors as we're the source ;) Surface Pro 8, Surface Duo v2, Surface Book 4.
  • Laptop 5 with Adler lake in 2022 I presume
  • There is a reason Intel hired an engineer to be the CEO and not some marketing dork. He knows Intel needs to build chips and he decided to invest $50 billion in plants. Samsung and TMC are doing the same. They are all investing in capacity because everyone recognizes the information age (50 years in the making) is now just starting to transform the world. Clearly many in the US have a smartphone and many companies are using apps to transform everyday activities. But there are billions of people around the world still trying to get on the information superhighway. Musk is building a satellite system to connect everyone in the world to 5G. What would the world be like in 10 years when everyone is walking around with a 5G capable device processing information? That is why the pandemic caught everyone by the short hairs. We see how powerful Zoom and computer systems have reduced the impact of sitting in your house all day long. Now people realize their lifestyle can be radically different with this tech and everyone is trying to buy it now. Supply can not keep up with the demand spike.
  • Yeah, I really like Gelsinger. His ideas will take a few years to take effect, but he seems the right guy for this turnaround. A shame it got to this point, however. TSMC is crushing it (Helps when you have the gov't as a partner).
  • And first dibs on the newest ASML EUV lithography machines.
    ASML reportedly can only build ~30 units a year and TSMC has a lock on half that.