Microsoft Q2: Cloud Soars as Gaming Revenue Dips
â–¼ Summary
– Microsoft reported strong Q3 FY2026 results with $81.3 billion in revenue, a 17% increase, and a net income of $30.9 billion, a 23% rise.
– PC shipments grew unexpectedly during the holiday quarter, partly due to Windows 10’s end of support and manufacturers stockpiling inventory against tariffs and memory shortages.
– Microsoft’s Windows OEM revenue grew 5%, but its combined Windows and Surface device revenue only increased 1% due to a decline in Surface sales.
– Xbox hardware revenue fell 32% year-over-year, continuing a multi-year decline, while overall gaming revenue and Xbox content/services also decreased.
– Microsoft’s cloud revenue was a standout, exceeding $50 billion with 26% growth, driven by a 39% increase in Azure and other cloud services.
Microsoft has released its financial results for the second quarter of fiscal year 2026, revealing a company powered by its cloud division while its gaming segment faces challenges. The tech giant reported revenue of $81.3 billion and a net income of $30.9 billion, marking significant year-over-year increases of 17 percent and 23 percent, respectively. This performance underscores a period of robust overall growth, even as different sectors of the business tell contrasting stories.
The holiday quarter saw an unexpected rise in PC shipments, partly driven by the approaching end of support for Windows 10. Industry analysts also note that manufacturers have been building inventory ahead of potential tariffs and ongoing memory shortages. Despite this market activity, Microsoft’s combined revenue from Windows OEM and devices saw only a modest one percent increase. When examined separately, revenue from Windows OEM licenses grew by five percent, but this was offset by declines in devices, as Microsoft now reports Surface revenue within this same category. The company did not introduce any new Surface hardware this quarter, following last spring’s launches of the Surface Pro and Surface Laptop.
In contrast to the steady PC market, Microsoft’s gaming division experienced a notable downturn. Xbox hardware revenue fell by 32 percent compared to the same period last year, continuing a multi-year decline. Overall gaming revenue dropped by nine percent. The segment encompassing Xbox content and services, which includes the Game Pass subscription, also decreased by five percent. Microsoft attributes this dip largely to a stronger lineup of first-party game releases in the prior year, rather than the recent price increase for Game Pass Ultimate. The company has not provided an updated subscriber count for Game Pass, a figure it last shared nearly two years ago.
This period also reflects Microsoft’s evolving software strategy, as it brings more former exclusives to competing platforms. Titles like Halo: Campaign Evolved, Fable, and Forza Horizon 6 are slated for release on the PS5, expanding their potential audience beyond the Xbox ecosystem.
The undeniable star of the quarter was Microsoft’s cloud business. Cloud revenue surged by 26 percent, surpassing $50 billion for the quarter. The Azure platform and related cloud services were particularly strong, with revenue growing by 39 percent. Microsoft’s Chief Financial Officer, Amy Hood, highlighted that cloud demand drove performance that exceeded expectations across key financial metrics.
The Intelligent Cloud unit, which includes Azure, generated $32.9 billion in revenue. This more than doubled the $14.3 billion contributed by the More Personal Computing division, which houses Windows, Xbox, and Surface. In fact, this consumer-focused division was the only major business unit to see a revenue decline, dropping by three percent compared to the previous year. The financial results paint a clear picture of a company where enterprise cloud services are the primary engine for growth.
(Source: The Verge)
