Microsoft reports strong cloud earnings in Q2 as gaming declines

Microsoft just posted the second quarter of its 2026 fiscal financial results. The software maker made $81.3 billion in revenue and a net income of $30.9 billion during Q3. Revenue is up 17 percent, and net income has increased by 23 percent.

The holiday quarter saw PC shipments grow unexpectedly amid an ongoing RAM shortage. Microsoft’s end of Windows 10 support helped push PC shipments up, but IDC revealed earlier this month that PC makers have also been aggressively pulling forward inventory to combat potential tariffs and ongoing global memory shortage.

Microsoft’s Windows OEM and devices revenue over this holiday period was up just 1 percent year-over-year. Businesses and consumers have clearly been upgrading PCs and laptops during the Windows 10 end of life period, because Windows OEM revenue on its own was up 5 percent. But this revenue was offset by a decline in devices revenue as Microsoft combines Surface revenue and Windows OEM revenue together now.

Microsoft didn’t announce any new Surface devices during the recent quarter, after launching both the 12-inch Surface Pro and 13-inch Surface Laptop in May last year. I would expect to hear more about new Surface devices in the spring.

Microsoft’s Xbox hardware revenue has declined for three financial years in a row, and it looks like those declining revenues are going to continue throughout fiscal 2026. Xbox hardware revenue was down 32 percent year-over-year during the recent holiday quarter. Overall gaming revenue was also down 9 percent.

Xbox content and services, which includes Game Pass, is down 5 percent, too. This decline is largely being attributed to stronger first-party content performance in the previous year, and not the Game Pass Ultimate price hike during the quarter. Unsurprisingly, Microsoft isn’t giving us an update on Xbox Game Pass subscriber numbers. The company last reported it had 34 million subscribers nearly two years ago, which included Xbox Game Pass Essential (previously Xbox Live Gold / Game Pass Core) members.

Microsoft has continued to publish more games on PS5, as part of its strategy to make previously Xbox-exclusive games available on Nintendo and Sony platforms. Microsoft revealed last year that Halo: Campaign Evolved is coming to PS5 and Xbox in 2026, and Fable and Forza Horizon 6 are also coming to Sony’s console this year.

Microsoft’s cloud revenue was once again strong this quarter, and even crossed $50 billion overall — up 26 percent year-over-year. Azure and other cloud services revenue grew 39 percent.“ Microsoft Cloud revenue crossed $50 billion this quarter, reflecting the strong demand for our portfolio of services,” says Microsoft CFO Amy Hood. “We exceeded expectations across revenue, operating income, and earnings per share.”

Microsoft’s Intelligent Cloud business, which includes Azure and server products, contributed $32.9 billion in revenue this quarter, more than double the $14.3 billion from the More Personal Computing business of Windows, Xbox, and Surface. In fact, the More Personal Computing division declined by 3 percent in revenue year-over-year, the only business unit to do so this quarter.