Microsoft Financial Highlights: Xbox Revenue and Net Income Growth

Microsoft reported a significant decline in Xbox hardware revenue during the third quarter ending March 31, 2026, as part of a broader downturn in its gaming division. Hardware revenues dropped 33% year-on-year, contributing to a 7% decrease in overall gaming revenue for the period.

The decline in hardware sales followed price increases implemented in 2025 for Series X and S consoles in the United States, where prices across the hardware range rose by between $20 and $70. Xbox content and services revenue saw a 5% year-over-year decrease, which the company attributed to a prior year that had been boosted by first-party content.

Strategic Pivot and Game Pass Adjustments

Despite the revenue drops, Microsoft reported that Xbox achieved record streaming hours and monthly active users during the quarter. In response to the financial performance and user feedback, the company has implemented changes to its Game Pass subscription model and content strategy.

The company reduced the monthly cost of its top-tier subscriptions, lowering Game Pass Ultimate from $29.99 to $22.99 and PC Game Pass from $16.49 to $13.99. Microsoft removed Call of Duty from the service’s day-one launch lineup.

In the near term, we are focused on fundamentals, prioritising quality and serving our core users better. You also see this in Xbox, where the team is recommitting to our core fans and players and shaping the future of play. Last week’s Game Pass changes are one example of how we are staying responsive to customer feedback.

Satya Nadella, Microsoft CEO

CEO Satya Nadella stated that the company is doing the foundational work required to win back fans and strengthen engagement across its consumer business, including the Xbox ecosystem.

AI and Cloud Growth Offsets Gaming Declines

The gaming slump occurred alongside strong growth in Microsoft’s cloud and artificial intelligence sectors. For the quarter ending March 31, 2026, Microsoft reported total revenue of $82.89 billion, an 18% increase year-over-year, and net income of $31.78 billion, up from $25.82 billion in the same quarter the previous year.

Microsoft Cloud generated over $54 billion in revenue, driven by strong demand for first-party AI applications and Azure. Intelligent Cloud revenue specifically rose 30% to $34.7 billion, with Azure and other cloud services growing 40% year-over-year.

The company’s AI business has reached an annual run rate exceeding $31 billion, representing a 123% increase. This growth is further supported by the Microsoft 365 Copilot AI add-on for commercial productivity subscriptions, which now has over 20 million paid seats.

Financial Outlook and Capital Spending

Microsoft provided guidance for the fourth fiscal quarter, forecasting revenue between $86.7 billion and $87.8 billion. The company expects Azure cloud growth to remain between 39% and 40% at constant currency, though it anticipates the operating margin will move to 44% from 46.3%.

A primary point of focus for investors is the company’s projected capital expenditure. Microsoft forecasts that capital spending for 2026 will reach $190 billion, a figure attributed to soaring memory costs. For the third fiscal quarter, capital expenditures and finance leases were $31.9 billion, a 49% increase.

Other key financial metrics for the quarter included:

• Adjusted earnings per share: $4.27 (compared to $4.06 expected).
• Operating income: $38.4 billion, an increase of 20%.
• More personal computing revenue (including Xbox): $13.2 billion, down 1%.

The adjusted earnings figures exclude a $14 million decrease in net income stemming from Microsoft’s investments in OpenAI.