Microsoft has published its third-quarter results, reporting a 5% decrease in Xbox content and services and a significant 33% drop in hardware revenues.
The numbers
For the three months ended March 31, 2026:
- Revenue: $82.9 billion (up 18%)
- More personal computing (incl. Xbox revenue): $13.2 billion (down 1%)
- Operating income: $38.4 billion (up 20%)
- Net income: $31.8 billion (up 23%)
The highlights
Microsoft Cloud drove third-quarter growth, generating over $54 billion due to strong demand for Azure and other first-party AI applications and services.
Intelligent Cloud revenue rose 30% to $34.7 billion. Azure and other cloud services grew 40% year over year, exceeding expectations.
Microsoft’s AI business reached an annual run rate of over $31 billion, a 123% increase.
Overall gaming revenue fell 7%, while Xbox content and services declined 5% year over year, compared to a prior year boosted by first-party content.
Xbox hardware revenue dropped 33% after price increases for Series X and S consoles in the US last year. Prices increased by $20 to $70 across the hardware range.
Despite lower content and hardware revenue, Xbox achieved record monthly active users and streaming hours this quarter.
During an earnings call, CEO Satya Nadella said Microsoft was “doing the foundational work required to win back fans and strengthen engagement” across its consumer business, including Xbox.
“In the near term, we are focused on fundamentals, prioritising quality and serving our core users better,” said Nadella.
“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.”
These changes included price reductions for the top-tier Game Pass subscription and the removal of Call of Duty from day-one launch.
Game Pass Ultimate decreased from $29.99 to $22.99 per month, and PC Game Pass was reduced from $16.49 to $13.99.
The recent price cuts did not fully offset the 50% increase from October 2025. Game Pass Ultimate was previously $19.99 on console and $11.99 on PC.
Microsoft expects Xbox content and services revenue to decline by a low single-digit percentage, while hardware revenue is projected to decrease further.
“[This reflects] a prior year comparable that benefited from strong first-party content, as well as the recent price changes for Xbox Game Pass as we focus on delivering more value to gamers,” said CFO Amy Hood.
Last week, the firm announced that Microsoft Gaming is reverting to Xbox under its new leadership.
As part of a sweeping mission statement, Xbox CEO Asha Sharma and CCO Matt Booty said Microsoft Gaming “describes our structure, but it does not describe our ambition.”
Sharma and Booty said console remains central to its future plans, which will be “built to be affordable, personal and open,” while its “new north star” will be daily active players and improvements across hardware, content, experiences, and services.
The executives added: “Along the way, we will re-evaluate our approach to exclusivity windowing and AI and share more as we learn and decide.”
Xbox’s future strategy focuses on sustainable growth and cost discipline by strengthening Game Pass with a viable financial model.
Plans include expanding into new markets such as China and other emerging regions, targeting mobile-first audiences, and maintaining growth in live games and long-term stewardship.
The company will also enhance creator-focused platforms such as Minecraft, The Elder Scrolls, and Sea of Thieves, and improve community features, including discovery, customisation, social, and personalisation.
