Microsoft reported strong cloud earnings in Q2 as gaming declined

Microsoft Just posted Its second quarter financial results for 2026. The software maker generated revenue of $81.3 billion and net income of $30.9 billion during the third quarter. Revenues rose 17 percent, and net income rose 23 percent.

The holiday quarter saw unexpected growth in PC shipments amid ongoing RAM shortages. Microsoft End of support for Windows 10 It helped push up PC shipments, however IDC revealed Earlier this month, PC makers also aggressively pulled inventory forward to combat potential tariffs and an ongoing global memory shortage.

Microsoft Windows OEM and hardware revenue during this holiday period was up just 1 percent year over year. It’s clear that businesses and consumers are upgrading PCs and laptops during Windows 10’s end-of-life period, because Windows OEM revenue alone rose 5 percent. But these revenues were offset by a decline in hardware revenues as Microsoft has now combined Surface revenues and Windows OEM revenues together.

Windows 11 also achieved a major milestone in the quarter, Reaching 1 billion users. That’s up 45 percent year-over-year, according to Microsoft CEO Satya Nadella. The end of support for Windows 10 has undoubtedly fueled this growth, helping Windows 11 reach 1 billion users faster than Windows 10.

Microsoft did not announce any new Surface devices during the last quarter, after launching both… Surface Pro 12 inch and Surface Laptop 13 inch In May of last year. I expect to hear more about new Surface devices in the spring.

Microsoft’s Xbox hardware revenue has declined for three straight fiscal years, and this revenue decline looks set to continue throughout fiscal 2026. Xbox hardware revenue fell 32 percent year-over-year during the most recent holiday quarter. Total gaming revenue also decreased by 9 percent.

Xbox content and services, which includes Game Pass, also fell 5 percent. This decrease was largely due to the stronger performance of first-party content in the prior year, rather than to the stronger performance of first-party content in the prior year Game Pass Ultimate price hike During the quarter. This indicates lower sales figures for Call of Duty: Black Ops 7which she just didn’t have to face Battlefield 6but also success Black ops 6 In 2024.

Unsurprisingly, Microsoft isn’t giving us an update on Xbox Game Pass subscriber numbers. The company last reported that it had 34 million subscribers Nearly two years ago, which included Xbox Game Pass Essential (formerly 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 this last year Hala: The campaign has evolved It’s coming to PS5 and Xbox in 2026 myth and Forza Horizon 6 It’s also coming to Sony’s console this year.

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

All eyes are still on Microsoft’s AI revenue and associated costs, and the software maker didn’t pull any specific numbers for its AI products this quarter. Capital spending in the second quarter was $37.5 billion, and most of that spending was on assets like CPU and GPUs to power cloud data centers and artificial intelligence. Commercial bookings also increased by 230 percent compared to last year, thanks to Azure commitments from OpenAI and Anthropic.

Microsoft announced The latest in-house AI chip is out this weekwhich will help host GPT-5.2 and other models for Microsoft Foundry and Microsoft 365 Copilot. The Maia 200 chip is designed for large-scale AI workloads and will compete head-to-head with similar AI inference chips from Amazon and Google.

Microsoft also saw Microsoft 365 consumer cloud revenue grow 29 percent year over year, along with Microsoft 365 commercial cloud revenue grow 17 percent. LinkedIn’s revenue also grew 11 percent year over year.

The strength of Microsoft’s Intelligent Cloud business, which includes Azure and server products, really highlights the decline of the Windows, Xbox, and Surface personal computing businesses. Intelligent Cloud contributed $32.9 billion to revenue this quarter, more than double the $14.3 billion from more personal computing. In fact, the More Personal Computing division declined 3 percent in revenue compared to last year, the only business unit to do so this quarter.

Microsoft blames gaming for the decline in more personal computing usage, and this has been offset by 10 percent growth in search and news advertising revenue and Windows OEM growth.

Update, January 28: The article has been updated with comments from Microsoft CEO Satya Nadella.