Microsoft Earnings Hit $81B On Cloud And AI Surge To Offset Big Dip In Xbox Hardware
Microsoft's earnings for the second quarter of its 2026 fiscal year managed to top expectations on Wall Street, with the Redmond outfit reporting $81.3 billion in revenue, which is a 17% increase from the same period in the prior year. The bulk of the revenue came from its Cloud business, leading to an overall net profit of $30.9 billion (non-GAAP basis) for an even bigger 23% year-over-year gain.
The impressive results come as Microsoft makes a concerted effort to integrate AI into practically every facet of its business, While this has been a point of consternation among consumers who have grown tired with constant chatter about AI, the strategy is clearly paying off, at least for now.
"We are only at the beginning phases of AI diffusion and already Microsoft has built an AI business that is larger than some of our biggest franchises," said Satya Nadella, chairman and chief executive officer of Microsoft. "We are pushing the frontier across our entire AI stack to drive new value for our customers and partners."
Microsoft's Cloud business contributed more than half of the company's Q2 revenue at $51.5 billion, and increase of 26% year-over-year. Broken down by segment, Microsoft saw gains in several notable areas, including Microsoft 365 Commercial cloud (up 17%), Microsoft 365 Consumer cloud (up 29%), LinkedIn (up 11%), and Dynamics 365 (up 19%). Azure and other cloud services revenue gained the most on a percentage basis, though, rising 39% to $32.2 billion.
The underlying story is that Microsoft is a services-first operation. By the numbers, revenue in Microsoft's More Personal Computing segment tallied $14.3 billion for a 3% decrease, with a 1% increase in Windows OEM and Devices revenue helping to soften the blow from declines in Xbox content and services revenue, which decreased 5%.
Xbox hardware sales saw a particularly big dip in sales, with revenue declining 32% year-over-year. Microsoft didn't get into the weeds of why Xbox hardware plunged to that extent, but we can reasonably assume it's partially because of multiple price hikes over the past year. This contributed to Gaming revenue dipping 9% overall to $5.99 billion (down $623 million). This was "below expectations" and "atypical for the reporting period," Microsoft said.
Even so, Microsoft remains upbeat about its Gaming business.
"In gaming, we are committed to delivering great games across Xbox, PC, cloud, and every other device, and we saw record PC players and paid streaming hours on Xbox. In closing, we feel very good about how we are delivering for customers today and building the full stack to capture the opportunity ahead," Nadella said during an earnings call.
One other interesting nugget that was revealed in the earnings call is that Windows 1 reached a new milestone—the OS now sits at 1 billion users, which is up 45% year-over-year. Of course, reaching that figure got an assist by Microsoft sunsetting Windows 10 last October (save for paid support), but it's an impressive achievement all the same.
Despite the strong Q2 earnings, investors are jittery about Microsoft's longer-term outlook, as evidenced by shares of Microsoft being down more than 7% in pre-market trading.
