Microsoft Q3 Earnings Beat Expectations as Cloud, Windows, and Xbox Drive Growth

Microsoft has released its fourth-quarter financial results for fiscal year 2025, marking the final quarter of the period. The software giant reported revenue of $76.4 billion and a net income of $27.2 billion for Q4. Revenue grew by 18 percent year-over-year, while net income rose by 24 percent.

As anticipated, cloud services were a key driver of Microsoft’s performance this quarter. Azure revenue increased by 39 percent compared to the same period last year. Microsoft CEO Satya Nadella highlighted that Azure surpassed $75 billion in revenue for the full fiscal year, reflecting a 34 percent growth.

These strong cloud earnings follow Microsoft's decision to lay off up to 9,000 employees earlier this month. As of June 30, Microsoft employed 228,000 full-time staff, matching its workforce numbers prior to the recent reductions.

Windows and Surface revenue

The PC market continues to be affected by geopolitical trade policies and shifting consumer spending, while businesses are preparing for the end of Windows 10 support in October. Consequently, revenue from Windows OEM and devices grew by 3 percent year-over-year, primarily driven by gains in Windows OEM sales.

According to Gartner, PC shipments increased by over 4 percent in the recent quarter, supported by a PC refresh cycle tied to Windows 11. Microsoft earns most of its Windows revenue through OEM licensing, where manufacturers pay to preinstall the operating system on new devices.

While Surface revenue had been declining for two years as of last year, Microsoft now combines Windows and devices revenue in its financial reporting, making it difficult to assess Surface performance in isolation. On today’s earnings call, CFO Amy Hood projected that devices revenue will decline next quarter, along with a mid to high single-digit drop in Windows OEM revenue.

Microsoft launched two new Surface devices during the quarter: the 12-inch Surface Pro and the 13-inch Surface Laptop. However, both were released mid-quarter, meaning their full impact on revenue will likely become apparent in the following quarter.

Xbox and gaming

Xbox content and services revenue, which includes Xbox Game Pass, increased by 13 percent this quarter. However, Microsoft has not updated its Game Pass subscriber count since February 2024, when it reported 34 million subscribers, including those on Xbox Game Pass Core (formerly Xbox Live Gold).

Over the past year, Microsoft has actively expanded its strategy to bring formerly Xbox-exclusive titles to PlayStation and Nintendo Switch. Senua’s Saga: Hellblade II is set to launch on PS5 next month, along with a remastered version of the original Gears of War. Earlier this year, Microsoft also released Forza Horizon 5 on PS5, alongside titles such as Age of Empires II: Definitive Edition, Age of Mythology: Retold, and Indiana Jones and the Great Circle.

While this cross-platform approach initially disappointed some Xbox loyalists, it has proven financially successful. Preorders for Indiana Jones and the Great Circle and Forza Horizon 5 topped the PlayStation Store earlier this year. According to Circana, Microsoft secured six of the top ten best-selling games on PlayStation last quarter.

“We are now the top publisher on both Xbox and PlayStation this quarter,” Nadella stated during the earnings call. He also noted that Game Pass annual revenue exceeded $5 billion for the first time and confirmed that Microsoft now has 500 million monthly active users across all gaming platforms and devices.

In contrast, Xbox hardware revenue decreased by 22 percent this quarter, even during a busy period for Game Pass. In May, Microsoft raised the price of Xbox Series X consoles by $100, bringing the retail price to $599.99, along with increases for controllers.

Overall gaming revenue at Microsoft increased by 10 percent year-over-year, adding $2 billion for the full fiscal year. Xbox content and services revenue grew 16 percent annually, but Xbox hardware revenue fell 25 percent due to lower console sales volume.

Microsoft’s “Xbox everywhere” strategy — a focus I’ve tracked in my Notepad newsletter over the past year — is expected to extend to Nintendo Switch 2 titles. One such title could be featured in Nintendo’s upcoming Switch 2 partner Direct event.

Looking forward, Microsoft will showcase new Xbox Ally handheld devices at Gamescom next month. Attendees will be able to play a demo of the highly anticipated Hollow Knight: Silksong on ROG Xbox Ally units, as well as “a couple more surprises at the show from our partners.”

For Q1 fiscal 2026, CFO Amy Hood anticipates a mid-single-digit decline in Xbox content and services revenue, alongside a mid-to-high single-digit drop in overall gaming revenue.

Office and cloud

Microsoft 365 commercial cloud revenue grew by 18 percent year-over-year, supported by higher per-user revenue and adoption of Microsoft 365 Copilot licenses. A January price increase for Microsoft 365 consumer plans contributed to 20 percent growth in consumer cloud revenue. Microsoft now has 89 million Microsoft 365 consumer subscribers, up 8 percent from last year.

Once again, cloud growth stood out this quarter. Azure and other cloud services surged by 39 percent, fueled by expansion across all service categories. Server products revenue, however, dropped by 2 percent, indicating that more customers are shifting to cloud-based solutions.

Nadella emphasized that all Azure regions now prioritize AI and support liquid cooling. Hood also disclosed that Microsoft plans to invest over $30 billion next quarter in AI infrastructure scaling. If sustained, this would bring annual spending to around $120 billion — exceeding the $80 billion allocated in the past 12 months.

LinkedIn revenue increased by 9 percent, while user sessions grew by 7 percent. Microsoft noted “record engagement” on the platform this quarter. Additionally, search and news advertising revenue rose by 21 percent following Bing’s AI-driven redesign and new features.