Microsoft has reported strong overall growth for its third quarter, though its gaming division continues to face pressure, with declines across both Xbox content and hardware sales.

For the three months ending March 31, 2026, the company posted revenue of about A$126.9 billion, up 18 per cent, alongside operating income of A$58.8 billion and net profit of A$48.7 billion, increases of 20 per cent and 23 per cent respectively.

Growth was largely driven by Microsoft’s cloud operations, which generated more than A$82.7 billion during the period. Demand for Azure and AI-related services remained strong, pushing Intelligent Cloud revenue up 30 per cent to around A$53.1 billion. Azure alone recorded a 40 per cent increase, outperforming expectations.

The company’s artificial intelligence segment has also expanded rapidly, reaching an annualised revenue run rate of roughly A$47.4 billion, more than doubling compared with the previous year.

In contrast, Microsoft’s gaming business saw weaker results. Overall gaming revenue fell 7 per cent, with Xbox content and services slipping 5 per cent year-on-year. The decline follows a particularly strong prior period that benefited from major first-party releases.

Hardware sales were hit even harder, dropping 33 per cent. The fall comes after price increases introduced last year for Xbox Series X and Series S consoles, with some models rising by between A$30 and A$105 in the United States.

Despite the revenue declines, engagement metrics showed improvement. Microsoft reported record levels of monthly active users and streaming activity for Xbox during the quarter, suggesting player interest remains strong even as spending shifts.

Chief executive Satya Nadella said the company is working to rebuild momentum within its consumer businesses by focusing on quality and strengthening connections with core users. He pointed to recent changes to the Game Pass subscription service as part of that effort.

The adjustments included reducing the cost of the premium Game Pass Ultimate tier from around A$45.90 to A$35.20 per month, while the PC version dropped from about A$25.30 to A$21.50. However, these reductions only partially reverse earlier increases introduced in late 2025.

Microsoft expects further pressure on its gaming segment in the near term. The company has forecast a low single-digit decline in Xbox content and services revenue, with hardware sales likely to fall again.

Chief financial officer Amy Hood said the outlook reflects both the strong comparison from last year’s content releases and the recent changes to subscription pricing aimed at delivering better value to players.

The company has also signaled a shift in how it positions its gaming division, moving away from the Microsoft Gaming label and placing renewed emphasis on the Xbox brand. Leadership has indicated that consoles will remain central to its long-term strategy, alongside expansion into new markets and a stronger focus on subscription services.

Future plans include targeting mobile-first audiences, growing its presence in regions such as China, and continuing to invest in long-running franchises including Minecraft and The Elder Scrolls. Microsoft is also looking to improve community features, discovery tools and personalisation across its platforms.

While cloud computing and AI continue to power Microsoft’s financial performance, the company faces a more complex path in gaming as it works to balance pricing, content, and long-term growth.