Microsoft just released its financial results for the third quarter of fiscal 2025. The software maker had third-quarter revenue of $70.1 billion and net profit of $25.8 billion. Revenue increased by 13% and net profit increased by 18%. Microsoft's revenue was previously expected to be $68.42 billion, so the results exceeded Wall Street expectations.
The growth of cloud computing business seems to be the main driver of revenue growth, with total revenue of Microsoft cloud computing business reaching $42.4 billion, an increase of 20%. However, Microsoft has not yet broken out the revenue from its artificial intelligence business, so it is unclear how much the business will grow.
Microsoft also reported a 3% year-over-year increase in Windows OEM and device revenue amid the impact of Trump's tariffs and consumer spending. Businesses and consumers are upgrading PCs and laptops ahead of Windows 10's October retirement, but Windows OEM revenue has yet to see significant growth. Microsoft said the increase in Windows OEM revenue was due in part to "high inventory levels due to tariff uncertainty."
Microsoft now consolidates Surface revenue with Windows OEM revenue, so the specific performance of its Surface product line is unclear. Microsoft hasn't launched any new consumer Surface devices in the latest quarter, but the company began selling the Intel-powered Surface Pro 11 and Surface Laptop 7 to businesses in February. It is rumored that Microsoft is about to launch smaller versions of Surface Pro and Surface Laptop.
On the gaming front, Microsoft warned last quarter that Xbox hardware revenue would decline, and now it's happening again. Xbox hardware revenue fell 6% in the quarter, a period during which Microsoft has been launching multiple games in Game Pass. Microsoft's overall gaming revenue grew 5%.
However, Xbox content and services, including Game Pass, grew 8%. However, Microsoft did not disclose any new Game Pass subscriber numbers. The last update was in February 2024, when Microsoft revealed that the number of Xbox Game Pass subscribers was 34 million, including Xbox Game Pass core members (formerly known as Xbox Live Gold members).
Over the past year, Microsoft has been advancing its strategy to bring more previously Xbox-exclusive games to PlayStation and Nintendo Switch. The move has proven successful, with pre-orders for Raiders of the Lost Ark and Forza Horizon 5 surpassing Sony's PlayStation Store last month.
Microsoft's Xbox Everywhere strategy will also include games for Nintendo Switch 2. Microsoft is preparing a similar list of games that will be ported to Switch 2 this year.
As always the highlight of Microsoft's financial reports, the company's Office and cloud businesses have once again become the focus. Microsoft 365 business product and cloud service revenue increased by 11% year-on-year, and even Office consumer version revenue increased by 10%. There are currently 87.7 million Microsoft 365 consumer subscribers.
Earlier this year, Microsoft bundled its Office AI capabilities into Microsoft 365 Personal and Home subscriptions and raised prices. Previously, Microsoft 365 subscribers had to pay an additional $20 per month to use Copilot in Office apps like Word, Excel, and PowerPoint as part of a Copilot Pro subscription. But now, Microsoft is offering these AI capabilities within Microsoft 365 apps for an additional $3 per month.
Existing subscribers can opt out of the AI features and avoid the price increase, but it's unclear how many users actually decide to do so. Microsoft did note that its "revenue per user" has increased since the price increase in January, but that was partially offset by "ongoing package mix adjustments" for the $1.99-per-month Microsoft 365 Basic subscription.
Revenue from Microsoft's Intelligent Cloud business grew 21% year over year to $26.8 billion, exactly double the revenue from Windows, Xbox, and search and news advertising (more on personal computing). Server products and cloud services revenue increased by 22%, with Azure growing by 33%.