Microsoft has just announced its financial results for the third quarter of fiscal year 2024. The software maker posted revenue of $61.9 billion and net profit of $21.9 billion in the third quarter. Revenue increased by 17% and net profit increased by 20%. This is the second quarter in a row that Microsoft has included additional revenue from the Activision Blizzard acquisition, which at one time made the gaming business Microsoft's third-largest business.
This time, the gaming business returned to fourth place behind Windows after Windows as a result of stronger-than-expected Windows OEM revenue for the quarter.
Despite Microsoft's strong performance in the quarter, with Office revenue and Microsoft cloud revenue up 23% year-over-year, Microsoft's overall gaming revenue grew only thanks to Activision Blizzard, with Xbox hardware revenue declining and Surface revenue declining again in the quarter.
Windows OEM revenue grew 11% year-over-year in the quarter, which was a big surprise given Microsoft's previous guidance that revenue would be relatively flat. This is the price paid by PC manufacturers to license laptops and PCs to use Windows, and while it was affected in 2023, it has picked up again throughout 2024. Microsoft is now looking to boost its Windows OEM revenue this summer with the launch of so-called "AI PCs" powered by Qualcomm's latest Snapdragon chips.
We expect Microsoft to unveil its own Surface terminals at a special event on AI and Surface on May 20, which will use Snapdragon X Elite and X Plus chips. If these new chips can deliver the balance of performance and battery life promised by Qualcomm, they will be the biggest CPU change since Apple Silicon.
Microsoft will rely on this boost, especially when it comes to the Surface. Equipment revenue fell sharply by another 17% in the third quarter. Despite Microsoft's launch of new Surface devices and adjustments to its hardware mix amid layoffs, device revenue has been declining for 12 consecutive months. After Panos Panay abruptly left for Amazon last year, Microsoft now has a new CEO for Windows and Surface. Pavan Davuluri recently took over the Windows division, following his takeover of Surface devices last year. Last year, Microsoft split the Windows and Surface divisions into two different leaders, but now they're back under one leader.
On Xbox and gaming, Xbox content and services revenue, including Xbox Game Pass, grew 62%. This is again due to Activision Blizzard's revenue, which accounts for the majority of revenue.
Microsoft revealed in February that Xbox Game Pass subscribers have now grown to 34 million, including Xbox Game Pass Core (formerly Xbox Live Gold) members. Four games that were previously exclusive to Xbox are now coming to PS5, and some of them will also be coming to Nintendo Switch.
This strategic shift is currently limited to these games, but appears to be in response to slowing Xbox Game Pass growth and slowing Xbox console sales. This quarter, Xbox hardware sales fell by a whopping 31%, another big drop after weak Xbox sales during last year's important holiday season. Microsoft acknowledged the obviousness in its earnings filing: the sharp decline was "driven by lower console sales."
Overall, gaming revenue grew 51%, driven by additional revenue from Activision Blizzard, with a net impact of 55 percentage points. This means that without Activision Blizzard, Microsoft's overall gaming revenue would actually have declined this quarter. The newly acquired segment recorded revenue of $1.97 billion in the third quarter, but integration costs, closing costs, and other revenue costs totaled $980 million. Combined with other operating expenses ($1.34 billion), Activision Blizzard's overall operating loss was $350 million.
Without Activision Blizzard, Xbox content and services revenue would also only grow by one percentage point, so it's clear that this huge acquisition has already had a big impact on Microsoft's overall gaming revenue.
Microsoft's Office and cloud businesses continue to be the stars of the show. Office commercial products and cloud services revenue grew 13% year-over-year, and even Office consumer revenue grew 4%. Currently, Microsoft 365 has 80.8 million consumer users.
Amy Hood, Microsoft's chief financial officer, said, "Microsoft cloud revenue for the quarter was $35.1 billion, up 23% year-over-year, driven by strong execution from our sales team and partners. Microsoft's server products and cloud services revenue grew 24% due to a 31% year-over-year increase in Azure and other cloud services. "
Investors are also looking to see signs of revenue from Microsoft's big investments in AI over the past year, particularly with Azure OpenAI, which charges businesses to run AI tasks in the cloud. Revenue from AI services contributed 7 percentage points of the 31% revenue growth from Azure and other cloud services, an early indicator of Microsoft's potential revenue in the AI space.
Microsoft will host an earnings call at 5:30 p.m. ET / 2:30 p.m. PT, and we'll keep you updated on comments from Hood or Microsoft CEO Satya Nadella.