The company's shares fell 1.9 percent to US$67 in trading after the bell.
Under chief executive Satya Nadella, who took the helm in 2014, Microsoft has sharpened its focus on the fast-growing cloud computing unit to counter a prolonged slowdown in the PC market, which has weighed on demand for its Windows software.
Revenue from Microsoft's personal computing unit, its largest by revenue, fell 7.4 percent to US$8.84 billion. Analysts on average had expected revenue of US$9.22 billion, according to research firm FactSet StreetAccount.
The business includes Windows software, Xbox gaming consoles, online search advertising and Surface personal computers.
Surface revenue dipped 26 percent in the quarter.
The lower-than-expected revenue in the personal computing division came amid an uptick in the PC market.
Worldwide PC shipments rose 0.6 percent in the first quarter of 2017, seeing growth for the first time in five years, market research firm IDC said earlier this month.
Revenue from Microsoft's "Intelligent Cloud" business, which houses server products and the company's flagship cloud computing platform, Azure, jumped about 11 percent to US$6.76 billion in the third quarter ended 31 March.
Azure revenue soared 93 percent in the quarter.
Azure competes with
The company's net income rose to US$4.80 billion, or 61 cents per share, in the third quarter ended 31 March, from US$3.76 billion, or 47 cents per share, a year earlier.
Excluding one-time items, Microsoft earned 73 cents per share. Analysts on average had expected 70 cents per share, according to Thomson Reuters I/B/E/S.
Revenue on an adjusted basis climbed 6 percent to US$23.56 billion, missing analysts' average estimate of US$23.62 billion.
Microsoft said LinkedIn, which it bought for about US$26 billion, contributed US$975 million in revenue in the quarter.
Microsoft's shares had risen 9.9 percent this year through Thursday, eclipsing the 7 percent gain in the broader S&P 500.
(Reporting by Pushkala A and Aishwarya Venugopal in Bengaluru; Editing by Sai Sachin Ravikumar)