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The vibes around Xbox aren't great right now, and Microsoft's latest financial report puts some hard numbers to that feeling. Hardware revenue continues to decline, and gaming revenue as a whole is effectively flat. That's not typically the kind of thing growth-minded investors like to hear – especially when Microsoft's cloud and AI services under the Azure brand are continuing to rapidly expand.
"Gaming revenue decreased $113 million or 2% driven by a decline in Xbox hardware, offset in part by growth in Xbox content and services," Microsoft says in its FY26 Q1 financial report. "Xbox hardware revenue decreased 29% driven by lower volume of consoles sold. Xbox content and services revenue increased 1% on a strong prior year comparable with growth in Xbox Game Pass and third-party content, offset in part by a decline in first-party content."
These sorts of declines in Xbox hardware have been going for years, and a 29% decline isn't even unprecedented – but it feels especially notable to see these figures reported as Microsoft continues to turn up the price of Xbox consoles. Bigger profit margins won't necessarily mean bigger revenue, but you've gotta try to get the graphs evened out somehow, right?
Notably, these figures are compared against the Q1 results of FY25, which is when the results of the Activision Blizzard acquisition hit the balance sheets. In that quarter, gaming revenue was up by 43% thanks to all the new revenue streams from games like Call of Duty, World of Warcraft, and Candy Crush. One thing was very familiar, though – that quarter also saw Xbox hardware revenue down 29%.
If you're an investor, you might prefer to see stats like those for Microsoft Cloud (up 26%), LinkedIn (up 10%), or Azure (up a whopping 40%). Azure covers a wide array of cloud and AI services, and with that kind of growth, you might start to see why Microsoft seems a lot more enthusiastic about AI than it does actually employing people to make games.
