Xbox sales have been tanking for a while now — and the story hasn’t gotten any brighter. Microsoft just released its Q1 2026 earnings and Xbox hardware revenue was down 29 percent year-over-year. Last quarter, it was down 22 percent. Down 29 percent in the first two quarters of 2025, down 42 percent in Q4 of 2024… You get the picture.
As tariffs and inflation take their toll, Microsoft has dramatically increased the prices on its gaming hardware, with the Series X now starting at $599.99. Microsoft’s response has been to deemphasize the console and pursue an “Xbox everywhere” strategy. That has yielded some success on the content and services front, though revenue there was largely flat this quarter, only growing one percent year over year.
Microsoft would obviously like to see more growth there. The company has reportedly been pursuing dramatic 30 percent profit margins there, leading to layoffs and cancelled projects. But the company’s outlook for Q2 isn’t much rosier. It expects Xbox hardware revenue to continue to decline, and content and services to continue low-single digits growth.
Microsoft did see hardware growth from Windows OEM and Devices, with revenue increasing a modest 6 percent year over year. The company stopped reporting Surface earnings separately, so it’s unclear how those devices are performing. They had been on a steady decline for several years.
It’s Azure and cloud services that remain the driving force behind Microsoft’s ascent. The growth of its intelligent cloud services is substantial. Revenue increased 28 percent year over year to $30.9 billion, with Azure specifically growing 40 percent.
More broadly, Microsoft Cloud revenue was $49.1 billion, an increase of 26 percent from Q1 2025. The company’s cloud divisions and Azure have been growing steadily for several years now.
In total, Microsoft reported $77.7 billion in revenue for the quarter, up 18 percent from the same time last year. And its net income was $27.7 billion, up 12 percent. While those increases are largely driven by the company’s various cloud offerings, its productivity and business processes still account for a significant portion of its income ($33 billion).
Update, October 29th: This article was updated with details from Microsoft’s earnings call. The headline was also updated to specify that it was hardware sales that were down.
