Microsoft Gaming Revenue Dips 2% as Xbox Hardware Sales Tumble

Microsoft reported its latest quarterly earnings results on Wednesday, revealing that gaming revenue decreased $113 million (2%) for the July-September quarter. The tech company attributed the decline almost entirely to a steep drop in Xbox hardware sales, which was "offset in part by growth in Xbox content and services."

The content and services division, which includes Xbox Game Pass subscriptions and digital sales, remains Microsoft’s key strategic focus. This segment grew 1% to $5.5 billion. Microsoft explained that the growth was mainly driven by Xbox Game Pass and third-party content, although this was partially reduced by lower sales of first-party content.

This slight but steady growth signals the company’s clear pivot away from relying on one-time console sales and toward building a stable business on recurring subscriptions.

Xbox Hardware Sales Tumble

The hardware division faced a much tougher environment, with revenue decreasing 29%, driven by "lower volume of consoles sold". This slump continues a significant downturn, following a 22% decline in the previous April-June quarter. The drop was likely aggravated by two separate price hikes that have made many consumers hesitant to buy a new console.

While the gaming division saw a slight dip, Microsoft as a whole had a strong quarter, beating Wall Street expectations for its first fiscal quarter of 2026. The company reported $77.7 billion in revenue and adjusted earnings per share (EPS) of $3.72, surpassing the analyst consensus forecast of $75.4 billion in revenue and $3.66 EPS.

The company's overall strength was driven by its booming cloud and AI businesses. CEO Satya Nadella focused his comments on this, stating, "Our planet-scale cloud and AI factory, together with Copilots across high-value domains, is driving broad diffusion and real-world impact." CFO Amy Hood added, "We delivered a strong start to the fiscal year, exceeding expectations across revenue, operating income, and earnings per share."

All eyes will now be on the next quarter’s report, which should include the first sales details for the recently launched handheld devices, the ROG Xbox Ally and ROG Xbox Ally X, to see if they can provide a new spark for the hardware division.