Xbox revenue fell 2% in Q1 as hardware dropped 14%, Microsoft says

Xbox content and services revenue declined 2% year-on-year in Microsoft's first quarter, with hardware revenue down 14%, according to the company's results for the three months ended September 30, 2026. First-party growth blunted the fall; lower third-party content spending and softer Game Pass performance drove it.

The gaming numbers sit inside a company that otherwise beat expectations. Microsoft posted $92.3 billion in revenue, up 19% year-on-year, with net income of $36.6 billion, up 32%. Devices and consumer revenue, which includes Xbox, fell 3% to $15.5 billion.

What changed in the quarter?

Xbox CEO Asha Sharma put the quarter plainly: "In Q1, Xbox revenue declined 2% YoY, compared with a 10% decline a quarter ago, while our accountability margin improved."

Her list of wins was specific. "Minecraft and World of Warcraft Forever set records, Call of Duty had its most acclaimed release in more than a decade, and our PC platform revenue grew double digits," Sharma said. Minecraft hit "all-time highs in both engagement and revenue," per the company's filing.

The console business is constrained, but not by demand. "Console sales remain constrained by supply, with more demand than consoles available," Sharma said. Microsoft is expanding a refurbishment program to get more units to players. "We're making progress, with a lot more work ahead," she added.

Costs fell faster than revenue. Devices and consumer cost of revenue dropped 8%, driven by lower amortisation of intangible assets from the Activision acquisition and the 14% hardware decline. Xbox helped trim segment operating expenses by 3%, "partially offset by continued investments in R&D compute capacity and talent," per the filing.

What did Nadella and Hood signal for Q2?

Microsoft CEO Satya Nadella framed the pipeline around reach rather than the box. "We remain focused on building great games and reaching players wherever they choose to play across console, PC, mobile, and cloud," he said.

The lineup he named: Modern Warfare 4, which launched last week "to the best reviews for a Call of Duty game in more than a decade," and Grand Theft Auto 6, which arrives on Xbox next month.

CFO Amy Hood guided to mid-to-high single digit growth in Xbox content and services revenue for Q2, "up sequentially driven by the timing of content launches across both third- and first-party." Expect the shape of the year to be lumpy: growth strongest in Q2, deceleration in Q3, further moderation in Q4. Hardware revenue should decline year-over-year again in Q2.

What about the cuts?

Growth and layoffs are running concurrently. Xbox continues a restructuring that has already cut 20% of its workforce, with additional layoffs expected in November and January.

Earlier this week, Xbox staff were among up to 60,000 Microsoft employees offered voluntary exit packages in the US, UK, Canada, and India.

Sharma reportedly told staff earlier this month that Xbox had "started to return to growth" and is "making the right decision to reinvest in the business." She was more quantitative in that internal message: "After an all-time low, we've started to return to growth, more than two to three times what we were, and we expect that to continue."

Recent launches — Gears of War: E-Day, Minecraft Dungeons 2, and World of Warcraft Forever — reportedly performed strongly, supporting that read.

The near-term test is arithmetic: whether GTA 6 next month and Modern Warfare 4's tail can deliver the Q2 growth Hood promised before the November and January layoffs land.