Xbox Q1 Revenue Falls 2% Despite Record Minecraft and Call of Duty Success

Key points

• Xbox content and services revenue fell 2% year-over-year, driven by lower third-party sales and Game Pass performance, though first-party content growth partially offset the drop.
• Hardware revenue declined 14% year-over-year, continuing a multi-quarter downward trend despite price increases for Xbox Series X and S consoles.
• Microsoft reported total revenue of $92.3 billion, up 19%, with net income rising 32% to $36.6 billion, exceeding analyst expectations.
• Xbox CEO Asha Sharma noted that the 2% revenue decline is an improvement over the 10% drop in the previous quarter, citing record engagement for Minecraft and World of Warcraft: Forever.
• The Devices and Consumer segment saw operating expenses drop 3% due to Xbox cuts, but this was offset by increased R&D investments in compute capacity and talent.
• Microsoft expects Xbox content and services revenue to grow 4-9% in the next quarter, driven by the launch of Grand Theft Auto VI and Modern Warfare 4, while hardware revenue is expected to continue declining.

Background

In September 2026, Xbox underwent a significant restructuring led by Asha Sharma, eliminating 1,600 jobs and consolidating studios like Halo and Rare under Activision. Microsoft CEO Satya Nadella endorsed these cuts as necessary for a 'sustainable business model.' This quarter’s results are the first full financial report following these major changes, which also included the separation of several Microsoft-owned studios.

How outlets are covering it

Kotaku emphasizes that the financial impact of the restructuring is unclear, noting that while operating expenses dropped, R&D spending increased, suggesting layoffs may not have significantly improved profitability. GamesIndustry.biz highlights that first-party content growth partially offset the revenue decline and points to record performance for Minecraft and World of Warcraft: Forever. VGChartz notes that the 2% decline is better than the 10% drop in the previous quarter but remains a fifth consecutive quarter of revenue decline. GamesBeat focuses on the broader Microsoft earnings, noting that Xbox’s performance was a drag on the Devices and Consumer segment, which saw a 3% revenue decline, but highlights the strong overall company performance.

Why it matters

The results indicate that while Xbox’s restructuring has stabilized revenue declines, it has not yet reversed the downward trend in hardware sales or significantly boosted content revenue. The continued reliance on first-party hits like Minecraft and Call of Duty suggests a strategic shift toward high-profile titles, but hardware supply constraints and price increases may continue to limit growth. The upcoming quarter, with major releases like Grand Theft Auto VI, will be critical in determining if the restructuring can translate into sustained growth.

What to watch

Microsoft expects Xbox content and services revenue to grow 4-9% in the next quarter, driven by the launch of Grand Theft Auto VI and Modern Warfare 4. Hardware revenue is expected to continue declining year-over-year. Additional layoffs are anticipated in November and January, and Microsoft has offered voluntary exit packages to 60,000 employees, including Xbox staff.