TL;DR
- Xbox games revenue down 9% to $623M in Q2 FY2026.
- Hardware sales plunge 32% due to fewer console units sold.
- Content/services drop 5%; more declines expected in Q3.
Microsoft's Xbox gaming division saw sharp declines in its latest quarterly earnings, with overall games revenue dropping 9% year-over-year to $623 million for the three months ending December 31, 2025. Hardware sales took the biggest hit, falling 32%, while content and services (including Game Pass and game sales) slipped 5%. The company pointed to weaker first-party game performance compared to the strong lineup in the prior year, and executives admitted the results came in below expectations.
The numbers paint a bad picture for Microsoft's gaming arm during what is usually a strong holiday period. Total revenue for the Xbox division hit $623 million, a clear step back from the same quarter last year. Breaking it down, Xbox content and services revenue fell 5% year-on-year. This category covers digital game sales, subscriptions like Game Pass, and other ongoing player spending. In the company's 10-Q filing with the SEC, Microsoft attributed much of this dip to last year's stronger first-party content performance. CFO Amy Hood told investors on the earnings call that the results were "below expectations" and "driven by first-party content."
It's not entirely clear which specific titles underperformed, but there are hints. Microsoft's Activision subsidiary shifted its strategy for Call of Duty releases.
On the hardware side, things look even rougher. Xbox hardware revenue declined 32% year-on-year, driven by weaker console sales. This continues a trend where Xbox console numbers have struggled in recent quarters, making it harder to compete in a market dominated by rivals.
CEO Satya Nadella emphasized the company's long-term vision during the investor call. "In gaming, we are committed to delivering great games across Xbox, PC, cloud, and every other device," he said. "And we saw record PC players, and paid streaming hours on Xbox." It's a nod to growth in areas like cloud gaming and PC engagement, even as traditional console metrics lag.
For Q3 (the three months ending March 31, 2026), Microsoft is guiding for another year-on-year decline in both Xbox content and services revenue and the hardware business.
Microsoft Gaming and Recent Layoffs
The gaming division has faced significant challenges beyond just these numbers, including multiple rounds of layoffs in recent years. In 2025 alone, Microsoft carried out several waves of job cuts across the company, with the gaming side hit hard. A major round in July 2025 affected about 9,000 employees overall, including closures like The Initiative studio and cancellations of projects such as Perfect Dark and Everwild. That marked the fourth big layoff wave in Xbox in about 18 months, tied to post-acquisition restructuring after the Activision Blizzard deal and efforts to streamline operations.
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