A mixed performance marked Microsoft’s latest quarterly results, with strong cloud growth offset by a clear slowdown in its Gaming business. The company reported weaker numbers for Xbox revenue and hardware sales, even as overall earnings continued to rise.
Microsoft said its Gaming revenue declined by 9% in the second quarter of FY 2026. Xbox content and services revenue dropped 5% year-on-year, while Xbox hardware revenue recorded a sharper fall of 32%. These figures were shared during the company’s earnings call for the quarter ended December 31.
During the call, Microsoft’s Chief Financial Officer Amy Hood confirmed that Xbox content and services revenue came in below expectations. The company attributed the decline to a lack of impactful Xbox first-party content, which affected engagement across the platform.
Looking ahead, Microsoft expects Xbox content and services revenue to decline in the mid-single digits in the third quarter. The company cited “strong content performance” in the same period last year as a key comparison factor. The decline is expected to be partly offset by growth in Xbox Game Pass. However, Microsoft did not share specific Game Pass growth numbers for the quarter. The company also expects Xbox hardware revenue to continue declining year-on-year in Q3.
Microsoft Gaming’s weaker performance stood in contrast to the company’s overall financial results. Total revenue reached $81.3 billion, up 17% year-on-year, driven largely by its Cloud business. Operating income for the quarter was $38.3 billion. Microsoft Cloud revenue rose 26% to $51.5 billion.
Microsoft Chief Executive Officer Satya Nadella said the company remains “committed to delivering great games across Xbox, PC, cloud, and every other device”. He also highlighted that the third quarter saw record PC players and paid streaming hours on Xbox.
The company’s personal computing segment, which includes Windows OEM and Devices, Gaming, and Search and News Advertising, declined 3%. Within this segment, Windows OEM and Devices revenue increased 1%. Microsoft also announced that Windows 11 reached 1 billion users during the quarter, marking growth of over 45% year-on-year.
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