Microsoft’s latest quarterly earnings report shows that Xbox revenue declined across several key areas, even as the company posted another record-breaking financial quarter driven largely by cloud computing and artificial intelligence.

The results highlight the ongoing challenges facing Microsoft’s gaming business during a period of significant restructuring across the Xbox division.

Xbox Content and Hardware Sales Decline

According to Microsoft’s latest earnings report, Xbox content and services revenue fell 10% year-over-year during the most recent quarter.

The company also reported another decline in console sales, with Xbox hardware revenue dropping 13% compared to the same period last year.

Looking at the full fiscal year, overall Xbox revenue decreased by 5%, reflecting weaker performance across the gaming segment despite continued growth in other parts of Microsoft’s business.

Microsoft Posts Record Revenue

While Xbox struggled, Microsoft’s overall business continued to perform exceptionally well.

The company reported $133.75 billion in annual revenue, representing a 31.3% increase compared to the previous year.

Much of that growth was driven by Microsoft’s cloud services, enterprise software, and rapidly expanding AI business, which have become the company’s primary financial engines.

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Xbox Continues Its Major Restructuring

The earnings report arrives during one of the biggest transitions in Xbox’s history.

In recent months, Microsoft has announced sweeping changes to its gaming division, including studio restructuring, layoffs, and leadership changes aimed at reshaping the business.

The financial report also references severance costs and impairment charges related to Xbox, indicating that the restructuring efforts have already had a measurable financial impact.

At the same time, Microsoft noted that retirement-related expenses were lower than expected, partially offsetting the costs associated with the gaming division.

AI Investments Continue to Drive Growth

Another major contributor to Microsoft’s strong financial performance was its investment in Anthropic, the artificial intelligence company behind Claude AI.

Microsoft reported a $3.2 billion gain related to that investment, while executives also highlighted continued momentum across the company’s AI products and services.

Artificial intelligence remains one of Microsoft’s fastest-growing businesses and continues to receive significant investment across the company.

A New Era for Xbox

The latest earnings come shortly after a major leadership shake-up.

Asha Sharma now leads the Xbox division following the retirement of Phil Spencer and the departure of Sarah Bond. Before taking over Xbox, Sharma held senior leadership roles within Microsoft’s AI organization.

With revenue declining, console hardware sales continuing to fall, and an ongoing company-wide restructuring underway, Xbox is entering a pivotal period as Microsoft looks to redefine the future of its gaming business while balancing investment between traditional gaming and rapidly growing AI initiatives.