Microsoft has released its FY26 Q1 earnings results. The company’s revenue was $77.7 billion, an increase of 18%, while the operating income was $38.0 billion, an increase of 24%. The two sectors responsible for the company’s revenue jump were Cloud and AI. Microsoft’s Chairman and CEO, Satya Nadella, explained the reason for their increased investment in AI.
“Our planet-scale cloud and AI factory, together with Copilots across high-value domains, is driving broad diffusion and real-world impact,” Nadella said. “It’s why we continue to increase our investments in AI across both capital and talent to meet the massive opportunity ahead.”
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Every other sector of the company’s business experienced significant growth, except Xbox content and services revenue, which increased just 1%. In contrast, Microsoft Cloud brought in one of the highest revenues at $49.1 billion. Below is a rundown of the performance of the different sectors of Microsoft’s business.
- Microsoft Cloud revenue was $49.1 billion and increased 26%
- Microsoft 365 Commercial cloud revenue increased 17%
- Microsoft 365 Consumer cloud revenue increased 26%
- LinkedIn revenue increased 10%
- Dynamics 365 revenue increased 18%
- Azure and other cloud services revenue increased 40%
- Windows OEM and Devices revenue increased 6%
- Xbox content and services revenue increased 1%
- Search and news advertising revenue excluding traffic acquisition costs increased 16%
Based on the result, Microsoft has returned $10.7 billion to shareholders as dividends and share repurchases in the first quarter of fiscal year 2026. According to the company, Xbox hardware sales were down 29%, accounting for the around $113 million revenue loss year-over-year.
Microsoft’s gaming division appears to be under pressure to turn a profit
Xbox appears to be the weakest link in Microsoft’s business, and the management seems to be under pressure to make the sector more profitable. Earlier in October, the company increased the price of Game Pass, a decision that was not well-received. Several people canceled their subscription because of that decision.
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“Xbox hardware revenue decreased 29% driven by lower volume of consoles sold,” the company said. “Xbox content and services revenue increased 1% on a strong prior year comparable with growth in Xbox Game Pass and third-party content, offset in part by a decline in first-party content.”
The pressure on the gaming division to become more profitable is arguably the reason why Xbox management is now pushing its first-party titles to rival platforms. The latest first-party title heading to PlayStation is Halo: Campaign Evolved.
With a strong 2026 lineup of first-party titles like Forza Horizon 6, Clockwork Revolution, and Fable, it will be interesting to see if next year will be the year the radical revolution initiated by the Xbox management will translate to profit.
Do you think Xbox is on the right path to becoming highly profitable for Microsoft? Share your thoughts in the comment box below.
