Microsoft’s AI business is booming — Xbox, not so much

Microsoft’s cloud and AI businesses are doing pretty well — and their impact is being felt across the company. In its Q2 2025 earnings, Microsoft announced revenue of $69.6 billion for the quarter, up 12 percent year-over-year, and net income of $24.1 billion, which is up 10 percent year-over-year.

As for the AI business, CEO Satya Nadella says in a statement that it has “surpassed an annual revenue run rate of $13 billion, up 175 percent year-over-year.” The company’s Azure and other cloud services business grew 31 percent year-over-year, a slight decrease from 33 percent YoY growth the previous quarter.

The company’s gaming revenues didn’t fare so well. Gaming revenue declined 7 percent, and Xbox hardware revenue declined 29 percent. Microsoft has been moving away from a focus on its own hardware with messaging like its “​​This is an Xbox” ad campaign and bringing Xbox Game Studios games to other platforms, and those changes could be contributing to the decline.

That means the focus is instead on games and services, and that’s where the business is seeing some improvements. Xbox content and services revenue were up 2 percent, “driven by growth in Xbox Game Pass,” Microsoft says. (Last quarter, Microsoft’s software gaming revenues were way up even as Xbox hardware revenue declined.)

During Wednesday’s earnings call, Nadella said that Game Pass “set a new quarterly revenue record” and noted that Xbox Cloud Gaming saw a “record 140 million hours streamed” during the quarter. Nadella also revealed that Indiana Jones and the Great Circle has “already been played by more than 4 million people.”

In its press release, Microsoft said that it saw Windows OEM and Devices revenue growth of 4 percent year-over-year, a slight bump from 2 percent in Q1.

On the earnings call, Microsoft CFO Amy Hood said that Windows OEM and devices should decline low to mid single digits in Q3 2025. Overall gaming revenue is expected to grow in single digits, with Xbox content and services expected to grow low to mid single digits. Xbox hardware revenue “will decline year over year.”

During the call, Nadella also reiterated that the company remains “very happy with the partnership with OpenAI” (the two companies announced last week that they are adjusting their partnership) and acknowledged that DeepSeek had some “real innovations.”

Update, January 29th: Added details from Microsoft’s earnings call.