Microsoft’s Q1 2025 earnings are in, and the results show that Microsoft’s software gaming revenues are way up even as Xbox hardware revenue is declining.

The company says that its Xbox content and services revenue grew 61 percent year over year from the previous quarter — a figure driven by “53 points of net impact from the Activision acquisition,” according to the company’s press release. But hardware revenues again declined, down 29 percent this quarter, which may be influenced by Microsoft’s continued strategy to make its games available more widely than just Xbox consoles.

During the quarter, Microsoft introduced its new Xbox Game Pass “Standard” tier and a price hike for Xbox Game Pass Ultimate. Q1 also saw the arrival of Call of Duty: Modern Warfare III on Xbox Game Pass, but this quarter doesn’t include the impact of Call of Duty: Black Ops 6, which launched last week. (Microsoft CEO Satya Nadella said on its earnings call that the game was the “biggest Call of Duty release ever.”)

The company’s Intelligent Cloud division was also a bright spot, with total revenues up 20 percent year over year to $24.1 billion driven by Azure. Azure and other cloud services revenue was up 33 percent, “including 12 points” from demand for its AI services. Productivity and Business Processes, which includes its Office products, was up 12 percent year over year to $28.3 billion in revenues.

Microsoft’s OEM and Devices revenue — which are now reported together — were up 2 percent. However, that figure was driven by “growth in Windows OEM” and “partially offset by a decline in Devices,” Microsoft says.

Microsoft, like many other companies, is investing heavily in AI-focused features and tools right now, especially to improve Copilot. “AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business process,” Nadella says in a statement. “We are expanding our opportunity and winning new customers as we help them apply our AI platforms and tools to drive new growth and operating leverage.” Microsoft’s AI business is set to surpass an annual run rate of $10 billion this quarter, Nadella said on the call.

Update, October 30th: Added updates from Microsoft’s earnings call.