Microsoft's entertainment and devices division, which includes its Xbox business, lost $229 million (£143m) in the three months ending March 31 after sales of Xbox 360 fell by almost half.
The division's revenue was down 16.5 per cent, to $1.6 billion (£1bn). Xbox 360 sales during the quarter totalled 1.4 million – a drop of more than 48 per cent from this time last year, when 2.7 million consoles were sold and the division's revenue rose 60 per cent.
Microsoft blamed the decline on a "soft gaming console market" and accentuated the positive: Xbox 360 has been the best-selling console in the US for 15 consecutive months, as NPD revealed last week.
Across the company as a whole, revenue totalled $17.41 billion (£10.87bn), an increase of 6 per cent; operating income rose 12 per cent to $6.37 billion (£3.98bn).
CEO Steve Ballmer pointed to the upcoming launch of Windows 8 and a new version of Microsoft Office, saying the company would "be delivering exceptional value to all our customers in the year ahead."
Despite Ballmer's confidence, Microsoft is lowering its forecasts for the financial year ending June 30. It expects total annual revenue to be between $28.3 billion and $28.7 billion (£17.6-£17.9bn).