Ouch: Xbox CEO Asha Sharma says Microsoft’s gaming business is facing declining sales and thin profit margins, even as the company is spending tens of billions in an effort to grow.

Sharma mentioned the issue in a memo sent to the Xbox team as Bloomberg reported that Microsoft is preparing “significant layoffs” in the gaming division.

In her memo, which is now public, Sharma disclosed that Xbox projects to end this fiscal year "at about a 3% accountability margin, down year-over-year.” This suggests the Xbox team is barely turning a profit considering its previous chief, Phil Spencer, reportedly defined the accountability margin as “the percent of your revenue that you keep in profit.”

Xbox sales have been stagnating, Sharma adds, even though Microsoft has spent a fortune to bolster the business, most notably its $68.7 billion deal to acquire Activision Blizzard.

“Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue,” she wrote.

The memo may have been released to justify the reported layoffs, which are expected to occur after June 30, according to Bloomberg. However, Sharma also framed the memo as being up-front about the major challenges facing the Xbox business. “We won’t succeed by hiding hard truths, nor will we succeed by doing the same thing and expecting different results,” she added.

The memo reiterates comments Sharma made the day before in an interview with Forbes, where she warned that the AI-driven memory shortage is upending the console business. “We are in a hardware component crisis,” she writes.

“When I joined as CEO in February, the price we paid for console storage components was over 2x as high as we paid last fall. These costs have since doubled again. And as we plan for the 2027 holiday season, we expect another significant increase, taking us over 5x the prices we paid only two years earlier,” she added. “Memory costs have followed a broadly similar trajectory.”

The situation is so bad that Sharma says, “We are currently unable to make as many consoles as players want to buy, and we need a new business model and partnerships for hardware as we remain committed to Helix,” the company’s codename for its next-gen Xbox. Her comments are raising speculation that Microsoft might need major changes for the upcoming console to keep it affordable.

“I think we've reached a point where it will be hard to imagine that mass audiences can afford thousands of dollars to spend on a console generation. And so I think we will start to see radically different business models that we never expected start to come into orbit later this year,” she also said in the Forbes interview.

The next-gen Xbox has been rumored to launch in late 2027 or possibly 2028.