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    MSFT
    Earnings call· Mar 2026(Q3 FY26)

    MICROSOFT Q3 FY26 earnings call MSFT

    Apr 29, 2026 Source

    Executive summary

    Microsoft Q3 FY26 — AI Business Surpasses $37B ARR with Strong M365 Copilot Adoption

    Microsoft delivered a strong quarter, driven by robust demand for its cloud and AI offerings, with significant acceleration in its AI business and M365 Copilot adoption. The company is aggressively investing in AI infrastructure and capacity to meet demand, while evolving its business models towards user-plus-usage to capture value from agentic computing. Management remains confident in future revenue and operating income growth despite some gross margin pressure and capacity constraints.

    Highlights

    5

    • Microsoft Cloud revenue exceeded $54 billion, up 29% year-over-year.

    • AI business surpassed $37 billion ARR, up 123% year-over-year.

    • Microsoft 365 Copilot paid seats reached over 20 million, increasing 250% year-over-year.

    • Azure and other Cloud Services revenue grew 40% (39% in constant currency), ahead of expectations.

    • Company delivered revenue of $82.9 billion (up 18%), operating income up 20%, and EPS up 21%.

    Concerns

    5

    • Company gross margin percentage was 68%, down year-over-year, driven by continued investment in AI infrastructure and growing AI product usage.

    • Free cash flow was $15.8 billion, reflecting higher capital expenditures.

    • Windows OEM revenue is expected to decline in the high teens in Q4 FY26 due to strong prior year comparable, inventory normalization, and higher memory prices.

    • Xbox content and services revenue decreased 5% (7% in constant currency) against a strong prior year comparable.

    • Azure capacity remains constrained at least through 2026 despite significant CapEx increases.

    Guidance & targets

    28
    CategoryTargetConfidence
    Q4 FY26 Revenue (Productivity and Business Processes)
    $37 billion to $37.3 billion
    medium materiality
    High
    Q4 FY26 M365 Commercial Cloud Revenue Growth (adjusted, constant currency)
    15% and 16%
    medium materiality
    High
    Q4 FY26 M365 Commercial Cloud Revenue Growth (reported, constant currency)
    13% and 14%
    medium materiality
    High
    Q4 FY26 M365 Commercial Products Revenue Growth
    mid-single digits
    low materiality
    Medium
    Q4 FY26 M365 Consumer Cloud Revenue Growth
    low 20% range
    medium materiality
    High
    Q4 FY26 LinkedIn Revenue Growth
    approximately 10%
    medium materiality
    High
    Q4 FY26 Dynamics 365 Revenue Growth
    low double digits
    medium materiality
    High
    Q4 FY26 Intelligent Cloud Revenue
    $37.95 billion to $38.25 billion
    high materiality
    High
    Q4 FY26 Azure Revenue Growth (constant currency)
    39% and 40%
    high materiality
    High
    Q4 FY26 On-premise Server Business Revenue Growth
    decline in the mid-single digits
    medium materiality
    High
    Q4 FY26 More Personal Computing Revenue
    $11.75 billion to $12.25 billion
    medium materiality
    High
    Q4 FY26 Windows OEM Revenue Growth
    decline in the high teens
    medium materiality
    High
    Q4 FY26 Windows OEM and Devices Revenue Growth
    decline in the mid- to high teens
    medium materiality
    High
    Q4 FY26 Search advertising revenue ex-TAC growth
    high single digits
    medium materiality
    High
    Q4 FY26 Xbox content and services revenue
    decline in the low teens
    medium materiality
    High
    Q4 FY26 Total Company Revenue
    $86.7 billion and $87.8 billion
    high materiality
    High
    Q4 FY26 COGS
    $29.4 billion to $29.6 billion
    medium materiality
    High
    Q4 FY26 Operating Expense
    $19.3 billion to $19.4 billion
    medium materiality
    High
    Q4 FY26 Other Income and Expense (excluding OpenAI impact)
    roughly negative $100 million
    low materiality
    High
    Q4 FY26 Adjusted Effective Tax Rate
    approximately 19%
    low materiality
    High
    Q4 FY26 CapEx
    over $40 billion
    high materiality
    High
    Full Year FY26 Operating Margins
    up about 1 point year-over-year
    high materiality
    High
    Calendar Year 2026 CapEx
    roughly $190 billion
    high materiality
    High
    Azure growth in H2 CY26
    show modest acceleration
    high materiality
    Medium
    FY27 Revenue Growth
    double-digit
    high materiality
    High
    FY27 Operating Income Growth
    double-digit
    high materiality
    High
    FY27 Headcount
    decrease year-over-year
    medium materiality
    High
    FY27 Operating Expense Growth
    mid- to high single digits
    medium materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Productivity and Business Processes
    Strong execution and improving product quality drove accelerating M365 Copilot seat adds. ARPU growth led by E5 and M365 Copilot. Segment gross margin percentage increased slightly due to efficiency gains, partially offset by AI investments. Operating expenses increased due to shared R&D AI investments and Copilot advertising.
    M365 Commercial Cloud revenue growth: 19% (15% in constant currency)M365 Copilot paid seats: over 20 millionM365 Commercial seats growth: 6% year-over-yearM365 Commercial products revenue growth: 1% (decreased 3% in constant currency)M365 Consumer Cloud revenue growth: 33% (29% in constant currency)M365 consumer subscriptions growth: 7%LinkedIn revenue growth: 12% (9% in constant currency)Dynamics 365 revenue growth: 22% (17% in constant currency)
    		$35 billion17%—60%
    Intelligent Cloud
    Results ahead of expectations due to earlier capacity delivery, enabling increased consumption across AI and non-AI services. Strong customer demand continues to exceed available capacity. Gross margin percentage decreased due to AI investment and increased GitHub Copilot usage, partially offset by Azure efficiency gains. Operating expenses increased due to shared R&D AI investments.
    Azure and other Cloud Services revenue growth: 40% (39% in constant currency)On-premises server business revenue growth: slightly (decreased 3% in constant currency)
    		$34.7 billion30%—40%
    More Personal Computing
    Windows OEM was ahead of expectations due to OEM and channel partners building inventory. Search advertising driven by higher volume and revenue per search. Gaming declined against a strong prior year comparable. Gross margin percentage increased due to sales mix shift to higher-margin businesses. Operating expenses increased due to impairment in gaming and shared R&D.
    Windows OEM and Devices revenue growth: decreased 2% (3% in constant currency)Windows OEM revenue growth: increased slightlySearch advertising revenue ex-TAC growth: 12% (9% in constant currency)Gaming revenue growth: decreased 7% (9% in constant currency)Xbox content and services revenue growth: decreased 5% (7% in constant currency)
    		$13.2 billiondeclined 1%—28%

    Operational metrics

    47
    AI business ARR
    $37 billionup 123% year-over-year
    Q3 FY26
    Microsoft Cloud revenue
    $54.5 billiongrew 29% and 25% in constant currency
    Q3 FY26
    Company gross margin percentage
    68%down year-over-year
    Q3 FY26
    Operating expenses growth
    9%8% in constant currency
    Q3 FY26
    Operating margins
    46%increased slightly year-over-year
    Q3 FY26
    Other income and expense (adjusted for OpenAI)
    $961 million
    Q3 FY26
    Capital expenditures
    $31.9 billiondown sequentially
    Q3 FY26
    Finance leases
    $4.7 billion
    Q3 FY26
    Cash paid for PP&E
    $30.9 billion
    Q3 FY26
    Returned to shareholders (dividends and share repurchases)
    $10.2 billion
    Q3 FY26
    Commercial bookings growth (excluding OpenAI)
    7%
    Q3 FY26
    Commercial bookings growth (including OpenAI)
    decreased 4%6% in constant currency
    Q3 FY26
    Microsoft Cloud gross margin percentage
    66%down year-over-year
    Q3 FY26
    Productivity and Business Processes operating expenses growth
    11%9% in constant currency
    Q3 FY26
    Intelligent Cloud operating expenses growth
    9%7% in constant currency
    Q3 FY26
    More Personal Computing operating expenses growth
    7%6% in constant currency
    Q3 FY26
    Q4 FY26 FX impact on revenue growth (Productivity and Business Processes)
    1 point
    Q4 FY26
    Q4 FY26 FX impact on revenue growth (More Personal Computing)
    1 point
    Q4 FY26
    Q4 FY26 FX impact on COGS growth
    1 point
    Q4 FY26
    Q4 FY26 Microsoft Cloud gross margin percentage
    64%down year-over-year
    Q4 FY26
    Q4 FY26 CapEx sequential increase components
    $5 billion
    Q4 FY26
    Q4 FY26 CapEx mix
    similar to Q3
    Q4 FY26
    Q4 FY26 one-time costs for voluntary retirement program (total)
    $900 million
    Q4 FY26
    Q4 FY26 one-time costs for voluntary retirement program (COGS)
    $350 million
    Q4 FY26
    Q4 FY26 one-time costs for voluntary retirement program (operating expense)
    $550 million
    Q4 FY26
    Windows OEM Q4 FY26 decline drivers (Windows 10 end of support)
    6 points
    Q4 FY26
    Windows OEM Q4 FY26 decline drivers (inventory levels)
    6 points
    Q4 FY26
    Windows OEM Q4 FY26 decline drivers (lower PC market)
    6 points
    Q4 FY26
    Monthly active Windows devices
    1.6 billion
    Q3 FY26
    Edge browser market share
    taken sharefor 20 consecutive quarters
    Q3 FY26
    Bing monthly active users
    1 billion
    Q3 FY26
    LinkedIn members
    1.3 billion
    Q3 FY26
    Microsoft 365 consumer subscribers
    nearly 95 million
    Q3 FY26
    GPU efficiency with MAI-Transcribe-1
    67% increase
    Q3 FY26
    Image-2 efficiency
    up to 260% increase
    Q3 FY26
    Fabric paid customers
    35,000up 60% year-over-year
    Q3 FY26
    Data in Fabric OneLake data lake
    increased nearly 4xyear-over-year
    Q3 FY26
    Customers using both Foundry and Fabric
    15,000up 60% year-over-year
    Q3 FY26
    Copilot credit consumptive offer growth
    nearly 2xquarter-over-quarter
    Q3 FY26
    System of work behind Work IQ data span
    more than 17 exabytesgrowing 35% year-over-year
    Q3 FY26
    Copilot queries per user
    up nearly 20%quarter-over-quarter
    Q3 FY26
    Customer service customers purchasing usage-based credits
    nearly 60%
    Q3 FY26
    LinkedIn Talent Solutions annualized revenue run rate
    $450 million
    Q3 FY26
    Security Copilot customers growth
    increased 2xyear-over-year
    Q3 FY26
    Data security triage agents alerts handled
    over 2 million
    Q3 FY26
    Copilot interactions audited by Purview
    35 billionup 7x year-over-year
    Q3 FY26
    Headcount
    declinedyear-over-year
    Q3 FY26

    Industry KPIs

    11
    MetricValueDetails
    Capacity CAPEXanother gigawattGW
    Revenue growth$82.9 billionUSD
    Arr net new arr$37 billionUSD
    Rpo current rpo$627 billionUSD
    Bookings billings7%%
    Pricing model mixnearly 60%%
    Large customer cohortsquadrupled
    Large deal new logo metrics740,000 seatsseats
    Operating FCF margin rule of 4046%%
    Ai product adoption monetizationover 20 millionseats
    Headcount internal ai productivitydeclined

    Orderbook & backlog

    4
    Commercial remaining performance obligation (excluding OpenAI)$627 billionQ3 FY26

    up 26%

    in line with historic seasonality

    Commercial remaining performance obligation (including OpenAI)$627 billionQ3 FY26

    up 99% year-over-year

    weighted average duration of approximately 2.5 years

    RPO recognized in next 12 months25%Q3 FY26

    up 39% year-over-year

    roughly 25% of total RPO

    RPO recognized beyond next 12 monthsincreased 138%Q3 FY26

    Product announcements

    3
    ProductTypeDetails
    MAI-Transcribe-1launch
    MAI-Image-2launch
    GitHub Copilot pricing modelupdate

    Deals & partnerships

    4
    OpenAIPartnership (strategic investment and technology licensing)through 2030 (revenue share), all the way to '32 (IP rights)

    The partnership ensures Microsoft has royalty-free access to OpenAI's frontier model IP until 2032 and a revenue share agreement through 2030. OpenAI remains a significant customer for Microsoft's AI accelerator and other compute services.

    AccentureCustomer contract (Microsoft 365 Copilot)

    Accenture committed to over 740,000 Microsoft 365 Copilot seats.

    Bayer, Johnson & Johnson, Mercedes, RocheCustomer contract (Microsoft 365 Copilot)

    Bayer, Johnson & Johnson, Mercedes, and Roche each committed to 90,000 or more Microsoft 365 Copilot seats.

    Shutterstock and WPPCommercial customer for MAI models through Foundry

    Microsoft brought MAI models to commercial customers like Shutterstock and WPP for the first time through Foundry.

    Capital programs

    2
    Fairwater data centercompleted

    Benefit: recognized revenue earlier

    Our Fairwater data center in Wisconsin came online earlier this month, 6 weeks ahead of schedule, allowing us to recognize revenue earlier.

    Overall footprint doublingunderway

    Benefit: double our overall footprint

    All up, we added another gigawatt of capacity this quarter and remain on track to double our overall footprint in just 2 years.

    Risks & headwinds

    6
    Gross margin pressure from AI investments and product usage.Q3 FY26, Q4 FY26

    Company gross margin percentage was 68%, down year-over-year. Microsoft Cloud gross margin percentage was 66%, down year-over-year. Q4 FY26 Microsoft Cloud gross margin percentage expected to be roughly 64%, down year-over-year.

    Mitigation: Ongoing efficiency gains, particularly in Azure and M365 Commercial Cloud.

    Azure capacity constraints.Q3 FY26, at least through 2026.

    Strong customer demand across workloads, customer segments and geographic regions continues to exceed available capacity. Expect to remain constrained at least through 2026.

    Mitigation: Accelerating delivery of capacity, increasing fleet efficiencies, balancing incoming supply with high ROI priorities (first-party apps, R&D, server replacement), significant CapEx investment (over $40B in Q4, $190B in CY26).

    Weak renewals impacting Dynamics 365 bookings.Q3 FY26

    Dynamics 365 bookings growth impacted by weaker renewals.

    Mitigation: Customers balancing spend between traditional per-seat and emerging seats-plus-consumption models.

    Windows OEM revenue decline.Q4 FY26

    Windows OEM revenue expected to decline in the high teens in Q4 FY26. This includes 6 points from Windows 10 end of support comparable, 6 points from inventory levels coming down, and 6 points from a lower PC market due to memory cost increases.

    Mitigation: Refocusing on delivering quality and value to consumers.

    Xbox content and services revenue decline.Q4 FY26

    Expected to decline in the low teens in Q4 FY26.

    Mitigation: Prior year comparable benefited from strong first-party content, recent price changes for Xbox Game Pass, focus on delivering more value to gamers.

    Impact of voluntary retirement program costs.Q4 FY26

    Roughly $900 million in one-time costs in Q4 FY26 ($350 million in COGS, $550 million in operating expense).

    Mitigation: Expected to be a one-time cost.

    Q&A highlights

    7

    How does strong AI demand translate into commercial bookings given changing contracting cycles (seats vs. consumption), and where will the money come from to pay for this increased AI spend across the industry?

    Amy Hood explained that bookings will evolve to reflect a "license plus consumption" model, similar to Azure, where usage-based billing will become more prevalent. Satya Nadella added that the shift is towards "per user and usage" business models, driven by agents creating value through cost reduction or revenue increase by compressing workflows. The focus is on intense users and usage, not just seat coverage.

    “I think the basic transformation of, I'll say, any per user business of ours, whether it's productivity, coding, security, will become a per user and usage business.”

    asked by Keith Weiss · answered by Amy Hood, Satya Nadella

    2 min read6 chapters

    Detailed Narrative

    01

    AI Infrastructure and Capacity Expansion

    Microsoft is aggressively building out its cloud and AI infrastructure, adding another gigawatt of capacity this quarter and remaining on track to double its overall footprint in two years. The Fairwater data center came online six weeks ahead of schedule, and new data center investments have been announced across four continents. The company is modernizing its fleet with custom silicon like Maia 200 AI accelerator and Cobalt server CPU, which offer improved tokens per dollar and are seeing increased adoption by large customers.

    02

    Agent App Platform and Model Diversity

    The agent app platform emphasizes model choice, offering a broad selection including OpenAI, Anthropic, and open-source models. Over 10,000 customers have used more than one model on Foundry, and 5,000 have used open-source models. The company's first-party MAI models (Transcribe-1, Image-2) are improving GPU efficiency and powering internal and commercial scenarios, while also innovating on OpenAI IP to reduce COGS.

    03

    Enterprise Data and Context with Fabric and Foundry

    Microsoft is building a unified "IQ layer" for organizational intelligence across Fabric, Foundry, Microsoft 365, and Security Graph. Over 15,000 customers now use both Foundry and Fabric, connecting agents to real-time operational and analytical data. The amount of data in Fabric OneLake data lake increased nearly 4x year-over-year, enhancing the grounding and effectiveness of agents.

    04

    Microsoft 365 Copilot Momentum and Usage

    Microsoft 365 Copilot saw record seat additions, increasing 250% year-over-year to over 20 million paid seats. Usage intensity is high, with monthly active usage up 6x year-to-date and weekly engagement now at the same level as Outlook. Innovations like Agent Mode, Critique and Council, and Cowork are driving this adoption, with Work IQ grounding responses in 17 exabytes of organizational data.

    05

    Business Model Evolution and GitHub Copilot

    The company is observing a shift from traditional per-seat models to "seats plus consumption," particularly in customer service and coding. GitHub Copilot now has nearly 140,000 organizations using it, with enterprise subscribers tripling year-over-year. A move to usage-based pricing for GitHub Copilot, effective June 1, aligns pricing with actual usage and cost, reflecting the broader trend towards usage-based monetization.

    06

    Strategic Capital Allocation and ROI

    Microsoft plans to invest over $40 billion in CapEx in Q4 FY26 and approximately $190 billion in calendar year 2026, with a significant portion for short-lived📎 assets like GPUs and CPUs. These investments are driven by strong demand signals and are expected to yield high ROI, despite continued capacity constraints in Azure. The company aims to accelerate capacity delivery and improve fleet efficiencies to meet customer demand and convert CapEx to revenue faster.

    AI-generated summary of the company’s earnings call. Not investment advice.