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Microsoft (MSFT) Q4 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q4 FY26)· Information Technology· Jul 29, 2026

Source: earnings call transcript

Executive summary

Microsoft Q4 FY26 — Strong AI-driven Cloud Growth and Strategic Capacity Expansion

Microsoft closed FY26 with robust cloud and AI-driven growth, marked by significant infrastructure expansion and strong adoption of its Copilot offerings. The company is strategically investing in AI capacity and platform development, while navigating challenges in the PC market and Xbox segment. Management is focused on expanding monetization models beyond per-seat licensing to consumption-based billing, aiming for durable long-term growth and enhanced customer value.

Highlights

5

  • Annual revenue surpassed $331 billion, up 18%, marking a record fiscal year.

  • Microsoft Cloud annual revenue exceeded $214 billion, growing 27%, with Azure surpassing $100 billion, up 41%.

  • Q4 revenue reached $90 billion, an 18% increase (17% in constant currency), with operating income up 18%.

  • Non-GAAP EPS was $4.74, a 23% increase (adjusted for OpenAI investment), exceeding expectations.

  • M365 Copilot paid seats exceeded 30 million, with net seat adds more than doubling quarter-over-quarter, and GitHub Copilot revenue accelerated over 60% QoQ.

Concerns

5

  • Xbox revenue decreased 10% (11% in constant currency) in Q4, with the business undergoing a reset for long-term growth.

  • Windows OEM and Devices revenue declined 7% (Windows OEM down 5%) in Q4, impacted by lower PC market demand and higher component costs.

  • Search advertising revenue ex TAC growth was impacted by third-party partnerships, leading to a sequential slowdown.

  • Dynamics 365 CRM experienced moderation with longer sales cycles, despite healthy ERP bookings growth.

  • Q1 FY27 guidance anticipates Windows OEM and Devices revenue to decline in the low 20s, and Xbox content and services revenue to decline mid-single digits.

Guidance & targets

CategoryTargetConfidence
Full Year FY27 Company Revenue Growth
double-digit growth
high materiality
High
Full Year FY27 Operating Income Growth
double-digit growth
high materiality
High
Full Year FY27 Operating Expenses Growth
mid- to high single digits
medium materiality
Medium
Full Year FY27 Capital Expenditures Growth
grow year-over-year
high materiality
High
Full Year FY27 Operating Margins
down less than 1 point
medium materiality
Medium
Full Year FY27 Free Cash Flow
positive
medium materiality
High
Full Year FY27 Effective Tax Rate
approximately 20%
low materiality
High
Q1 FY27 Total Company Revenue
USD 89.85 billion to USD 90.95 billion
high materiality
High
Q1 FY27 Productivity and Business Processes Revenue
USD 36.7 billion to USD 37 billion
medium materiality
High
Q1 FY27 M365 Commercial Cloud Revenue Growth (Constant Currency, Adjusted)
approximately 16%
medium materiality
High
Q1 FY27 Intelligent Cloud Revenue
USD 40.95 billion to USD 41.25 billion
high materiality
High
Q1 FY27 Azure Revenue Growth (Constant Currency)
approximately 45%
high materiality
High
Q1 FY27 More Personal Computing Revenue
USD 12.2 billion to USD 12.7 billion
medium materiality
High
Q1 FY27 COGS
USD 29.6 billion to USD 29.8 billion
medium materiality
High
Q1 FY27 Operating Expense
USD 16.8 billion to USD 16.9 billion
medium materiality
High
Q1 FY27 Operating Margins
relatively flat year-over-year
medium materiality
Medium
Q1 FY27 Other Income and Expense (ex-OpenAI)
roughly negative $100 million
low materiality
High
Q1 FY27 Effective Tax Rate
approximately 20%
low materiality
High
Q1 FY27 Capital Expenditures
over $50 billion
high materiality
High

Segment performance

SegmentRevenueYoYQoQMargin
Productivity and Business Processes
Strong performance driven by M365 Copilot momentum, premium offerings (E5, E7), and ARPU growth. Dynamics 365 ERP bookings remained healthy, but CRM moderated with longer sales cycles. Gross margin percentage decreased slightly due to increased Copilot usage and investment.
M365 Commercial cloud revenue growth: 16% adjusted (14% reported)M365 Commercial paid seats growth: 6% YoYM365 Commercial paid seats: >30 millionM365 Commercial products revenue growth: 19%M365 consumer cloud revenue growth: 24% (22% cc)M365 consumer subscriptions growth: 7%LinkedIn revenue growth: 12% (10% cc)Dynamics 365 revenue growth: 13% (12% cc)Gross margin dollars growth: 14% (13% cc)Operating expenses growth: 11%Operating income growth: 15% (14% cc)
$37.8B14%—58% operating margin
Intelligent Cloud
Revenue growth was ahead of expectations, primarily driven by Azure's strong performance (43% growth) due to efficiency gains and earlier delivery of new capacity. Customer demand continues to exceed available capacity. GitHub Copilot consumption also benefited results. Gross margin percentage decreased due to sales mix shift to Azure and AI infrastructure investments, but improved through the quarter with usage-based pricing.
Azure and other cloud services revenue growth: 43%On-premises server business revenue growth: relatively unchanged YoY (down 1% cc)Gross margin dollars growth: 24%Operating expenses growth: 10%Operating income growth: 31%
$39.3B32%—41% operating margin
More Personal Computing
Revenue declined due to lower PC market demand and a high prior-year comparable for Windows. Search advertising saw growth driven by higher revenue per search and volume, but was impacted by third-party partnerships. Xbox revenue decreased against a strong prior-year comparable, with impairment charges impacting operating expenses. Gross margin percentage increased due to lower amortization from the Activision acquisition.
Windows OEM and Devices revenue decrease: 7%Windows OEM decrease: 5%Search advertising revenue ex TAC increase: 10% (9% cc)Xbox revenue decrease: 10% (11% cc)Xbox content and services revenue decrease: 10%Gross margin dollars decrease: 2%Operating expenses increase: 8% (7% cc)Operating income decrease: 14% (15% cc)
$12.9B-4%—21% operating margin

MSFT operating KPIs by quarter

MSFT operating KPIs stated on its earnings calls, by fiscal quarter
KPI Mar 2025 Q3 FY25 Sep 2025 Q1 FY26 Dec 2025 Q2 FY26 Mar 2026 Q3 FY26This call Jun 2026 Q4 FY26Change vs prior quarter
Customers Microsoft Fabric
21K+ Microsoft Fabric has more than 21,000 paid customers, up 80% year-over-year. Source: earnings call transcript
28K We now have 28,000 paid Fabric customers. Source: earnings call transcript
31K+ 2 years since it became broadly available, Fabric's annual revenue run rate is now over $2 billion with over 31,000 customers, and it continues to be the fastest-growing analytics platform on the market with revenue up 60% year-over-year. Source: earnings call transcript
35K We now have 35,000 paid Fabric customers, up 60% year-over-year. Source: earnings call transcript
40K+ When it comes to analytics, we now have over 40,000 paid Fabric customers, up more than 60% year-over-year, and over 17,000 customers now use Foundry and Fabric, up 60% year-over-year as enterprises connect agents to real-time operational, analytical, and unstructured data in Fabric. Source: earnings call transcript
—
Users GitHub Copilot
15M+ All-up, we now have over 15 million GitHub Copilot users, up over 4x year-over-year. Source: earnings call transcript
26M+ When it comes to coding, GitHub Copilot is the most popular AI pair programmer now with over 26 million users. Source: earnings call transcript
——
50M When it comes to developers, GitHub Copilot now has 50 million users. Source: earnings call transcript
—
Customers Security
1.4M All-up, we now have 1.4 million security customers, over 900,000, including EY Global, ManpowerGroup, TriNet, Regions Bank have 4 or more workloads, up 21% year-over-year. Source: earnings call transcript
—
1.6M In Security, we now have 1.6 million security customers, including over 1 million who use 4 or more of our workloads. Source: earnings call transcript
———
Monthly active users (MAU) Entra
900M+ And in identity, Entra now has more than 900 million monthly active users. Source: earnings call transcript
1B In security, our end-to-end stack is now informed by 100 trillion daily signals, 1 billion monthly active users of Entra, 16 billion Copilot interactions audited by Purview, up 72% quarter-over-quarter, 40,000 Sentinel customers, and we took share across all categories we serve in security. Source: earnings call transcript
————
Remaining performance obligation (RPO) Commercial
$315B Commercial remaining performance obligation increased to $315 billion, up 34% and 33% in constant currency. Source: earnings call transcript
$392B Commercial remaining performance obligation increased to $392 billion and was up 51% year-over-year. Source: earnings call transcript
$625B Commercial remaining performance obligation, which continues to be reported net of reserves increased to $625 billion, and was up 110% year-over-year with a weighted average duration of approximately 2.5 years. Source: earnings call transcript
$627B RPO increased to $627 billion and was up 99% year-over-year with a weighted average duration of approximately 2.5 years when including OpenAI. Source: earnings call transcript
$678B Commercial remaining performance obligation grew 84% to $678 billion. Source: earnings call transcript
+8.1%
Subscribers M365 Consumer—
90M+ M365 consumer subscriptions grew 7% to over 90 million. Source: earnings call transcript
—
<95M And in Microsoft 365 consumer, we now have nearly 95 million subscribers and early signals show increasing satisfaction as we make Agent Mode the default. Source: earnings call transcript
——
Paid seats Microsoft 365 Copilot——
15M We saw accelerating seat growth quarter-over-quarter and now have 15 million paid Microsoft 365 Copilot seats and multiples more enterprise chat users. Source: earnings call transcript
20M+ Quarter-over-quarter, we continue to see acceleration and now have over 20 million Microsoft 365 Copilot paid seats. Source: earnings call transcript
30M+ When it comes to knowledge work, we now have over 30 million paid Microsoft 365 Copilot seats, with net seat adds more than doubling quarter-over-quarter. Source: earnings call transcript
—

Operating figures the company stated on at least two of the calls shown, checked against each call's transcript. Click a figure to read the sentence. A dash means it was not stated that quarter.

Orderbook & backlog

Commercial Remaining Performance Obligation (RPO) $678B Q4 FY26

grew 84%

All sequential commercial RPO growth driven by commitments from customers outside of frontier model companies.

Commercial Remaining Performance Obligation (RPO) ex-OpenAI $678B Q4 FY26

increased 25%

Excluding OpenAI impact.

RPO Weighted Average Duration 2.3 years Q4 FY26
RPO Recognized in Next 12 Months 30% Q4 FY26

up 37% YoY

Portion of RPO expected to be recognized as revenue in the next 12 months.

RPO Recognized Beyond Next 12 Months 70% Q4 FY26

increased 112%

Remaining portion of RPO recognized beyond the next 12 months.

Product announcements

ProductTypeDetails
HorizonDBlaunch
Rayfinlaunch
Project Perceptionlaunch
Microsoft Frontier Co.launch

Deals & partnerships

Mistral Bring Mistral models to Microsoft Sovereign Cloud

Enables customers to run Mistral models across public, customer-controlled, and fully disconnected environments.

EY Deployment of E7 suite

Deployed E7 to 400,000 employees, noted as Microsoft's largest win to date for E7.

NHS England Rolling out Copilot

Rolling out Copilot to 505,000 clinicians and staff, the largest healthcare deployment of its kind, after trials showed 43 minutes saved per day per employee.

KPMG Expanding Copilot deployment

Expanding deployment across its global workforce of more than 276,000 professionals.

HSBC Commitment for Copilot seats

Committed to 200,000 Copilot seats to accelerate workforce transformation.

AstraZeneca Copilot purchase

Purchased 60,000 or more Copilot seats.

Boeing Copilot purchase

Purchased 60,000 or more Copilot seats.

Infosys Copilot purchase

Purchased 60,000 or more Copilot seats.

Koch Inc. Copilot purchase

Purchased 60,000 or more Copilot seats.

Procter & Gamble Copilot purchase

Purchased 60,000 or more Copilot seats.

Stellantis Copilot purchase

Purchased 60,000 or more Copilot seats.

Tata Consultancy Services Copilot purchase

Purchased 60,000 or more Copilot seats.

University of Pittsburgh Medical Center Copilot purchase

Purchased 60,000 or more Copilot seats.

Wells Fargo Copilot purchase

Purchased 60,000 or more Copilot seats.

Wipro Copilot purchase

Purchased 60,000 or more Copilot seats.

Mass General Brigham Rolling out Dragon Copilot

Rolled out Dragon Copilot to over 4,000 providers, after a study found ambient AI reduced burnout by 21%.

Novo Nordisk FDE team project to build an agent

Worked with Microsoft Frontier Co. (FDE teams) to build an agent that helps analyze clinical data while meeting strict compliance requirements.

LSEG FDE team project to embed AI into LSEG Workspace

Partnered with Microsoft Frontier Co. (FDE teams) to embed AI into LSEG Workspace, helping finance professionals ask complex questions and quickly find answers across structured and unstructured financial content.

BHP Early customer for Microsoft Discovery

Early customer for Microsoft Discovery, a platform for building and governing agentic workflows for science and engineering.

GSK Early customer for Microsoft Discovery

Early customer for Microsoft Discovery, a platform for building and governing agentic workflows for science and engineering.

Pacific Northwest National Lab Early customer for Microsoft Discovery

Early customer for Microsoft Discovery, a platform for building and governing agentic workflows for science and engineering.

Capital programs

Data Center and Office Building Useful Life Extension announced
Start: FY27

Effective at the start of FY '27, extending estimated useful life from 15 to 25 years. Expected to have minimal benefit to FY '27 operating income. Greater impact on CapEx as more future data center leases shift from finance to operating leases. Calendar year 2026 CapEx investment expectations remain unchanged, but the shift adjusts expectation to approximately $175 billion.

Risks & headwinds

Sales mix shift to Azure Q4 FY26

impacted company gross margin percentage (down YoY) and Microsoft Cloud gross margin percentage (down YoY)

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

Continued investments in AI infrastructure and growing product usage Q4 FY26

impacted company gross margin percentage (down YoY) and Microsoft Cloud gross margin percentage (down YoY)

Mitigation:Ongoing efficiency gains.

Low prior-year comparable Q4 FY26

impacted G&A growth

Severance expense and impairment charges in Xbox Q4 FY26

partially offset benefit from Anthropic gain and lower VRP expenses; increased MPC operating expenses

Mitigation:Xbox business reset for long-term growth.

Lower PC market demand Q4 FY26

Windows OEM and Devices revenue decreased 7%; Windows OEM decreased 5%

Mitigation:Investing in Windows for quality, fundamentals, and secure edge AI.

High prior-year comparable for Windows 10 end of support Q4 FY26

impacted Windows OEM revenue

Elevated inventory levels Q4 FY26

impacted Windows OEM revenue

Xbox business reset Q4 FY26

Xbox revenue decreased 10% (11% cc)

Mitigation:Making necessary decisions across content portfolio, platform, and operations to return to growth in FY27.

Dynamics 365 CRM moderation Q4 FY26

longer sales cycles

Customer demand exceeding available capacity for Azure Q4 FY26 and Q1 FY27

Azure revenue grew 43% but demand still exceeds supply

Mitigation:Delivering efficiencies across CPU and GPU fleet, process improvements for earlier capacity delivery.

On-premises server business customer shift to cloud offerings Q4 FY26 and Q1 FY27

revenue relatively unchanged YoY (down 1% cc) in Q4 FY26; expected to decline low to mid-single digits in Q1 FY27

Search advertising revenue ex TAC growth impacted by third-party partnerships Q1 FY27

growth down sequentially in Q1 FY27 (mid-single digits)

Higher transactional purchasing from timing of product launches FY27

expected to cause M365 Commercial products and Server products KPIs revenue to decline mid-single digits for FY27

Lower ARPU new seat adds in frontline worker and SMB SKUs Q1 FY27

mitigates sequential growth from Copilot, E5, and E7 in M365 Commercial cloud revenue for Q1 FY27

Mitigation:Premium SKU momentum and increased monetization opportunity from usage-based billing products.

What to watch in Q1 FY27

Azure Capacity vs. Demand

Q1 FY27
Current Demand continues to exceed available capacity
Target Bridge the gaps between demand and supply

Why it matters

Azure's ability to meet demand is crucial for continued cloud revenue acceleration and market share gains in AI infrastructure.

In Azure, we expect revenue growth of approximately 45% in constant currency, and we remain focused on delivering efficiencies that help us bridge the gaps we see as customer demand continues to exceed supply.

Find out whether MSFT delivers this. Inve re-checks your case every morning.

Q&A highlights

How material is the traction for open and custom models, and how does Microsoft benefit from this shift given its frontier lab exposure?

Satya Nadella emphasized that firms need to control their own 'learning machine' and IP, with models being an input, not an extraction of knowledge. Microsoft's platform architecture allows for a mix of frontier, low-cost, and custom models, ensuring flexibility, cost control, and resilience. Amy Hood added that Azure benefits regardless of model choice due to its efficient infrastructure for delivering diverse models.

“The frontier is about every firm having a frontier and the choice, the cost control, and the capability that they need in order to be able to control their destiny.”

asked by Karl Keirstead · answered by Satya Nadella

3 min read 6 chapters

Detailed narrative

AI Infrastructure and Capacity Expansion

Microsoft significantly expanded its AI infrastructure, adding 31 new data centers this quarter for a total of 88 this fiscal year, and bringing another gigawatt of capacity online. The company aims to roughly double its overall capacity in two years, driven by accelerating demand.

Efficiency gains, such as a 50% reduction in dock-to-live times for new GPUs and a 4x increase in Copilot workload throughput, are key to monetizing this expansion. Microsoft is also modernizing its fleet with proprietary silicon like Maia 200 (delivering 30% better performance per dollar) and Cobalt VMs, alongside next-gen hardware from NVIDIA and AMD.

AI Platform and Model Innovation

The company emphasizes model choice, offering over 11,000 models from various providers, including its own MAI family. MAI models are co-designed with silicon, achieving 40% better performance per watt on Maia 200. This approach focuses on cost-efficient inference and business continuity, allowing models to be substitutable.

Examples include MAI-Code-1-Flash in GitHub Copilot (higher acceptance, 10% lower token usage) and Excel (comparable quality to GPT-5.6 at lower cost), and MAI-Cyber-1-Flash in security (better performance than Mythos at half the cost).

Enterprise Data and Agentic Stack

Microsoft is evolving its data estate to support agents, with AI-optimized databases like Cosmos DB and PostgreSQL seeing rapid adoption (PostgreSQL revenue up 55%). Fabric now has over 40,000 paid customers, and Foundry, the complete app and agent stack, has 100,000 customers with revenue more than doubling year-over-year.

The company introduced HorizonDB (managed PostgreSQL) and Rayfin (agent-first SDK for Fabric), and Web IQ to give agents access to real-world intelligence. Agent 365, a control plane for governance, identity, and security, has nearly 40 million registered agents across tens of thousands of companies.

M365 Copilot and Monetization Strategy

M365 Copilot reached over 30 million paid seats, with net seat adds more than doubling sequentially. User satisfaction scores doubled over the last three quarters, and latency was cut by 25%. The product is evolving into a 'super app' with chat, Cowork, Autopilot, and Code experiences.

Monetization is shifting to a 'per seat plus consumption' model, with usage-based billing added to Cowork and GitHub Copilot. The new E7 suite, integrating Copilot, E5, Entra, and Agent 365, has seen rapid adoption, with EY deploying it to 400,000 employees.

Strategic Initiatives and Customer Engagement

Microsoft launched Frontier Co., an outcome-driven engineering organization with 6,000 experts embedded with customers to co-design and continuously improve AI systems. This initiative has completed over 330 projects with 164 customers. In healthcare, the company automated 28 million patient encounters this quarter, aiming for 100 million this calendar year.

Xbox is undergoing a business reset to return to growth in FY27, while Windows focuses on quality, fundamentals, and secure edge AI. LinkedIn continues strong engagement with double-digit member growth and AI-powered solutions for recruiters.

Financial Performance and Outlook

Microsoft delivered strong FY26 results with 18% revenue growth and 21% operating income growth. Q4 revenue was $90 billion, up 18%, with non-GAAP EPS up 23%. Commercial bookings (ex-OpenAI) grew 18%, and Microsoft Cloud revenue grew 27%. The company provided FY27 guidance for double-digit revenue and operating income growth, with CapEx expected to grow year-over-year.

A change in the estimated useful life of data centers and office buildings from 15 to 25 years will impact future depreciation and shift some CapEx reporting from finance to operating leases.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.