Skip to content
    MSFT
    Earnings call· Sep 2025(Q1 FY26)

    MICROSOFT CORP MSFT

    Oct 29, 2025 Source

    Executive summary

    Microsoft Q1 FY26 — Strong Cloud Growth and AI Momentum

    Microsoft delivered a robust Q1 FY26, driven by strong cloud demand and accelerating AI adoption across its platform and Copilot offerings. The company continues to invest heavily in AI infrastructure and talent, leading to significant RPO growth and commercial bookings, despite facing capacity constraints in Azure. Management remains confident in its strategy to build fungible, efficient AI systems and monetize through a balanced portfolio of first- and third-party applications.

    Highlights

    5

    • Microsoft Cloud revenue surpassed $49 billion, up 26% year-over-year.

    • Commercial Remaining Performance Obligation (RPO) increased over 50% to nearly $400 billion.

    • Azure revenue grew 40% (39% in constant currency), exceeding expectations.

    • Commercial bookings increased 112% (111% in constant currency), significantly ahead of expectations.

    • Microsoft 365 Copilot adoption is accelerating rapidly, growing 50% quarter-over-quarter in usage intensity.

    Concerns

    5

    • Azure capacity is expected to remain constrained through at least the end of FY26.

    • Company gross margin percentage was 69%, down slightly year-over-year, driven by AI investments.

    • LinkedIn Talent Solutions business was impacted by continued weakness in the hiring market.

    • Gaming revenue decreased 2% (3% in constant currency) against a strong prior year comparable.

    • Windows OEM and Devices revenue is expected to decline in the mid-single digits in Q2 FY26 due to elevated inventory levels.

    Guidance & targets

    30
    CategoryTargetConfidence
    Total Revenue
    $79.5 billion to $80.6 billion
    high materiality
    High
    Total Revenue Growth
    14% to 16%
    high materiality
    High
    COGS
    $26.35 billion to $26.55 billion
    medium materiality
    High
    COGS Growth
    21% to 22%
    medium materiality
    High
    Operating Expense
    $17.3 billion to $17.4 billion
    medium materiality
    High
    Operating Expense Growth
    7% to 8%
    medium materiality
    High
    Operating Margins
    relatively flat year-over-year and down sequentially
    medium materiality
    High
    Other Income and Expense (excluding OpenAI impact)
    roughly $100 million
    low materiality
    High
    Effective Tax Rate
    approximately 19%
    low materiality
    High
    Capital Expenditures Growth Rate
    higher than FY25
    high materiality
    High
    Commercial Bookings
    healthy growth in the core business
    medium materiality
    High
    Microsoft Cloud Gross Margin Percentage
    roughly 66%
    medium materiality
    High
    Productivity and Business Processes Revenue
    $33.3 billion to $33.6 billion
    medium materiality
    High
    Productivity and Business Processes Revenue Growth
    13% to 14%
    medium materiality
    High
    M365 Commercial Cloud Revenue Growth
    13% and 14% in constant currency
    medium materiality
    High
    M365 Commercial Products Revenue Growth
    low to mid-single digits
    low materiality
    High
    M365 Consumer Cloud Revenue Growth
    mid-20s
    low materiality
    High
    LinkedIn Revenue Growth
    approximately 10%
    medium materiality
    High
    Dynamics 365 Revenue Growth
    mid- to high teens
    medium materiality
    High
    Intelligent Cloud Revenue
    $32.25 billion to $32.55 billion
    high materiality
    High
    Intelligent Cloud Revenue Growth
    26% to 27%
    high materiality
    High
    Azure Revenue Growth
    approximately 37% in constant currency
    high materiality
    High
    Azure Capacity Constraint
    through at least the end of our fiscal year
    high materiality
    High
    On-premises Server Business Revenue
    decline in the low to mid-single digits
    low materiality
    High
    More Personal Computing Revenue
    $13.95 billion to $14.45 billion
    medium materiality
    High
    Windows OEM and Devices Revenue
    decline in the mid-single digits
    medium materiality
    High
    Windows OEM Revenue
    decline low to mid-single digits
    medium materiality
    High
    Search and News Advertising ex TAC Revenue Growth
    low double digits
    medium materiality
    High
    Xbox Content and Services Revenue
    decline in the low to mid-single digits
    low materiality
    High
    Hardware Revenue
    decline year-over-year
    low materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Productivity and Business Processes
    Revenue growth driven by ARPU (E5 and M365 Copilot) and seats. Operating margins increased 3 points year-over-year. Gross margin percentage increased due to efficiency gains in M365 Commercial Cloud, partially offset by AI investments.
    M365 Commercial Cloud revenue growth: 17% (15% in constant currency)Paid M365 Commercial seats growth: 6% year-over-yearM365 Consumer Cloud revenue growth: 26% (25% in constant currency)M365 consumer subscriptions: 90 million (up 7%)LinkedIn revenue growth: 10% (9% in constant currency)Dynamics 365 revenue growth: 18% (16% in constant currency)
    		$33 billion17%—62%
    Intelligent Cloud
    Azure growth driven by core infrastructure and largest customers, with demand exceeding supply. Operating margins were down slightly year-over-year as increased AI investments were mostly offset by improved operating leverage. Gross margin percentage decreased due to AI investments, partially offset by Azure efficiency gains.
    Azure and other Cloud services revenue growth: 40% (39% in constant currency)On-premise server business revenue growth: 1% (relatively unchanged in constant currency)
    		$30.9 billion28%—43%
    More Personal Computing
    Windows OEM and Devices benefited from strong demand ahead of Windows 10 end of support and elevated inventory. Search and news advertising grew due to volume and third-party partnerships. Gaming declined against a strong prior year comparable. Operating margins increased 3 points year-over-year due to sales mix shift to higher-margin businesses.
    Windows OEM and Devices revenue growth: 6% year-over-yearSearch and news advertising revenue ex TAC growth: 16% (15% in constant currency)Gaming revenue growth: -2% (-3% in constant currency)Xbox content and services revenue growth: 1% (relatively unchanged in constant currency)
    		$13.8 billion4%—30%

    Operational metrics

    44
    Microsoft Cloud revenue
    $49.1 billionup 26% and 25% in constant currency
    Q1 FY26
    Microsoft Cloud gross margin percentage
    68%down year-over-year
    Q1 FY26

    Slightly better than expected, down due to AI investments partially offset by efficiency gains.

    Company gross margin percentage
    69%down slightly year-over-year
    Q1 FY26

    Driven by investments in AI, including scaling AI infrastructure and growing usage of AI product features, partially offset by efficiency gains.

    Operating expenses growth
    5%4% in constant currency
    Q1 FY26

    Driven by investments in Cloud and AI engineering, compute capacity, and AI talent.

    Operating income growth
    24%22% in constant currency
    Q1 FY26
    Non-GAAP EPS
    $4.13increase of 23% and 21% in constant currency
    Q1 FY26

    Adjusted for the impact of investments in OpenAI.

    Other income and expense (adjusted for OpenAI)
    $401 million
    Q1 FY26

    Interest income more than offset interest expense, which includes interest payments related to data center finance leases.

    Capital expenditures
    $34.9 billion
    Q1 FY26

    Driven by growing demand for Cloud and AI offerings.

    Cash paid for PP&E
    $19.4 billion
    Q1 FY26

    Difference from total CapEx primarily due to finance leases and timing of goods received.

    Capital returned to shareholders
    $10.7 billion
    Q1 FY26

    Through dividends and share repurchases.

    Commercial bookings growth
    112%111% in constant currency
    Q1 FY26

    Significantly ahead of expectations, driven by Azure commitments from OpenAI and growth in $100M+ contracts.

    Commercial RPO
    $392 billionup 51% year-over-year
    Q1 FY26

    Balance nearly doubled over the past 2 years. Does not include incremental $250 billion Azure commitments from OpenAI announced yesterday.

    M365 Copilot usage intensity growth
    50%quarter-over-quarter
    Q1 FY26

    Adoption accelerating rapidly.

    Agent users growth
    doubledquarter-over-quarter
    Q1 FY26

    Overall number of agent users.

    PwC M365 Copilot seats added
    155,000
    Q1 FY26

    PwC now has over 200,000 deployed across its global operations.

    GitHub Copilot users
    over 26 million
    Q1 FY26

    Most popular AI pair programmer.

    GitHub developers
    over 180 million
    Q1 FY26

    Platform growing at fastest rate in its history, adding a developer every second.

    GitHub pull requests merged
    over 500 million
    past year

    Driven by the rise of AI coding agents.

    Dragon Copilot patient encounters documented
    over 17 millionup nearly 5x year-over-year
    Q1 FY26

    Helps providers automate critical workflows.

    Health care organizations purchased Ambient listening tech
    More than 650
    to date

    Including University of Michigan Health where over 1,000 physicians are actively using it.

    Edge browser market share
    taken sharefor 18 consecutive quarters
    Q1 FY26
    Bing Copilot consumer app daily users growth
    nearly 50%quarter-over-quarter
    Q1 FY26
    Fabric revenue growth
    60%
    Q1 FY26

    Faster than any other data and analytics platform in the industry.

    Paid Fabric customers
    28,000
    Q1 FY26
    SQL DB hyperscale revenue growth
    nearly 75%
    Q1 FY26
    Cosmos DB revenue growth
    50%
    Q1 FY26
    Security signals
    100 trillion
    daily

    End-to-end stack informed by this many daily signals.

    Entra monthly active users
    1 billion
    monthly
    Purview Copilot interactions audited
    16 billionup 72% quarter-over-quarter
    Q1 FY26
    Sentinel customers
    40,000
    Q1 FY26
    LinkedIn members
    nearly 1.3 billion
    Q1 FY26
    Minecraft monthly active users
    155 million
    monthly

    An all-time high.

    AI capacity increase
    over 80%
    this year
    Total data center footprint increase
    roughly double
    over the next 2 years

    Reflecting demand signals.

    Token throughput for GPT-4.1 and GPT-5
    over 30%increased
    during the quarter

    Per GPU, for two of the most widely used models.

    Azure customers developing cloud/AI capabilities within borders
    33
    Q1 FY26

    To meet local data residency requirements.

    Azure AI Foundry customers
    80,000
    Q1 FY26

    Including 80% of the Fortune 500.

    Phi family SLMs downloads
    over 60 millionup 3x year-over-year
    Q1 FY26
    AI features monthly active users
    900 million
    monthly

    Across products.

    First-party Copilots monthly active users
    150 million
    monthly

    Across information work, coding, security, science, health, and consumer.

    Microsoft 365 Copilot Fortune 500 adoption
    more than 90%
    Q1 FY26
    Lloyds Banking Group M365 Copilot seats
    30,000
    Q1 FY26

    Saving each employee an average of 46 minutes daily.

    PwC M365 Copilot interactions
    over 30 million
    in just 6 months

    Credited with saving millions of hours in employee productivity.

    Phishing Triage Agent efficiency
    up to 6.5x
    Q1 FY26

    Analysts can be more efficient in detecting malicious mails with Defender.

    Industry KPIs

    8
    MetricValueDetails
    Capacity CAPEX$34.9 billionUSD
    Revenue growth$77.7 billionUSD
    Rpo current rpo$392 billionUSD
    Bookings billings112%%
    Customer account count90 millionsubscriptions
    Large deal new logo metrics—
    Operating FCF margin rule of 4049%%
    Ai product adoption monetization900 millionusers

    Orderbook & backlog

    2
    Commercial RPO$392 billionQ1 FY26

    up 51% year-over-year

    Weighted average duration of approximately 2 years; balance nearly doubled over the past 2 years.

    OpenAI Azure commitments$250 billionOctober 28, 2025

    incremental

    Announced yesterday, not included in the Q1 FY26 RPO balance.

    Product announcements

    13
    ProductTypeDetails
    New Definitive Agreement with OpenAIupdate
    Fairwater AI Data Centerlaunch
    Microsoft Agent Frameworklaunch
    Agent Mode (M365 Copilot)update
    Teams Mode (M365 Copilot)update
    App Builderlaunch
    Agent HQ (GitHub Copilot)launch
    Copilot wake word (Windows 11)update
    Copilot Vision and Actions (Windows 11)update
    AI features (Edge browser)update
    Conversational capabilities (Bing overview pages)update
    Groups (Copilot consumer app)update
    Microsoft 365 Premiumlaunch

    Deals & partnerships

    1
    OpenAINew definitive agreement extending partnership terms and Azure services commitment.incremental $250 billion of Azure servicesthrough 2030 (rev share, IP rights, API exclusivity); through 2032 (model and product IP rights)

    Microsoft closed a new definitive agreement with OpenAI, marking the next chapter in their partnership. This agreement extends model and product IP rights through 2032, and includes an incremental $250 billion commitment from OpenAI for Azure services. Microsoft's rev share, exclusive IP rights, and API exclusivity for Azure continue until AGI or through 2030.

    Capital programs

    1
    Fairwater AI Data Centerannounced
    Start: Q1 FY26

    Benefit: 2 gigawatts alone

    Announced as the world's most powerful AI data center in Wisconsin, expected to go online next year.

    Risks & headwinds

    5
    Azure capacity constraintsthrough at least the end of FY26

    Demand again exceeded supply across workloads.

    Mitigation: Accelerating the amount of capacity being brought online; balancing Azure revenue growth with needs across first-party apps, AI solutions, R&D, and end-of-life server replacements.

    AI investment impact on gross marginQ1 FY26

    Company gross margin percentage was 69%, down slightly year-over-year.

    Mitigation: Partially offset by ongoing efficiency gains, particularly in Azure and M365 Commercial cloud.

    Weakness in the hiring market impacting LinkedIn Talent SolutionsQ1 FY26

    Talent Solutions business was impacted by continued weakness in the hiring market.

    Gaming revenue decline against strong prior year comparableQ1 FY26

    Gaming revenue decreased 2% and 3% in constant currency.

    Mitigation: Xbox content and services revenue increased 1% and was relatively unchanged in constant currency, driven by better-than-expected performance from third-party content.

    Elevated inventory levels impacting Windows OEM and Devices revenueQ2 FY26

    Windows OEM and Devices revenue should decline in the mid-single digits in Q2 FY26, impacted by elevated inventory levels at the end of Q1.

    Mitigation: Inventory levels are expected to come down through the quarter.

    What to watch in Q2 FY26

    5

    Azure capacity availability

    through at least the end of FY26
    CurrentDemand exceeds supply
    TargetImproved capacity to meet demand

    Why it matters

    Azure capacity directly impacts revenue growth and ability to monetize AI demand.

    Therefore, we now expect to be capacity constrained through at least the end of our fiscal year.

    Q&A highlights

    5

    Could AGI or changes in computing architectures weaken Microsoft's strong market position, and what are the concerns regarding the evolution of generative AI models?

    Satya Nadella stated that the new OpenAI agreement provides certainty on IP. He emphasized that AI systems will have 'jagged intelligence' for a long time, requiring organizing layers like GitHub Agent HQ and M365 Copilot to smooth out these edges and create value. He feels confident in building these multi-agent systems and does not believe AGI, as defined in their contract, will be achieved anytime soon.

    “I don't think AGI as defined at least by us in our contract is ever going to be achieved anytime soon. But I do believe we can drive a lot of value for customers with advances in AI models by building these systems.”

    asked by Keith Weiss · answered by Satya Nadella

    2 min read5 chapters

    Detailed Narrative

    01

    OpenAI Partnership Evolution

    Microsoft announced a new definitive agreement with OpenAI, marking the next chapter in their partnership. This includes OpenAI contracting an incremental $250 billion of Azure services, and Microsoft extending model and product IP rights through 2032, having already 10x-ed its investment. This deal aims to provide more certainty regarding IP relationships and mutual growth, with Microsoft's rev share and API exclusivity for Azure continuing until AGI or through 2030.

    02

    AI Infrastructure Expansion

    Microsoft is significantly expanding its AI capacity, planning an over 80% increase this year and roughly doubling its total data center footprint over the next two years. This includes the new 2-gigawatt Fairwater data center in Wisconsin, set to go online next year, and the deployment of NVIDIA GB300s. The strategy focuses on building a fungible and continuously optimized fleet across the globe for various AI workloads, maximizing performance and efficiency, and supporting digital sovereignty needs in 33 countries.

    03

    Copilot Adoption and Ecosystem Growth

    The company reports 900 million monthly active users of AI features across its products, with first-party Copilots surpassing 150 million monthly active users. Microsoft 365 Copilot adoption is accelerating, growing 50% quarter-over-quarter, with over 90% of Fortune 500 companies using it. A growing ecosystem of ISVs and customers are building agents for Copilot, exemplified by PwC adding 155,000 seats this quarter, bringing their total to over 200,000 deployed.

    04

    Agentic AI Systems Strategy

    Satya Nadella emphasized the importance of building agentic systems like GitHub Agent HQ and M365 Copilot to manage the 'jagged intelligence' of AI models. These systems, such as Agent Mode in Excel or Teams mode in M365 Copilot, orchestrate multi-agent workflows with compliance and observability, enabling complex tasks and iterations. This approach is seen as critical for driving real-world value from AI advancements and is being extended to third-party customers via Azure AI Foundry.

    05

    Strategic Capacity Prioritization

    Amy Hood clarified that Azure capacity constraints are leading to strategic prioritization of resources. This includes allocating capacity first to M365 Copilot, security features, GitHub momentum, and internal product R&D. The company is investing in both short-lived📎 assets (GPUs/CPUs) to match contract durations and long-lived assets (data centers) for long-term monetization, balancing demand with efficient build-out and ensuring the fleet serves a broad customer base.

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