What Management Said

Read the full Q1 2026 transcript ↗

More detailed Outlook slides will be available on the Microsoft Investor Relations website. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency, when available, as a framework for assessing how our underlying business performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rate only.

Microsoft Cloud revenue surpassed $49 billion, up 26% year-over-year, and our commercial RPO increased over 50% to nearly $400 billion with a weighted average duration of only two years. We are seeing increasing demand and diffusion of our AI platform and family of Copilots, which is fueling our investments across both capital and talent. This is a great milestone for both companies, and we continue to benefit mutually from each other's growth across multiple dimensions. We will increase our total AI capacity by over 80% this year and roughly double our total data center footprint over the next two years, reflecting the demand signals we see.

We're optimizing this fleet across silicon, systems, and software to maximize performance and efficiency. These kinds of real production-scale AI deployments are driving Azure's overall growth, and once again, this quarter, Azure took share. We have integrated chat and Agentic workflows into everyday tools like Outlook, Word, Excel, PowerPoint, and Teams. Adoption is accelerating rapidly, growing 50% quarter-over-quarter, and we continue to see usage intensity increase.

What went well
  • It was a very strong start to the fiscal year, with Microsoft Cloud revenue surpassing $49 billion, up 26% year-over-year, and commercial RPO increasing over 50% to nearly $400 billion.
  • Q1 revenue was $77.7 billion, up 18% and 17% in constant currency, exceeding expectations across revenue, operating income, and earnings per share.
  • Earnings per share was $4.13, an increase of 23% and 21% in constant currency when adjusted for the impact of investments in OpenAI.
  • Operating income increased 24% and 22% in constant currency, and operating margins increased year-over-year to 49%, ahead of expectations.
  • Commercial bookings increased 112% and 111% in constant currency, significantly ahead of expectations, driven by Azure commitments from OpenAI and continued growth in $100 million-plus contracts (excluding the newly announced incremental $250 billion OpenAI commitment).
  • Intelligent Cloud revenue was $30.9 billion, up 28% and 27% in constant currency, with Azure and other cloud services growing 40% and 39% in constant currency, ahead of expectations on core infrastructure strength from the largest customers.
  • Productivity and Business Processes revenue was $33 billion, up 17% and 14% in constant currency, with operating margins up three points to 62%.
  • The first-party family of Copilots surpassed 150 million monthly active users, and 900 million monthly active users engage with AI features across products.
  • Microsoft 365 Copilot chat adoption grew 50% quarter-over-quarter, the number of agent users doubled quarter-over-quarter, and more than 90% of the Fortune 500 now use Microsoft 365 Copilot.
  • GitHub Copilot reached over 26 million users on a platform of 180 million developers, and Azure AI Foundry served 80,000 customers with access to over 11,000 models.
  • Cash flow from operations was $45.1 billion, up 32%, free cash flow increased 33% to $25.7 billion, and Microsoft returned $10.7 billion to shareholders.
  • Microsoft closed a new definitive agreement with OpenAI, roughly 10x-ing its investment, securing an incremental $250 billion Azure commitment, rev-share and API exclusivity through AGI or 2030, and model and product IP rights through 2032.
What went wrong
  • In gaming, revenue decreased 2% and 3% in constant currency against a strong prior-year comparable, with Xbox content and services up only 1% and relatively unchanged in constant currency.
  • Azure AI services demand again exceeded supply across workloads even as more capacity came online, and the company remained capacity constrained.
  • Other income and expense reflected a $4.1 billion charge on a GAAP basis, driven entirely by Microsoft's share of increased OpenAI equity-method losses.
  • Company gross margin percentage was 69%, down slightly year-over-year, driven by investments in AI and growing usage of AI product features.
  • LinkedIn's talent solutions business was impacted by continued weakness in the hiring market.
  • Microsoft Cloud gross margin percentage was 68%, down year-over-year, and was guided lower to roughly 66% for Q2 on continued AI investment and mix shift to Azure.

Guidance Changes

MetricPeriodCurrent guidance
Total company revenueQ2 FY2026$79.5B-$80.6B, or 14%-16% growth
Cost of goods soldQ2 FY2026$26.35B-$26.55B, or 21%-22% growth
Operating expenseQ2 FY2026$17.3B-$17.4B, or 7%-8% growth
Operating marginsQ2 FY2026Relatively flat year-over-year and down sequentially, aligned with historic seasonality
Microsoft Cloud gross margin percentageQ2 FY2026Roughly 66%, down year-over-year on continued AI investment and mix shift to Azure
Other income and expense (excl. OpenAI)Q2 FY2026Roughly $100 million, as interest income more than offsets interest expense
Effective tax rateQ2 FY2026Approximately 19%
Capital expendituresQ2 FY2026 / FY2026Total spend to increase sequentially; FY2026 CapEx growth rate now expected higher than FY2025 on accelerating demand
FX impact on total revenue growthQ2 FY2026+2 points to total revenue growth; +2 points in P&BP and Intelligent Cloud, +1 point in MPC

Performance Breakdown

MetricYoYNote
Total revenue +18% (+17% cc) to $77.7B Broad demand for cloud and AI offerings with continued share gains and strong high-margin business results.
Microsoft Cloud revenue +26% (+25% cc) to $49.1B Ahead of expectations on cloud and AI demand.
Productivity and Business Processes revenue +17% (+14% cc) to $33B M365 commercial and consumer growth, with operating margins up to 62%.
Intelligent Cloud revenue +28% (+27% cc) to $30.9B Accelerating Azure demand plus improved on-premises server results.
Azure and other cloud services +40% (+39% cc) Better-than-expected core infrastructure growth from the largest customers; Azure AI in line as demand exceeded supply.
More Personal Computing revenue +4% to $13.8B Strong Windows OEM ahead of Windows 10 end of support, offset by a gaming decline.
M365 commercial cloud +17% (+15% cc) ARPU and seat growth (seats +6%), ARPU led by E5 and M365 Copilot, plus one point from end-period revenue recognition.
M365 commercial products +17% (+14% cc) Higher-than-expected Office 2024 transactional purchasing.
M365 consumer cloud +26% (+25% cc) ARPU growth; subscriptions grew 7% to over 90 million.
LinkedIn revenue +10% (+9% cc) Driven by marketing solutions; talent solutions weighed by the hiring market.
Dynamics 365 revenue +18% (+16% cc) Continued growth across all workloads.
On-premises server business +1% (unchanged cc) Transactional purchasing of Windows Server 2025, ahead of expectations.
Windows OEM and devices +6% Strong demand ahead of Windows 10 end of support plus elevated inventory levels.
Search and news advertising ex-TAC +16% (+15% cc) Volume growth and a better-than-expected continued third-party partnership benefit.
Gaming revenue -2% (-3% cc) Strong prior-year comparable; Xbox content and services up 1% on better-than-expected third-party content.
Earnings per share +23% (+21% cc) to $4.13 (adjusted) Revenue outperformance and operating margin expansion to 49%.

Earnings Call Themes & Trends

TopicPrevious mentionCurrent periodTrend
Commercial RPO scaleRoughly $200B two years agoNearly $400 billion ($392B), up 51% year-over-year, with weighted average duration stable at about two years—
OpenAI partnership termsPrior agreement with less IP certaintyNew definitive agreement: ~10x return on investment, incremental $250B Azure commitment, IP rights extended through 2032, API exclusivity through AGI or 2030—
Data center capacity build-outPrior-year total AI capacity and footprint smallerPlans to increase total AI capacity over 80% this year and roughly double the data center footprint over two years; announced 2 GW Fairwater (Wisconsin) and first large-scale NVIDIA GB300 cluster—
Copilot consumer app engagementLower prior-quarter daily usageDaily users of the Copilot consumer app increased nearly 50% quarter-over-quarter—
M365 Copilot chat and agentsPrior-quarter adoption baseChat adoption up 50% quarter-over-quarter; overall agent users doubled quarter-over-quarter—
GPU efficiency via softwareGPT-4.1/GPT-5 throughput a quarter agoToken throughput increased over 30% per GPU for GPT-4.1 and GPT-5 through software optimization—
CapEx trajectoryIn July FY26 CapEx growth guided to moderate versus FY25Now expects FY2026 CapEx growth rate to be higher than FY2025 on accelerating demand and growing RPO—
Phi family of small language models~20 million downloads a year agoOver 60 million downloads, up 3x year-over-year—

Q&A Summary

Keith Weiss (Morgan Stanley) asked, given results well ahead of expectations yet an underperforming stock, whether Satya sees anything on the horizon (including AGI) that could change Microsoft's strong positioning.
Nadella said the new OpenAI agreement adds certainty around the AGI-related IP relationship, and that even as model intelligence grows exponentially it will remain 'jagged'; systems like GitHub Agent HQ and the M365 Copilot system smooth those edges and keep agents on rails (illustrated with Excel agent mode and the analyst agent). He said AGI as defined in the contract is not close, but Microsoft can drive large customer value by building these organizing-layer systems.
Brent Thill (Jefferies) raised concentration risk behind the 51% RPO and 110%+ bookings growth, asking what gives confidence in the breadth of the deals.
Hood said the nearly $400 billion RPO spans numerous products and customers of all sizes, and with a roughly two-year weighted average duration most of it is consumed in relatively short order, meaning customers only commit if there is real-world value. She said OpenAI is one piece of a balance built across many customers, and the color was intended to address concerns that the backlog is long-dated.
Mark Moerdler (Bernstein) asked how much confidence Microsoft has that software and consumer internet can monetize the global AI investment, whether it is a bubble, and what factors would signal overbuilding.
Hood connected the $400 billion of short-dated RPO to high near-term infrastructure needs for already-booked business, described the pivot to short-lived GPU/CPU assets matched to contract durations, and said Microsoft has been short capacity for many quarters as demand keeps increasing across products, so it will spend with confidence to serve Azure, first-party apps, product R&D, and end-of-life replacements. Nadella added that an efficient, fungible planet-scale 'token factory' plus high-value agent systems (in information work, coding, security, health, consumer) give confidence to invest capital and R&D.
Karl Keirstead (UBS) asked Amy to explain the unusually large $4.1 billion OpenAI investment charge in other income and whether it signals an accounting change.
Hood said the Q1 number was not impacted at all by the new agreement and that the increased loss was entirely Microsoft's percentage of OpenAI's losses under the equity method, with nothing else in it.
Mark Murphy (JPMorgan) asked how Microsoft evaluates the ability of a small number of AI-native customers to follow through on very large commitments, and how it places guardrails on customer concentration.
Nadella pointed to building a fungible asset and a balanced portfolio spanning first-party and third-party, enterprise and digital natives, saying digital natives are early adopters that help build scale before enterprise adoption spreads, and that thoughtful yes/no decisions plus long-lived assets with multiple refresh cycles mitigate concentration risk. Hood added that CPU/GPU/storage gear only comes into play when contracts start, giving lead time to assess status.
Brad Zelnick (Deutsche Bank) asked whether Microsoft can quantify the revenue impact of Azure being short on capacity and the risk of workloads going elsewhere.
Hood said it is hard to quantify precisely but Azure bears most of the impact, because Microsoft first prioritizes increasing M365 Copilot and Copilot chat usage, security features, GitHub momentum, and capacity for product/research teams; she said the constrained revenue number could be higher.
Kash Rangan (Goldman Sachs) congratulated Amy on his last call and asked Satya about reports another hyperscaler took OpenAI business Microsoft could have had, and Microsoft's criteria.
Nadella said the guiding principle is a fungible fleet serving first-party, third-party, and research, and that Microsoft says no to demand that is too concentrated by customer, location, or single-meter (e.g., only AI accelerators) because a hyperscaler's margin also depends on compute and storage and Microsoft must fund its own R&D and model capability; he said he feels good about the decisions, even better the day after saying no.

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Q1 2026 call
Reported 2025-10-29 · figures from the Microsoft Corp Q1 2026 earnings call.

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