MSFT 2026 Q2

Microsoft Cloud revenue surpassed $50 billion for the first time, growing 26% year over year, which Nadella attributed to accelerating AI-driven demand across the platform.

“the Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year over year”— Satya Nadella, CEO

Total company revenue, operating income and EPS all exceeded prior expectations this quarter, continuing a pattern of beating plan while still investing heavily for growth.

“we again exceeded expectations across revenue, operating income, and earnings per share while investing to fuel long-term growth”— Amy Hood, CFO

Azure growth is guided to significantly accelerate in Q3 and Q4 as demand continues to exceed available supply, a step-up versus prior growth commentary.

“demand continues to exceed supply, significantly accelerating growth rates in both Q3 and Q4”— Amy Hood, CFO

On-premises server revenue grew 21% in constant currency, ahead of expectations, driven by the SQL Server 2025 launch and transactional purchasing pulled forward ahead of memory price increases.

Per Amy Hood, CFO

Microsoft 365 commercial products revenue grew 13% in constant currency, ahead of expectations, due to higher-than-expected Office 2024 transactional purchasing that management expects to normalize and decline next quarter.

Per Amy Hood, CFO

Search and news advertising revenue growth of 9% came in slightly below expectations due to execution challenges, with further sequential moderation guided as third-party partnership benefits normalize.

Per Amy Hood, CFO

Xbox content and services revenue declined 6% in constant currency, below expectations, driven by weaker first-party content performance across the platform.

Per Amy Hood, CFO

Windows OEM revenue is guided to decline roughly 10% next quarter as the Windows 10 end-of-support benefit normalizes and elevated inventory levels come down, a reversal from recent growth.

Per Amy Hood, CFO

Commercial bookings grew 23% in constant currency, driven by a large new multiyear Azure commitment from OpenAI and the previously announced Anthropic commitment, signaling stepped-up future demand commitments.

Per Amy Hood, CFO

Commercial RPO grew 10% year over year, with the portion recognized within 12 months accelerating to 39% growth and the longer-dated portion up 56%, indicating a pickup in near-term revenue conversion.

Per Amy Hood, CFO

Microsoft 365 Copilot seat additions hit a record, up over 160% year over year, with seat growth accelerating quarter over quarter to reach 15 million paid seats.

“it was a record quarter for Microsoft 365 Copilot seat additions, up over 160% year over year”— Satya Nadella, CEO

GitHub Copilot Pro Plus subscriptions for individual developers increased 77% quarter over quarter, contributing to total paid subscribers growing 75% year over year to 4.7 million.

Per Satya Nadella, CEO

Microsoft 365 Copilot usage intensity hit a record, with average conversations per user doubling year over year and daily active users increasing 10x, described as the biggest quarter-over-quarter quality improvement to date.

“This has driven record usage intensity, with the average number of conversations per user doubling year over year”— Satya Nadella, CEO

Customers spending over $1 million per quarter on Foundry grew nearly 80%, and the number of large Microsoft 365 Copilot deployments (35,000+ seats) tripled year over year, indicating accelerating large-enterprise adoption.

Per Satya Nadella, CEO

Microsoft expanded sovereignty offerings and announced data center investments in seven countries this quarter, reflecting a new push to address rising customer demand for local data residency.

Per Satya Nadella, CEO

Demand for region-specific sovereign AI models, including Cohere, is increasing as more customers seek sovereign choices, a new demand pattern beyond the major model providers.

Per Satya Nadella, CEO

Microsoft brought online its new Maya 200 AI accelerator, delivering over 30% improved total cost of ownership versus the prior generation fleet hardware, marking a new milestone in custom silicon performance.

“Maya 200 delivers 10 plus flops at FP4 precision with over 30% improved total cost of ownership compared to the latest generation hardware in our fleet”— Satya Nadella, CEO

Microsoft introduced Agent 365, a new cross-cloud agent governance and security control plane, which management framed as a first-of-its-kind offering and a significant new growth category.

“We are the first provider to offer this type of agent control plane across clouds”— Satya Nadella, CEO

Fabric's annualized revenue run rate crossed $2 billion for the first time, growing 60% year over year, positioning it as the fastest-growing analytics platform two years after general availability.

Per Satya Nadella, CEO

New SQL Server 2025 achieved over 2x the IaaS adoption of the previous version, indicating an acceleration in cloud migration uptake for the on-premises franchise.

Per Satya Nadella, CEO

Foundry added support for GPT-5.0.2 and Claude 4.5, with over 1,500 customers now using both Anthropic and OpenAI models, reflecting a new multi-model adoption pattern.

Per Satya Nadella, CEO

Company gross margin percentage declined slightly year over year to 68%, driven by continued AI infrastructure investment and rising AI product usage, partially offset by efficiency gains and mix shift to higher-margin businesses.

Per Amy Hood, CFO

Microsoft Cloud gross margin came in slightly better than expected at 67% but still down year over year due to continued AI investment, partially offset by efficiency gains.

Per Amy Hood, CFO

Microsoft Cloud gross margin is guided to decline further to roughly 65% next quarter, down year over year, as AI investment continues to outweigh efficiency gains.

“Microsoft cloud gross margin percentage should be roughly 65%, down year over year driven by continued investments in AI”— Amy Hood, CFO

Intelligent Cloud segment gross margin percentage decreased year over year due to continued AI investment and sales mix shift toward Azure, partially offset by fleet efficiency gains.

Per Amy Hood, CFO

Productivity and Business Processes segment gross margin percentage increased, driven by Microsoft 365 commercial cloud efficiency gains that outweighed continued AI investment including Copilot usage costs.

Per Amy Hood, CFO

Operating margin increased year over year to 47%, coming in ahead of expectations despite continued heavy AI investment.

“Operating margins increased year over year to 47%, ahead of expectations”— Amy Hood, CFO

Full-year FY26 operating margin outlook was raised to 'up slightly' year over year, reflecting stronger-than-planned H1 execution and a favorable revenue mix shift toward Windows OEM and on-premises server.

“we now expect FY '26 operating margins to be up slightly”— Amy Hood, CFO

Q3 operating margins are guided to be down slightly year over year, a reversal from the current quarter's margin expansion, due to continued R&D and AI compute investment.

Per Amy Hood, CFO

Intelligent Cloud operating margin declined slightly year over year to 42%, as increased AI investment was only mostly offset by improved operating leverage.

Per Amy Hood, CFO

Operating expenses grew 5% in constant currency, driven by increased R&D investment in compute capacity and AI talent plus gaming impairment charges, and are guided to grow faster at 10-11% next quarter against a low prior-year comparable.

Per Amy Hood, CFO

Microsoft reported share gains this quarter across Windows, Edge and Bing, and guided continued share gains in Bing and Edge going forward.

“we expect continued share gains across Bing and Edge with growth driven by volume”— Amy Hood, CFO

Management said Microsoft is now taking share in Dynamics 365 through built-in agents across the suite, framing this as a new competitive dynamic versus prior positioning.

Per Satya Nadella, CEO

Total capital returned to shareholders via dividends and share repurchases combined rose 32% year over year to $12.7 billion, a step-up in the pace of shareholder returns.

“we returned $12.7 billion to shareholders through dividend and share repurchases, an increase of 32% year over year”— Amy Hood, CFO

Following OpenAI's recapitalization, Microsoft changed its equity-method accounting to recognize gains/losses based on OpenAI's balance sheet net assets rather than income statement results, producing a $10 billion GAAP gain this quarter.

Per Amy Hood, CFO

Capital expenditures are guided to decrease sequentially in Q3 due to normal variability in cloud infrastructure build-outs and timing of finance lease deliveries, after CapEx of $37.5 billion this quarter.

“we expect capital expenditures to decrease on a sequential basis due to normal variability from cloud infrastructure build-outs and the timing of delivery of finance leases”— Amy Hood, CFO

Management flagged that rising memory prices would newly begin to impact capital expenditure levels going forward, though the effect on cloud gross margins will build gradually given six-year depreciation.

Per Amy Hood, CFO

Management framed the company as being in the 'beginning phases of AI diffusion' with broad GDP impact still ahead, implying the addressable market will grow substantially as diffusion accelerates.

“We are in the beginning phases of AI diffusion and its broad GDP impact”— Satya Nadella, CEO

Rising memory prices emerged as a new macro factor this quarter, pulling forward transactional purchasing in Windows OEM and on-premises server and creating a wider-than-normal range of outcomes for the PC market going forward.

“The range of potential outcomes remains wider than normal, in part due to the potential impact on the PC market from increased memory pricing”— Amy Hood, CFO

FX benefit to revenue is expected to shrink sharply, from a 3-point boost to total revenue growth in Q3 to less than a 1-point boost in Q4, a fading tailwind versus recent quarters.

Per Amy Hood, CFO