Microsoft's FY26Q1 covers July through September 2025.
Microsoft FY2026 Q1 Earnings Summary:
Revenue was $77.7B, up 18% year over year, setting a new all-time high for the sixth consecutive quarter, with growth accelerating for the third straight quarter. Operating income was $38B, up 24% year over year, setting a new all-time high for the eleventh consecutive quarter. Net income was $27.7B, up 13% year over year, a new all-time high, which included a recognized $3.1B loss from OpenAI. Non-GAAP net income was $30.8B, up 22% year over year, a new all-time high.
Productivity and Business Processes
Productivity and Business Processes revenue was $33B, up 17% year over year, with sequential growth acceleration of 1 percentage point. Gross margin was disclosed for the first time at 83%, up 1.4 percentage points year over year. Operating income was $20.4B, up 24% year over year.
Microsoft 365 revenue was approximately $26.2B, up 18% year over year, with sequential growth acceleration of 1 percentage point. M365 Commercial Cloud revenue growth was driven by both ARPU and seat count. ARPU growth was again led by E5 and M365 Copilot. M365 Commercial paid seats grew 6% year over year, with installed base expansion across all customer segments, but concentrated in SMB and frontline worker products. M365 Commercial product revenue exceeded expectations, mainly due to higher-than-expected Office 2024 purchases. M365 Consumer Cloud revenue was also driven by ARPU growth. M365 Consumer subscriptions grew 7%, exceeding 90M. In healthcare, DAX Copilot helped document over 17M patient encounters this quarter alone, up nearly 5x year over year. Over 650 healthcare organizations have purchased ambient listening technology.
Monthly active users of AI features in products exceeded 900M. First-party Copilot family monthly active users exceeded 150M. Within nine months of launch, tens of millions of users within the M365 customer base are using Chat functionality. Adoption is accelerating rapidly, up 50% quarter over quarter. Customers are adopting M365 Copilot faster than any previous new M365 suite. Over 90% of the Fortune 500 now use M365 Copilot. Edge has gained share for 18 consecutive quarters. Bing share has also improved. Copilot consumer app daily active users grew nearly 50% quarter over quarter. Management indicated Copilot ARPU is more scalable compared to M365 ARPU.
LinkedIn revenue was $4.7B, up 10% year over year. LinkedIn has nearly 1.3B members. Revenue growth was driven primarily by Marketing Solutions. Talent Solutions was impacted by continued softness in the hiring market.
Dynamics revenue was $2.1B, up 16% year over year. Dynamics 365 revenue grew 18% year over year. Dynamics 365 market share continues to rise, with growth across all workloads.
Intelligent Cloud
Intelligent Cloud revenue was $30.9B, up 28% year over year, with sequential growth acceleration of 2 percentage points. Gross margin was disclosed for the first time at 60%, down 4.1 percentage points year over year. Operating income was $13.4B, up 27% year over year.
Azure revenue was approximately $23.6B, up 40% year over year, with sequential growth acceleration of 1 percentage point. Growth was driven by better-than-expected large customer demand in core infrastructure. Azure market share continues to rise. Cloud migration continues to accelerate. Azure AI services revenue was in line with expectations. Even with more capacity brought online this quarter, it could not satisfy faster-growing AI demand. Going forward, Microsoft will continue to balance Azure revenue growth with the ever-growing capacity needs from Copilot and its own R&D. Azure revenue growth could have been higher. AI capacity constraints will extend through the end of FY26 (previously FY26 H1). AI capacity will increase by over 80% this year and double again over the next two years, reflecting the demand seen. Azure AI Foundry has 80,000 customers, covering 80% of the Fortune 500.
Microsoft is building a planetary-scale cloud and AI factory, maximizing tokens per dollar per watt while supporting customer and national sovereignty requirements. Azure customers in 33 countries/regions are now developing their own cloud and AI capabilities within their borders to meet local data residency requirements. This quarter, Microsoft announced the Fairwater data center in Wisconsin, the world's most powerful AI data center, coming online next year, scaling to 2 GW. It also deployed the world's first large-scale GB300 cluster.
In Data & Analytics, Fabric revenue grew 60%, with 28,000 paid users (up from 25,000 last quarter). In Databases, SQL DB Hyperscale revenue grew nearly 75%, Cosmos DB grew 50%. GitHub now has over 180M developers. GitHub Copilot users exceed 26M (up from 20M last quarter).
In Security, over 30 agents are integrated into Entra, Defender, Purview, and Intune within Copilot. Entree monthly active users reached 1B. Purview audited 16B Copilot interactions, up 72% quarter over quarter. Market share improved across all served security categories.
More Personal Computing
More Personal Computing revenue was $13.8B, up 4% year over year. Gross margin was disclosed for the first time at 56%, up 3.3 percentage points year over year. Operating income was $4.2B, up 18% year over year.
Windows & Devices revenue was $4.6B, up 5% year over year, driven by the Win10 end-of-life refresh cycle.
Gaming revenue was $5.5B, down 2% year over year. Xbox hardware revenue declined year over year. High-margin content and services revenue grew 1% year over year. Minecraft monthly active users reached 155M, a new all-time high.
Search and news advertising revenue was $3.7B, up 16% year over year.
Earnings Call Highlights
Azure and M365 drove RPO to new highs. Commercial RPO was $392B this quarter, up 51% year over year and up $24B sequentially, a new all-time high, not including the recently announced $250B OpenAI order. Unlike Oracle, 40% of Microsoft's RPO will be recognized within 12 months, and the weighted average duration has remained stable at approximately 2 years.
FY26 Q2 guidance: Revenue up 14-16% year over year. Operating income up 17% year over year. Azure up 37% year over year. M365 Commercial Cloud up 13-14% year over year. Consumer Cloud up mid-twenties% year over year. LinkedIn up 10% year over year. Dynamics 365 up mid-to-high teens% year over year. Windows OEM & Devices up mid-single digits year over year. Search advertising up low-teens% year over year. Gaming services down low-to-mid single digits year over year.
Capex this quarter was $34.9B. Half went to short-lived assets, primarily GPUs and CPUs, to support growing Azure platform demand. The remainder went to long-lived assets that will support monetization for 15+ years, including $11.1B in finance leases, primarily for large data center sites. Due to the high proportion of finance leases, the sequential increase in capex has a negligible impact on free cash flow. FY26 Q2 capex is expected to continue growing sequentially. FY26 total capex growth is expected to exceed FY25 (last quarter guided for a decline), driven by continued strong demand signals.
FY26 full-year guidance: Revenue up double digits year over year. Operating income up double digits year over year. Operating margin flat.
Equity-method loss from OpenAI this quarter: recognized a $3.086B loss, compared to $523M loss in the year-ago quarter. Future focus should shift to Microsoft's Non-GAAP profit.
Overall, this earnings report continues to highlight the stability of Microsoft's business model, especially against a backdrop of intense capital spending. Microsoft stated that the margin profile of fully Copilot-infused SaaS products is far higher than Azure. Therefore, with limited AI capacity, Azure's priority is unexpectedly lower. Management "intentionally" suppressed Azure growth.
All three cloud hyperscalers benefited from AI to achieve sequential acceleration this quarter, and all continue to increase capex. Yet the market remains full of voices still viewing this as a bubble.
