MICROSOFT CORP (MSFT) Q1 2026 Earnings Summary

Executive Summary

• Q1 FY26 delivered broad beats: revenue $77.67B (+18% YoY), non-GAAP EPS $4.13 (+23% YoY), and operating income $37.96B (+24% YoY), all ahead of Street; GAAP EPS was $3.72 (+13% YoY) .
• Microsoft Cloud revenue reached $49.1B (+26%), Azure and other cloud services grew +40%, and commercial RPO surged to $392B (+51% YoY), with bookings up +112% as demand exceeded supply across AI workloads .
• Guidance for Q2 FY26: revenue $79.5–$80.6B; Azure growth ~37% CC; Microsoft Cloud GM ~66% (down YoY); continued capacity constraints through at least fiscal year-end; OI&E outlook now excludes OpenAI’s equity-method impact and is ~+$100M .
• Non-GAAP adjustments exclude $3.086B loss from OpenAI investments (–$0.41 EPS), introducing OI&E volatility; management emphasized aggressive capacity build and software-driven efficiency to meet accelerating AI demand .
• Potential stock catalysts: sustained Azure acceleration and bookings/RPO momentum; OpenAI partnership expansion (PBC recap and ~$135B stake), but capacity constraints and Cloud GM dilution remain watch items .

What Went Well and What Went Wrong

What Went Well

• “Planet-scale cloud and AI factory” powering broad diffusion: Microsoft Cloud revenue $49.1B (+26%); Azure +40% with share gains; 900M MAU of AI features; 150M MAU for first-party Copilots .
• Commercial momentum: bookings +112% (ahead of expectations), RPO $392B (+51% YoY, ~2-year WAD), multiple $100M+ contracts across Azure and M365; Microsoft Cloud GM slightly better than expected .
• Productivity and MPC beats: P&BP +17%; M365 commercial cloud +17%; consumer cloud +26% with >90M subs (+7%); Search ex-TAC +16%; Windows OEM/Devices +6% .

What Went Wrong

• Capacity constraints: demand exceeded supply in AI services; management expects to remain capacity constrained through at least FY26 year-end; Azure likely bears most revenue impact due to prioritization of 1P apps and core AI product usage .
• Gross margin pressure: company GM % down slightly YoY to 69% and Microsoft Cloud GM down YoY on AI infrastructure scaling despite efficiency gains .
• Segment pockets of weakness: gaming revenue –2% (Xbox content/services +1%), LinkedIn Talent Solutions impacted by hiring market softness .

Financial Results

Consolidated Results vs prior quarters

Segment Revenue

KPIs and Growth Drivers

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• Satya Nadella: “Our planet-scale cloud and AI factory, together with Copilots across high value domains, is driving broad diffusion and real-world impact” .
• Amy Hood: “We delivered a strong start to the fiscal year, exceeding expectations across revenue, operating income, and earnings per share” .
• Capacity prioritization: “We now expect to be capacity-constrained through at least the end of our fiscal year” .
• OpenAI equity method: “That increased loss was all due to our percentage of losses in OpenAI’s equity method” .
• Strategy on demand selection: “We say no to some demand that may be something we could serve, but it’s not in our long-term interest” .

Q&A Highlights

• AGI/AI architecture: Management downplayed near-term AGI, emphasizing “jagged intelligence” and systems (Copilot, Agent HQ) to smooth capabilities for real-world ROI .
• Concentration risk: Bookings/RPO breadth across products and customer sizes; OpenAI is one piece within a diversified base; weighted-average duration ~2 years .
• Capacity constraints impact: Azure bears most revenue impact due to prioritization of 1P apps and AI R&D; demand increasing across many areas .
• OI&E volatility: OpenAI equity-method losses drove OI&E; outlook will exclude OpenAI impacts going forward (~+$100M in Q2) .
• CapEx/efficiency: Short-lived assets matched to contract durations; long-lived leases for sites; software optimizations (tokens per GPU) drive capital efficiency .

Estimates Context

• Q1 FY26 beat: Revenue $77.67B vs $75.39B*; EPS (non-GAAP) $4.13 vs $3.66*; strong upside across both vs consensus as Copilot/Cloud demand and bookings inflected .
• Prior quarters also beat: Q4 FY25 revenue $76.44B vs $73.87B*; EPS $3.65 vs $3.38* . Q3 FY25 revenue $70.07B vs $68.44B*; EPS $3.46 vs $3.22* .
• Estimate breadth: EPS estimates (count) increased from 35 to 37; revenue estimates around 37–41 contributors*.

Values retrieved from S&P Global.*

Key Takeaways for Investors

• Azure trajectory is accelerating (+40% YoY) amid severe capacity constraints; management is prioritizing 1P AI applications and enterprise demand—expect near-term supply limitations but improving efficiency per GPU .
• Bookings +112% and RPO +51% YoY to $392B (WAD ~2 years) underpin durable multi-quarter revenue visibility and justify continued CapEx ramp .
• Gross margin dilution from AI infrastructure persists (company GM ~69%; Cloud GM down YoY), but software-led efficiency and mix management aim to stabilize margins .
• Non-GAAP EPS is the appropriate lens given OpenAI equity-method losses (–$0.41 EPS Q1); OI&E outlook now excludes OpenAI to reduce volatility in forward guides .
• Q2 guide indicates sustained demand (Azure ~37% CC; revenue ~$80B) and sequential spending increase; monitor Cloud GM (~66%) and Windows OEM normalization as inventories decline .
• Copilot adoption is accelerating (>90% F500 using; >90M consumer subs), reinforcing the AI application layer monetization beyond infra .
• Trading lens: near-term upside from beats and bookings; watch margin trajectory and capacity delivery timing; OpenAI PBC recap’s exclusivity/IP terms strengthen strategic moat while clarifying OI&E noise .

Additional References

• Q1 FY26 press release and exhibits (OpenAI PBC agreement; investor presentation): results and non-GAAP reconciliations .
• Prior quarter press releases: Q4 FY25 and Q3 FY25 financials and segment detail .
• Earnings call transcripts for Q1 FY26, Q4 FY25, Q3 FY25: detailed guidance, margin, bookings, capacity commentary .