MICROSOFT (MSFT)·Q2 2026 Earnings Summary

Microsoft Beats on Cloud and AI, But Stock Plunges 7% on CapEx Concerns

January 28, 2026 · by Fintool AI Agent

Microsoft delivered another quarter of strong execution, with revenue and EPS beating consensus, Azure growth accelerating to 39%, and Microsoft Cloud surpassing $50 billion for the first time. CEO Satya Nadella declared Microsoft has "built an AI business that is larger than some of our biggest franchises that took decades to build."

Yet shares plunged ~7% in after-hours trading to $449.63, reflecting investor concerns about massive AI infrastructure spending ($37.5B CapEx this quarter) and Q3 Azure guidance of 37-38% that implies slight deceleration.

Did Microsoft Beat Earnings?

Yes — Microsoft beat on all key metrics:

Revenue grew 17% year-over-year (15% in constant currency), while operating income surged 21% (19% CC). Operating margins reached 47%, ahead of expectations.

GAAP EPS of $5.16 included a $10 billion gain from OpenAI's recapitalization. Excluding this impact, adjusted EPS was $4.14, up 24% YoY (21% CC).

What Did Management Guide?

CFO Amy Hood provided Q3 FY2026 guidance that implies some moderation:

Key guidance details:

• CapEx expected to decrease sequentially from Q2's $37.5B due to normal variability in build-outs and finance lease timing
• Windows OEM to decline ~10% as Windows 10 end-of-support benefit normalizes
• FY2026 operating margins now expected to be up slightly (improved from prior outlook)

AI and Copilot Metrics: The Key Story

This quarter revealed explosive growth in Microsoft's AI products:

Microsoft 365 Copilot

Notable deployments: Fiserv, ING, NASA, University of Kentucky, University of Manchester, US Department of Interior, and Westpac all purchased over 35,000 seats. Publicis alone purchased over 95,000 seats for nearly all employees.

GitHub Copilot

Siemens is adopting the full GitHub platform after a successful Copilot rollout to 30,000+ developers.

Other AI Products

Satya Nadella noted that over 250 customers are on track to process over 1 trillion tokens on Foundry this year, and 80% of the Fortune 500 have active agents built using Copilot Studio and Agent Builder.

What Drove the Beat?

Intelligent Cloud: Azure Accelerates

Azure and other cloud services grew 39% (38% CC), slightly ahead of the ~37% guidance.

The Intelligent Cloud segment delivered $32.9 billion in revenue (+29% YoY), beating the $32.25-32.55B guidance range. Amy Hood noted "ongoing efficiency gains across our fungible fleet, enabling us to reallocate some capacity to Azure that was monetized in the quarter."

Commercial RPO surged 110% to $625 billion, with weighted average duration of ~2.5 years. Approximately 45% of this balance is from OpenAI. The remaining ~$350 billion grew 28% and "reflects ongoing broad customer demand across the portfolio."

Productivity & Business Processes

The P&BP segment delivered $34.1 billion (+16% YoY), beating guidance.

More Personal Computing

MPC revenue was $14.3 billion (-3% YoY), with mixed results:

• Windows OEM: +5% (benefiting from Windows 10 end of support)
• Search & News ex-TAC: +9% CC (slightly below expectations due to "execution challenges")
• Xbox content & services: -6% CC (below expectations, driven by first-party content)

Gaming segment saw impairment charges recorded this quarter.

How Did the Stock React?

Despite the beat, MSFT shares fell ~7% in after-hours trading to $449.63, down from the regular session close of $481.63.

The negative reaction likely reflects:

1. Massive CapEx — $37.5B this quarter, with roughly two-thirds on short-lived assets (GPUs/CPUs). Cash paid for PP&E was $29.9B.
2. Azure guidance implies deceleration — Q3 guide of 37-38% CC vs 38% in Q2
3. Capacity still constrained — "Demand continues to exceed supply"
4. OpenAI concentration — 45% of $625B RPO is from OpenAI

Q&A Highlights: The CapEx ROI Question

The most important exchange came from Keith Weiss of Morgan Stanley, who noted "CapEx is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected."

Amy Hood's response was revealing:

"If I had taken the GPUs that just came online in Q1 and Q2, and allocated them all to Azure, the KPI would have been over 40. And I think the most important thing to realize is that this is about investing in all the layers of the stack that benefit customers."

She explained CapEx allocation priorities:

1. First-party AI apps — M365 Copilot, GitHub Copilot, Dragon Copilot, Security Copilot
2. R&D and product innovation — "Much of the acceleration you've seen from us in products is coming because we are allocating GPUs to talented AI people we've been hiring"
3. Azure capacity — "The remainder going towards serving Azure capacity"

Satya Nadella added:

"As an investor, when you think about our capital and the GM profile of our portfolio, you should think about Azure, but you should think about M365 Copilot, GitHub Copilot, Dragon Copilot, Security Copilot. All of those have a GM profile and lifetime value... We don't want to maximize just one business of ours."

On GPU contract durability, Hood noted: "The majority of the capital that we're spending today, and a lot of the GPUs that we're buying, are already contracted for most of their useful life."

Infrastructure and AI Strategy

Satya provided extensive detail on Microsoft's AI infrastructure buildout:

Capacity Expansion

• Added nearly 1 GW of total capacity this quarter alone
• Connected Atlanta and Wisconsin data centers through an AI WAN to build a "first-of-its-kind AI super factory" (Fairwater)
• Announced DC investments in 7 countries this quarter for data sovereignty

Custom Silicon Progress

Satya noted Microsoft achieved a 50% increase in throughput on one of its highest-volume workloads: OpenAI inferencing powering Microsoft's Copilots.

On the silicon strategy: "We have NVIDIA and AMD and our own Maia chips, delivering the best all-up fleet performance, cost, and supply across multiple generations of hardware... We want to have the flexibility here."

Model Strategy

• Added support for GPT-5 and Claude 4.5 on Foundry
• Over 1,500 customers have used both Anthropic and OpenAI models on Foundry
• Increasing demand for region-specific models (Mistral, Cohere) for sovereign AI

Key Management Quotes

Satya Nadella on the AI opportunity:

"This quarter, the Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year-over-year, reflecting the strength of our platform and accelerating demand. We are in the beginning phases of AI diffusion and its broad GDP impact. Our TAM will grow substantially across every layer of the tech stack as this diffusion accelerates and spreads."

On the key optimization metric:

"The key metric we are optimizing for is tokens per watt per dollar, which comes down to increasing utilization and decreasing TCO using silicon systems and software."

On Work IQ (Microsoft 365 data layer):

"The most important database underneath, for any company that uses Microsoft today is the data underneath Microsoft 365... it has all this tacit information. Who are your people? What are their relationships? What are the projects they're working on?"

What Changed From Last Quarter?

The massive jump in commercial RPO to $625B (+110% YoY) was driven by the previously announced large Azure commitments from OpenAI and Anthropic. Commercial bookings grew 230% due to these contracts.

Capital Returns

Microsoft returned $12.7 billion to shareholders this quarter through dividends and share repurchases, an increase of 32% year-over-year.

Free cash flow was $5.9 billion, down from $22.3B in operating cash flow minus the massive $29.9B cash CapEx.

Financial Summary

Note: GAAP results include a $10B gain from investments in OpenAI related to their recapitalization.

Other Notable Highlights

• Windows 11: 1 billion users, up 45% YoY
• Security customers: 1.6 million, including 1M+ using 4+ workloads
• SQL Server 2025: Over 2x the IaaS adoption of the previous version
• LinkedIn: Double-digit member growth with 30% growth in paid video ads
• Agent 365: New product for extending governance, identity, security, and management to AI agents. Partners integrating include Adobe, Databricks, Genspark, Glean, NVIDIA, SAP, ServiceNow, and Workday.

Bottom Line

Microsoft delivered a clean beat on Q2 FY2026 results, with Azure growth at 39%, Microsoft Cloud crossing $50 billion, and explosive AI product adoption — 15 million M365 Copilot seats (up 160% YoY), 4.7 million GitHub Copilot subscribers (up 75% YoY), and daily Copilot users up 10x.

However, the ~7% after-hours decline reflects real investor concerns:

• CapEx intensity — $37.5B in capital expenditure this quarter, with the company prioritizing first-party AI apps and R&D over maximizing Azure
• Azure deceleration — Q3 guidance of 37-38% implies slowing from 38% in Q2, even as demand exceeds supply
• OpenAI concentration — 45% of the $625B RPO backlog is from one customer

Amy Hood's candid admission that Azure growth "would have been over 40" if they allocated all GPUs there provides helpful context: Microsoft is deliberately investing in its full-stack AI strategy rather than optimizing for near-term Azure metrics. Whether investors reward that long-term orientation remains to be seen.

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Data sourced from Microsoft's Q2 FY2026 earnings call transcript and 8-K filing.

Related:

• Microsoft Company Profile
• Q1 FY2026 Earnings
• Q2 FY2026 Transcript