Microsoft Corp Earnings - Q3 2025 Analysis & Highlights
Key Takeaways
Microsoft's Q1 2026 earnings call highlighted strong financial results driven by AI and cloud services, with significant growth in Microsoft Cloud revenue and commercial RPO. The company discussed its investments in AI infrastructure, the OpenAI partnership, and the expansion of its Copilot offerings. Microsoft also provided guidance for Q2, emphasizing continued growth and investment in AI.
Key Financial Results
Q1 revenue was $77.7 billion, up 18% and 17% in constant currency.
Earnings per share (EPS) was $4.13, an increase of 23% and 21% in constant currency, adjusted for OpenAI investments.
Microsoft Cloud revenue surpassed $49 billion, up 26% year-over-year.
Commercial RPO increased over 50% to nearly $400 billion.
Capital expenditures were $34.9 billion.
Cash flow from operations was $45.1 billion, up 32%.
Free cash flow increased 33% to $25.7 billion.
Business Segment Results
Productivity and Business Processes revenue was $33 billion, up 17%.
Intelligent Cloud revenue was $30.9 billion, up 28%.
More Personal Computing revenue was $13.8 billion, up 4%.
M365 commercial cloud revenue increased 17%.
Azure revenue grew 40%.
Dynamics 365 revenue increased 18%.
LinkedIn revenue increased 10%.
Capital Allocation
Capital expenditures will increase sequentially, with the FY 2026 growth rate expected to be higher than FY 2025.
Roughly half of the capital expenditure was on short-lived assets, primarily GPUs and CPUs.
The remaining capital expenditure was for long-lived assets, including $11.1 billion of finance leases primarily for large datacenter sites.
Returned $10.7 billion to shareholders through dividends and share repurchases.
Industry Trends and Dynamics
Increasing demand and diffusion of AI platform and family of Copilots.
Cloud migrations are accelerating.
Growing demand for cloud and AI offerings.
Demand for Azure AI services exceeded supply.
Continued customer shift to cloud offerings.
Competitive Landscape
Azure took share in the market.
Dynamics 365 gained share.
Edge has taken share for 18 consecutive quarters.
Took share again in search.
Took share across all categories served in security.
Growth Opportunities and Strategies
Building a planet-scale cloud and AI factory.
Innovating across the family of Copilots.
Expanding AI capacity, increasing it by over 80% this year and doubling the datacenter footprint over the next two years.
Optimizing the fleet across silicon, systems, and software to maximize performance and efficiency.
Building Azure AI Foundry to help customers build their own AI apps and agents.
Focusing on higher margin content and services in gaming.
Financial Guidance and Outlook
Q2 revenue is expected to be $79.5 billion to $80.6 billion, or growth of 14% to 16%.
Q2 COGS is expected to be $26.35 billion to $26.55 billion, or growth of 21% to 22%.
Q2 operating expense is expected to be $17.3 billion to $17.4 billion, or growth of 7% to 8%.
Q2 Microsoft Cloud gross margin percentage should be roughly 66%.
Expect healthy growth in commercial bookings.
Expect Q2 Azure revenue growth of approximately 37% in constant currency.
Expect Windows OEM and Devices revenue to decline in the mid-single digits.
