Microsoft Corp Earnings - Q4 2025 Analysis & Highlights
Microsoft Corp. (MSFT) reported a strong Q2 2026 with revenue of $81.3 billion, up 17%, and earnings per share (EPS) of $4.14, an increase of 24%. The Microsoft Cloud surpassed $50 billion in revenue for the first time, growing 26% year-over-year. The company highlighted significant investments in AI infrastructure and product innovation, with capital expenditures reaching $37.5 billion, primarily for GPUs and CPUs. Commercial bookings increased 230%, driven by large Azure and Anthropic commitments. Microsoft 365 Copilot saw record seat adds, up 160% year-over-year, reaching 15 million paid seats. The company also provided Q3 outlook, expecting revenue between $80.65 billion and $81.75 billion, and discussed the strategic importance of silicon innovation and cloud migration in the AI era.
Key Financial Results
Revenue was $81.3 billion, up 17% and 15% in constant currency.
Gross margin dollars increased 16% and 14% in constant currency.
Operating income increased 21% and 19% in constant currency.
Earnings per share was $4.14, an increase of 24% and 21% in constant currency when adjusted for the impact from the investment in OpenAI.
Company gross margin percentage was 68%, down slightly year-over-year, primarily driven by continued investments in AI infrastructure and growing AI product usage.
Operating expenses increased 5% and 4% in constant currency, driven by R&D investments in compute capacity and AI talent, as well as impairment charges in the gaming business.
Operating margins increased year-over-year to 47%, ahead of expectations.
Microsoft Cloud revenue was $51.5 billion and grew 26% and 24% in constant currency.
Microsoft Cloud gross margin percentage was slightly better than expected at 67%, and down year-over-year due to continued investments in AI.
Commercial bookings increased 230% and 228% in constant currency, driven by the previously announced large Azure commitment from OpenAI and the Anthropic commitment, as well as healthy growth across core annuity sales motions.
Commercial remaining performance obligation (RPO) increased to $625 billion, up 110% year-over-year, with a weighted average duration of approximately 2.5 years.
Approximately 45% of the commercial RPO balance is from OpenAI.
The significant remaining balance of RPO grew 28%, reflecting ongoing broad customer demand across the portfolio.
Business Segment Results
Productivity and Business Processes revenue was $34.1 billion and grew 16% and 14% in constant currency.
M365 Commercial cloud revenue increased 17% and 14% in constant currency, with increasing contribution from strong Copilot results.
Paid M365 Commercial seats grew 6% year-over-year to over 450 million.
M365 Commercial products revenue increased 13% and 10% in constant currency, ahead of expectations due to higher-than-expected Office 2024 transactional purchasing.
M365 Consumer cloud revenue increased 29% and 27% in constant currency, driven by ARPU growth.
LinkedIn revenue increased 11% and 10% in constant currency, driven by Marketing Solutions.
Dynamics 365 revenue increased 19% and 17% in constant currency, with continued growth across all workloads.
Productivity and Business Processes segment gross margin dollars increased 17% and 15% in constant currency, and gross margin percentage increased.
Productivity and Business Processes operating expenses increased 6% and 5% in constant currency, and operating income increased 22% and 19% in constant currency.
Productivity and Business Processes operating margins increased year-over-year to 60%.
Intelligent Cloud segment revenue was $32.9 billion and grew 29% and 28% in constant currency.
Azure and other cloud services revenue grew 39% and 38% in constant currency, slightly ahead of expectations.
On-premises server business revenue increased 2% and 1% in constant currency, ahead of expectations, driven by demand for hybrid solutions and the launch of SQL Server 2025.
Intelligent Cloud segment gross margin dollars increased 20% and 19% in constant currency.
Intelligent Cloud operating expenses increased 3% and 2% in constant currency, and operating income grew 28% and 27% in constant currency.
Intelligent Cloud operating margins were 42%, down slightly year-over-year.
More Personal Computing revenue was $14.3 billion and declined 3%.
Windows OEM and devices revenue increased 1%, and was relatively unchanged in constant currency.
Windows OEM grew 5% with strong execution and a continued benefit from Windows 10 end of support.
Search and news advertising revenue ex TAC increased 10% and 9% in constant currency, slightly below expectations.
Gaming revenue decreased 9% and 10% in constant currency.
Xbox content and services revenue decreased 5% and 6% in constant currency, and was below expectations.
More Personal Computing segment gross margin dollars increased 2% and 1% in constant currency, and gross margin percentage increased year-over-year.
More Personal Computing operating expenses increased 6% and 5% in constant currency, driven by impairment charges in the gaming business and R&D investments.
More Personal Computing operating income decreased 3% and 4% in constant currency, and operating margins were relatively unchanged year-over-year at 27%.
Capital Allocation
Capital expenditures were $37.5 billion, with roughly two-thirds on short-lived assets, primarily GPUs and CPUs.
Total finance leases were $6.7 billion, primarily for large datacenter sites.
Cash paid for PP&E was $29.9 billion.
Cash flow from operations was $35.8 billion, up 60%, driven by strong Cloud billings and collections.
Free cash flow was $5.9 billion and decreased sequentially, reflecting higher cash capital expenditures from a lower mix of finance leases.
$12.7 billion was returned to shareholders through dividends and share repurchases, an increase of 32% year-over-year.
Industry Trends and Dynamics
The company is in the beginning phases of AI diffusion and its broad GDP impact.
The total addressable market (TAM) will grow substantially across every layer of the tech stack as AI diffusion accelerates.
Sovereignty is increasingly top of mind for customers, leading to expansion of solutions and global footprint.
A new app platform is being born, with agents being the new apps.
Customers expect to use multiple models as part of any workload, fine-tuning them based on cost, latency, and performance requirements.
There is increasing demand for region-specific models as more customers look for sovereign AI choices.
AI experiences are intent-driven and are beginning to work at task scope, entering an age of macro delegation and micro steering.
The security industry is facing a severe talent shortage.
Cloud migrations continue, with the new SQL server having over 2x the IaaS adoption of the previous version.
Competitive Landscape
The company has built an AI business that is larger than some of its biggest franchises that took decades to build.
The company offers the broadest selection of models of any hyperscaler.
Microsoft 365 Copilot's accuracy and latency powered by Work IQ is unmatched, delivering faster and more accurate work-grounded results than competition.
The company is taking share in Dynamics 365 with built-in agents across the entire suite.
The company is the first provider to offer an agent control plane across clouds.
The company has great partnerships with NVIDIA and AMD, who are innovating alongside their own innovations.
Growth Opportunities and Strategies
The company is shaping its infrastructure to support new high-scale workloads, optimizing for tokens per watt per dollar by increasing utilization and decreasing TCO using silicon, systems, and software.
The Maia 200 accelerator delivers 10-plus petaFLOPS at FP4 precision with over 30% improved TCO compared to the latest generation hardware.
The Cobalt 200 delivers over 50% higher performance compared to the first custom-built processor for cloud-native workloads.
The company is expanding its solutions and global footprint to match customer needs for sovereignty, announcing DC investments in seven countries this quarter.
The company offers the most comprehensive set of sovereignty solutions across public, private, and national partner clouds.
The company added support for GPT-5.2 and Claude 4.5 this quarter.
The company continues to invest in its first-party models optimized for high-value customer scenarios like productivity, coding, and security.
Fabric's annual revenue run rate is now over $2 billion with over 31,000 customers, and it continues to be the fastest-growing analytics platform on the market with revenue up 60% year-over-year.
The number of customers spending $1 million-plus per quarter on Foundry grew nearly 80%.
Over 250 customers are on track to process over 1 trillion tokens on Foundry this year.
The company introduced Agent 365, which makes it easy for organizations to extend existing governance, identity, security, and management to agents.
Daily users of the Copilot app increased nearly 3x year-over-year.
Microsoft 365 Copilot is becoming a daily habit, with daily active users increasing 10x year-over-year.
Microsoft 365 Copilot seat adds were up over 160% year-over-year, with 15 million paid seats.
The number of customers with over 35,000 seats for Microsoft 365 Copilot tripled year-over-year.
Copilot Pro+ subs for individual devs increased 77% quarter-over-quarter.
There are now 4.7 million paid Copilot subscribers, up 75% year-over-year.
The company added a dozen new and updated Security Copilot agents across Defender, Entra, Intune, and Purview.
Dragon Copilot is helping over 100,000 medical providers automate workflows, documenting 21 million patient encounters this quarter, up 3x year-over-year.
Windows reached 1 billion Windows 11 users, up over 45% year-over-year.
The company had share gains this quarter across Windows, Edge, and Bing, with double-digit member growth in LinkedIn and 30% growth in paid video ads.
The company saw record PC players and paid streaming hours on Xbox.
Financial Guidance and Outlook
For Q3, FX is expected to increase total revenue growth by 3 points.
Q3 revenue is expected to be $80.65 billion to $81.75 billion, or growth of 15% to 17%.
Q3 COGS is expected to be $26.65 billion to $26.85 billion, or growth of 22% to 23%.
Q3 operating expense is expected to be $17.8 billion to $17.9 billion, or growth of 10% to 11%.
Q3 operating margins should be down slightly year-over-year.
Excluding the impact from OpenAI investments, other income and expense is expected to be roughly $700 million.
The adjusted Q3 effective tax rate is expected to be approximately 19%.
Capital expenditures are expected to decrease on a sequential basis in Q3.
Microsoft Cloud gross margin percentage for Q3 is expected to be roughly 65%, down year-over-year, driven by continued investments in AI.
Productivity and Business Processes revenue for Q3 is expected to be $34.25 billion to $34.55 billion, or growth of 14% to 15%.
M365 Commercial cloud revenue growth for Q3 is expected to be between 13% and 14% in constant currency.
M365 Commercial products revenue for Q3 should decline in the low single digits.
M365 Consumer cloud revenue growth for Q3 should be in the mid- to high 20% range. [2
