Table of Contents
a. Key Points
- Impressive ongoing Azure acceleration.
- Rising confidence in AI return on investment.
- Committed to positive FCF for next year.
- Extended data center useful life estimate from 15 years to 25 years (more in line with peers).
b. Demand
- Beat revenue estimate by 2.6% & beat guidance by 3.1%.
- Full year revenue growth (this was Q4 of their 2026 fiscal year) accelerated from 15% last year to 18% this year, thanks mainly to Azure.
- For Q4, constant currency (CC) revenue growth was 17% Y/Y compared to 15% last quarter and 17% last year.
- By segment:
- More Personal Computing (MPC) revenue beat estimate by 5.5%. The beat was driven by channel partners ordering ahead of component inflation.
- Intelligent Cloud (IC) revenue beat estimate by 3%. Azure outperformed but better-than-expected on-premise performance contributed to the beat too.
- Productivity & Business Processes (PBP) revenue beat estimate by 1.6%.
- Unearned revenue beat estimate by 2%.
- Seat growth remains stable at 6%. There was some modest weakness in its frontline worker segment, but that’s not somewhere that AI agents can replace workers.
Commercial bookings growth was 11% CC and 18% excluding their highly lumpy business with OpenAI. Good to see their non-OpenAI bookings scaling more quickly. For remaining performance obligation (RPO) growth, OpenAI is helping a lot as massive long-term contracts from earlier in the fiscal year are still propping up growth for this metric. This is why RPO growth was 84% including OpenAI and 25% excluding it.
c. Profits
- Company gross margin was 67% vs. 69% Y/Y due to rapid Azure growth and infrastructure investments.
- They’re getting more efficient with running Azure and other businesses like their commercial cloud suite, which is alleviating some of the GPM pressure. Still, those sources of help are not large enough to offset those much bigger headwinds.
- Beat 64% Cloud GPM estimate & beat identical guidance by 1 point each. This is because of the same Azure-related progress just mentioned.
- Beat 66.5% GPM estimate by 70 basis points (bps; 1 basis point = 0.01%).
- Beat EBIT estimate by 4.1% & beat guidance by 5.7%.
- Good to see Microsoft deliver a little more than a point of Y/Y EBIT margin expansion for FY 2026 amid rising depreciation and AI-related spending tied to the ongoing supercycle.
- OpEx rose by 10% Y/Y, led by 13% R&D growth. Headcount fell by 2% Y/Y.
- The material decline in MPC EBIT margin is related to current demand softness paired with investments in Xbox to improve that segment’s performance. More on this later.
- Beat $4.25 EPS estimate by $0.56. EPS rose by 32% Y/Y, by 23% Y/Y when excluding OpenAI and by 16% when excluding Anthropic and lower expenses from its Voluntary Retirement Program. EPS was still $0.22 ahead excluding any of this noisy non-operating help.
- Beat $15B FCF estimate by $4.6B. CapEx was 1.5% higher than expected.
- CapEx was $41B, representing about 70% Y/Y growth.
- FCF fell by 24% Y/Y due to rapid CapEx growth. Operating Cash Flow rose by 30% Y/Y.
d. Balance Sheet
- $77B cash & equivalents.
- $40B debt.
- -0.3% Y/Y dilution.
- Dividends rose by 10% Y/Y.