Microsoft Corporation Q1 FY2026 earnings call

Management Statement and Operational Highlights

• Microsoft Cloud revenue surpassed $49 billion, up 26% year-over-year. Commercial RPO increased over 50% to nearly $400 billion with a 2-year weighted average duration.
• AI platform and Copilots: Expansive data center fleet, increasing AI capacity, new AI data center in Wisconsin, Azure AI Foundry with 80,000 customers including 80% of Fortune 500. First-party models like MAI and Phi family, Microsoft Agent Framework used by KPMG.
• Productivity: Microsoft 365 Copilot with over 150 million monthly active users, 50% quarter-over-quarter growth in chat usage, introduced Agent Mode and Teams mode. GitHub Copilot with over 26 million users, Agent HQ launched.
• Intelligent Cloud: Azure took share, Fabric revenue grew 60%, SQL DB hyperscale up nearly 75%, Cosmos DB up 50%.
• More Personal Computing: Windows OEM and Devices strong due to Windows 10 end of support, search and news advertising growth, gaming updates including new games and Xbox Ally.

Segment Performance

• Productivity and Business Processes: Revenue was $33 billion, growing 17% and 14% in constant currency. M365 Commercial Cloud revenue increased 17% and 15% in constant currency, with ARPU growth led by E5 and M365 Copilot. M365 Commercial Products revenue rose 17% and 14% in constant currency. M365 Consumer Cloud revenue grew 26% and 25% in constant currency, with consumer subscriptions over 90 million. LinkedIn revenue increased 10% and 9% in constant currency driven by Marketing Solutions. Dynamics 365 revenue grew 18% and 16% in constant currency. Segment gross margin dollars increased 19% and 16% in constant currency, with gross margin percentage up due to efficiency gains in M365 Commercial Cloud offset by AI investments.
• Intelligent Cloud: Revenue was $30.9 billion, growing 28% and 27% in constant currency. Azure and other Cloud services revenue grew 40% and 39% in constant currency, driven by core infrastructure. On-premise server business revenue increased 1% in constant currency. Segment gross margin dollars increased 20% and 19% in constant currency, with gross margin percentage down due to AI investments but offset by Azure efficiency gains.
• More Personal Computing: Revenue was $13.8 billion, growing 4%. Windows OEM and Devices revenue increased 6% year-over-year. Search and news advertising revenue ex TAC grew 16% and 15% in constant currency. Gaming revenue decreased 2% and 3% in constant currency. Segment gross margin dollars increased 11% and 10% in constant currency, with gross margin percentage up due to sales mix shift to higher-margin businesses.

Guidance

• Q2 revenue expected to be $79.5 billion to $80.6 billion, growth 14% to 16%. COGS expected $26.35 billion to $26.55 billion, growth 21% to 22%. Operating expense $17.3 billion to $17.4 billion, growth 7% to 8%.
• Commercial bookings expected healthy growth, positively impacted by OpenAI commitments. Microsoft Cloud gross margin percentage expected ~66%, down due to AI investments and mix shift to Azure.
• Segment guidance: Productivity and Business Processes revenue $33.3 billion to $33.6 billion, growth 13% to 14%. Intelligent Cloud revenue $32.25 billion to $32.55 billion, growth 26% to 27%. More Personal Computing revenue $13.95 billion to $14.45 billion.

Risks

• Concentration risk related to large contracts, impact of AI investments on margins, capacity constraints in Azure affecting revenue growth.

Question and Answer

Q: Keith Weiss asks about AGI and potential weakening of Microsoft's position.

A: Satya Nadella says they're building systems to smooth jagged intelligence edges, confident in ability to drive value with AI models.

Q: Brent Thill asks about concentration risk and RPO.

A: Amy Hood says RPO covers multiple products and customers, weighted average duration 2 years, indicating short-term consumption with value.

Q: Mark Moerdler asks about monetizing investments and bubble concern.

A: Amy Hood and Satya Nadella discuss fleet fungibility, efficient token factory, and high-value agent systems mitigating risk.

Q: Karl Keirstead asks about OpenAI investment.

A: Amy Hood says Q1 number not impacted by new agreement, increased loss due to equity method losses in OpenAI.

Q: Mark Murphy asks about evaluating AI natives' contract follow-through.

A: Satya Nadella talks about fungible fleet and balanced customer portfolio, Amy Hood mentions lead time for contract delivery.

Q: Brad Zelnick asks about Azure capacity shortfall.

A: Amy Hood says Azure bears revenue impact, prioritizing M365 Copilot, product teams, and AI talent, capacity constraints impact Azure.

Q: Kash Rangan asks about customer concentration and terminal value.

A: Satya Nadella talks about fungible fleet and balanced portfolio, Amy Hood thanks and wishes well.