Microsoft Corporation Q2 FY2026 earnings call

Management Statement and Operational Highlights

• Microsoft Cloud Performance: The Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year over year, driven by strength in the platform and accelerating AI demand.
• AI Infrastructure Investments: Built infrastructure for heterogeneous workloads, with a 50% increase in throughput for OpenAI inferencing and the launch of the Maya 200 accelerator. Invested in data centers globally to meet sovereignty needs.
• Agent Platform Developments: Offered broad model choice, with support for GPT-5.0.2 and Claude 4.5. Foundry saw growth, with over 1,500 customers using Anthropic and OpenAI models, and Agent 365 introduced for agent governance.
• High-Value Agentic Experiences: Strong momentum in consumer (e.g., Copilot app daily users up nearly 3x YOY), enterprise (Microsoft 365 Copilot seat ads up over 160% YOY), coding (GitHub Copilot Pro Plus subs up 77% Q/Q), security, health care, and science/engineering.
• Financial Results: Revenue was $81.3 billion, up 17% in constant currency; gross margin was 68%; operating income increased 21% in constant currency; earnings per share was $4.14, up 24% in constant currency when adjusted for OpenAI investment

Segment Performance

• Productivity and Business Processes: Revenue was $34.1 billion, growing 16% in constant currency. Microsoft 365 commercial cloud revenue increased 17% in constant currency, LinkedIn revenue grew 11% in constant currency, and Dynamics 365 revenue rose 19% in constant currency. Segment gross margin dollars increased 17% in constant currency, with operating income up 22% in constant currency.
• Intelligent Cloud: Revenue was $32.9 billion, growing 29% in constant currency. Azure and other cloud services revenue grew 39% in constant currency, and the on-premises server business revenue increased 21% in constant currency. Segment gross margin dollars increased 20% in constant currency, with operating income up 28% in constant currency.
• More Personal Computing: Revenue was $14.3 billion, declining 3%. Windows OEM and devices revenue increased 1% in constant currency. Search and news advertising revenue ex TAC grew 9% in constant currency, while gaming revenue decreased 9% in constant currency. Segment gross margin dollars increased 2% in constant currency, with operating income down 3% in constant currency

Guidance

• Q3 Outlook: Expected revenue of $80.65 to $81.75 billion, growth 15 to 17%. COGS expected $26.65 to $26.85 billion, growth 22 to 23%; operating expense expected $17.8 to $17.9 billion, growth 10 to 11%.
• Segment-Specific Guidance:
  • Productivity and Business Processes: Revenue $34.25 to $34.55 billion, growth 14 to 15%.
  • Intelligent Cloud: Revenue $34.1 to $34.4 billion, growth 27 to 29%.
  • More Personal Computing: Revenue $12.3 to $12.8 billion, with varied performance across Windows OEM, search, and gaming.
• FY26 Outlook: FX expected to impact revenue and COGS, with FY26 operating margins expected slightly up, considering H1 investments and favorable revenue mix

Risks

• Memory Pricing Impact: Rising memory prices could affect Windows OEM and on-premises server markets, impacting capital expenditures and cloud gross margins over time.
• CapEx ROI Concerns: Investor concerns about ROI on CapEx spend for AI infrastructure, though Azure contracts and GPU leases already cover useful life in many cases

Question and Answer

• Q: Keith Weiss asked about CapEx growth and Azure ROI.

A: Amy Hood and Satya Nadella discussed CapEx allocation to Azure and other growth areas, emphasizing long-term investment in AI and R&D, and how CapEx supports multiple growth fronts including Azure, Microsoft 365 Copilot, and GitHub Copilot.

• Q: Mark Moerdler asked about hardware CapEx to revenue/margins.

A: Amy Hood explained RPO duration and contracts already covering the useful life of hardware, noting that the majority of capital spend for GPUs and CPUs is already contracted for their useful life.

• Q: Brent Thill asked about OpenAI backlog exposure.

A: Amy Hood highlighted diversified RPO, with 55% of RPO related to a broad customer portfolio, and expressed confidence in the OpenAI partnership as a key part of their innovative app ecosystem.

• Q: Karl Keirstead asked about capacity additions.

A: Amy Hood discussed global capacity expansion efforts, emphasizing the need to add capacity across multiple locations globally to meet customer demand, though specific site timelines are multiyear.

• Q: Mark Murphy asked about silicon core competency.

A: Satya Nadella talked about the Maya 200 accelerator and silicon innovation, emphasizing TCO optimization through vertical integration and partnerships with NVIDIA and AMD to maintain fleet advantage.

• Q: Brad Zelnick asked about enterprise AI journey momentum.

A: Satya Nadella discussed the compounding benefits of Microsoft's AI stack across suites like Microsoft 365, security, and GitHub, highlighting how agents and WorkIQ are transforming enterprise processes.

• Q: Raimo Lenschow asked about CPU side and cloud transitions.

A: Satya Nadella discussed the importance of CPU in AI workloads, noting that AI requires compute and storage resources, and ongoing cloud migrations driven by the need for proper AI infrastructure